Report of Independent Auditors and Financial Statements with Supplementary Information. Community Food Bank

Transcription

1 Report of Independent Auditors and Financial Statements with Supplementary Information Community Food Bank June 30, 2017

2 Table of Contents REPORT OF INDEPENDENT AUDITORS... 1 FINANCIAL STATEMENTS Statement of Financial Position... 4 Statement of Activities... 5 Statement of Functional Expenses... 6 Statement of Cash Flows... 7 Notes to Financial Statements... 8 SUPPLEMENTARY INFORMATION Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards SINGLE AUDIT REPORTS REPORT OF INDEPENDENT AUDITORS ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS REPORT OF INDEPENDENT AUDITORS ON COMPLIANCE FOR THE MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE Schedule of Findings and Questioned Costs Summary Schedule of Prior Audit Findings... 29

3 Report of Independent Auditors To the Board of Directors Community Food Bank Report on the Financial Statements We have audited the accompanying financial statements of Community Food Bank (a nonprofit organization), which comprise the statement of financial position as of June 30, 2017, and the related statements of activities, functional expenses, and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Community Food Bank as of June 30, 2017, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Supplementary Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated February 23, 2018, on our consideration of Community Food Bank s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of Community Food Bank s internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Community Food Bank s internal control over financial reporting and compliance. Fresno, California February 23,

5 Financial Statements

6 Statement of Financial Position June 30, 2017 ASSETS CURRENT ASSETS Cash and cash equivalents $ 157,044 Investments in mutual funds at fair value 1,128,432 Accounts receivable 96,138 Grants receivable 590,293 Inventory 3,560,480 Prepaid expenses 104,823 Total current assets 5,637,210 PROPERTY AND EQUIPMENT, net 754,821 DEPOSITS 21,786 $ 6,413,817 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts payable $ 407,503 Accrued expenses 216,973 Total current liabilities 624,476 NET ASSETS Temporarily restricted 384,924 Unrestricted 5,404,417 5,789,341 $ 6,413,817 4 See notes to financial statements.

7 Statement of Activities Year Ended June 30, 2017 Temporarily Unrestricted Restricted Total REVENUES, GAINS, AND OTHER SUPPORT Contributions commodities $ 54,862,762 $ - $ 54,862,762 Grants commodities 4,695,629-4,695,629 Grants operations and administrative 801, ,514 Contributions other 2,180, ,532 2,513,691 Fundraising and direct mail campaigns 1,227,751-1,227,751 Agency fees and charges 1,020,706-1,020,706 Gain on sale of assets Interest and dividend income 35,592-35,592 64,824, ,532 65,158,045 Net assets released from restriction 248,479 (248,479) - Total revenues, gains, and other support 65,072,992 85,053 65,158,045 EXPENSES Program services 63,757,666-63,757,666 Supporting services Management and general 679, ,337 Fundraising 1,020,007-1,020,007 Total expenses 65,457,010-65,457,010 Change in net assets (384,018) 85,053 (298,965) NET ASSETS, beginning of year 5,788, ,871 6,088,306 NET ASSETS, end of year $ 5,404,417 $ 384,924 $ 5,789,341 See notes to financial statements. 5

8 Statement of Functional Expenses Year Ended June 30, 2017 Management Program and General Fundraising Total Contributed commodities $ 59,467,620 $ - $ - $ 59,467,620 Salaries and related expenses 1,502, , ,643 2,323,907 Purchased commodities 1,328, ,328,712 Outside services 8,858 2, , ,131 Rents 249,978 75,280 61, ,582 Freight, fuel, and transportation 257, ,961 Supplies and materials 236,053 3,973 3, ,263 Repairs and maintenance 194,299 21, ,888 Office expenses 128,669 34,133 27, ,607 Utilities 81,355 24,500 19, ,813 Depreciation 95,984 11,292 5, ,922 Professional fees 72,568 21,854 17, ,224 Special events ,885 50,885 Insurance 32,890 9,905 8,068 50,863 Dues and subscriptions 27,801-15,192 42,993 Seminars, training and workshops 25,171 7,580 6,175 38,926 Telephone 17,017 5,125 4,174 26,316 Accounting and auditing 14,873 4,479 3,648 23,000 Travel and meetings 14,677 4,420 3,600 22,697 Miscellaneous $ 63,757,666 $ 679,337 $ 1,020,007 $ 65,457,010 6 See notes to financial statements.

9 Statement of Cash Flows Year Ended June 30, 2017 CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ (298,965) Adjustment to reconcile change in net assets to net cash used in operating activities: Depreciation 112,922 Gain on disposal of assets (400) Contributed commodities (54,939,588) Distribution of contributed commodities 54,533,263 Contributed commodities - grants (4,695,629) Distribution of contributed commodities - grants 5,011,184 Interest and dividend income 35,592 Change in operating assets and liabilities: Receivables (112,078) Inventory (44,752) Prepaid expenses (26,799) Accounts payable 113,438 Accrued expenses 11,564 Net cash used in operating activities (300,248) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments in mutual funds (43,227) Proceeds from sales of investments in mutual funds 472,016 Purchase of property and equipment (222,178) Net cash from investing activities 206,611 Net change in cash and cash equivalents (93,637) CASH AND CASH EQUIVALENTS, beginning of year 250,681 CASH AND CASH EQUIVALENTS, end of year $ 157,044 See notes to financial statements. 7

10 Notes to Financial Statements NOTE 1 NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of activities Community Food Bank (the Organization) is a California nonprofit corporation established to conduct a program that provides food pantries and agencies of Fresno, Madera, Tulare, Kern, and Kings Counties with an organizational resource whose volume purchasing, warehousing, and food product management capacity efficiently and effectively deliver food and goods. The Organization is affiliated with the national network of food banks known as Feeding America. Food and commodities are donated by the general public and government agencies. Revenues are primarily derived from fundraising, direct mail campaigns, grants, and contributions. Basis of presentation The Organization is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets as follows: Unrestricted net assets These are resources available to support operations. The only limits on the use of unrestricted net assets are the broad limits resulting from the nature of the Organization, the environment in which it operates, the purposes specified in its corporate documents and its application for tax-exempt status, and any limits resulting from contractual agreements with creditors and others that are entered into in the course of its operations. Temporarily restricted net assets These are resources that are restricted by a donor for use for a particular purpose or in a particular future period. The Organization s unspent contributions are reported in this class if the donor limited their use, as are promised contributions that are not yet due. Contributions of property and equipment or cash restricted to acquisition of property and equipment are reported as temporarily restricted new assets if the donor has restricted the use of the property or equipment to a particular program. If donors specify a length a time over which the property or equipment must be used, the restrictions expire evenly over the required period. Absent that type of restriction for use, the Organization considers the restriction met when assets are placed in service. When a donor s restriction is satisfied, either by using the resources in the manner specified by the donor or by the passage of time, the expiration of the restriction is reported in the financial statements by reclassifying the net assets from temporarily restricted to unrestricted net assets. Permanently restricted net assets These are resources the use of which is limited by donor-imposed restrictions that neither expire by being used in accordance with a donor s restriction nor by the passage of time. At June 30, 2017, the Organization did not have any permanently restricted net assets. Method of accounting The Organization uses the accrual basis method of accounting in accordance with accounting principles generally accepted in the United States of America. 8

11 Notes to Financial Statements Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Organization s method of valuation for commodities donated from the general public is considered a significant estimate. Cash and cash equivalents For purposes of reporting the statement of cash flows, the Organization considers all highly liquid investments with an original maturity of three (3) months or less to be cash equivalents. Accounts at each financial institution are insured by the Federal Deposit Insurance Corporation up to $250,000. At June 30, 2017, uninsured cash balances totaled $33,611. Fair value of financial instruments The carrying values of cash and cash equivalents, promises to give and other receivables, inventory, and prepaid expenses approximate fair value because of the terms and relative short maturity. Investment in mutual funds Investments in mutual funds consist of two (2) open-end mutual funds and are carried at fair value. These investments are covered by the Securities Investor Protection Corporation up to $500,000 (including $100,000 of cash). Investment income and unrealized gains and losses are included in the change in net assets. Accounts and grants receivable Accounts receivable consist primarily of shared maintenance fees charged to agencies. Receivables are written off through an allowance for doubtful accounts when the Organization determines the payments will not be received. There was not an allowance for doubtful accounts at June 30, All accounts receivable are noninterest bearing. Grants receivable consist of amounts due from funding sources for services performed under cost reimbursement grants or contracts. Grants receivable are considered fully collectible and, therefore, no allowance for doubtful accounts has been reported. Contributions and promises to give Unconditional contributions, including promises to give at estimated net realizable value, are recognized as revenue in the period received. Donated goods and services The Organization reports the fair value of donated commodities over which it has control as unrestricted public support and, shortly thereafter, as expense when distributed. During the year ended June 30, 2017, the Organization received and distributed approximately 31.7 million pounds and million pounds, respectively. The approximate average wholesale value of one pound of donated product was determined to be $1.73 based upon a product valuation study performed by Feeding America. The dollar amount of the received and distributed pounds is approximately $54,860,000 and $48,215,000 respectively, and is reported in the statement of activities. Contributions of noncash assets are utilized by the Organization in providing services and are recorded at their fair values in the period received. Contributions of donated services that create or enhance nonfinancial assets or that require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation, are recorded at their fair values in the period received. 9

12 Notes to Financial Statements A number of unpaid volunteers have made significant contributions of their time to the Organization. However, the values of these services are not reflected in these financial statements since the recognition criteria was not met. Advertising costs Advertising costs, except for costs associated with direct-response advertising, are charged to operations when incurred. Advertising costs were $21,966 during the year ended June 30, Exchange transactions Revenues earned from contracts and grants with State and Federal agencies are considered to be exchange transactions. Revenue from exchange transactions are reported gross of any related expense in the accompanying financial statements. Functional expenses The costs of providing the Organization's food programs and supporting services have been summarized on a functional basis in the statements of activities and functional expenses. Indirect or shared costs are allocated among program, support services and fundraising by a method that measures the relative degree of benefit, such as hours worked. Accordingly, certain costs have been allocated to program, supporting services and fundraising benefited. Fundraising expenses Fundraising expenses are expensed as incurred. Revenue from fundraising events is recognized in the period in which the event takes place. Property and equipment It is the Organization s policy to capitalize property and equipment over $2,500. Purchased property and equipment is capitalized at cost, donated property and equipment is recorded at fair value. Contributions of property and equipment are recorded as unrestricted support, unless the donor stipulates how long the assets must be used. Expenditures that increase the life of the related assets are capitalized. Repairs and maintenance, including planned major maintenance activities, are charged to operations when incurred. Leasehold improvements are depreciated over the lesser of the remaining lease agreement or the estimated useful life. Depreciation is computed using the straight-line method over the following estimated useful lives: Furnishings, equipment, and vehicles Leasehold improvements 3 10 years 5 39 years Long-lived assets Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset and longlived assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. No impairment losses were recognized during the year ended June 30, Income taxes The Organization is a tax-exempt corporation under section 501(c)(3) of the Internal Revenue Code (IRC) and section 23701(d) of the State of California Corporate Code. Uncertain tax positions The Organization recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. The Organization does not believe its financial statements include any uncertain tax positions. 10

13 Notes to Financial Statements Inventory Inventory consists of donated food and nonfood items, purchased food, and commodities received from the United States Department of Agriculture (USDA) and California Department of Social Services (CDSS). The USDA, as passed through the CDSS, contributes commodities to the Organization. USDA commodities are valued based on published USDA prices. CDSS provides additional food assistance to communities with high levels of unemployment due to the drought. The Drought Food Assistance Program (DFAP) was established and those commodities are valued based on estimated CDSS prices. Donated inventory is valued based on a product valuation survey conducted for Feeding America. Purchased food is valued at the latest purchase price. Subsequent events Subsequent events are events or transactions that occur after the statement of financial position date, but before financial statements are available to be issued. The Organization recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the statement of financial position, including the estimates inherent in the process of preparing the financial statements. The Organization s financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the statement of financial position, but arose after the statement of financial position date and before financial statements are issued. The Organization has evaluated subsequent events through February 23, 2018, which is the date the financial statements were available to be issued. NOTE 2 PROPERTY AND EQUIPMENT Property and equipment consisted of the following at June 30, 2017: Vehicles $ 1,013,755 Equipment 557,365 Office equipment and furnishings 231,972 Leasehold improvements 545,764 2,348,856 Less: accumulated depreciation (1,594,035) $ 754,821 NOTE 3 INVESTMENTS IN MUTUAL FUNDS Investments in mutual funds carried at fair value consisted of the following at June 30, 2017: Mutual funds: Lord Abbett Short Duration Income Fund $ 643,619 Eaton Vance Low Duration Fund 484,813 $ 1,128,432 During the year ended June 30, 2017, interest and dividend income was $35,

14 Notes to Financial Statements NOTE 4 FAIR VALUE MEASUREMENTS The Organization s investments are reported at fair value in the accompanying statement of financial position. The methods used to measure fair value may produce an amount that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Organization believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The following table sets forth by level, within the fair value hierarchy, the Organization s assets at fair value as of June 30, 2017: Assets at Fair Value as of June 30, 2017 Level 1 Level 2 Level 3 Total Mutual funds Fixed income funds $ 1,128,432 $ - $ - $ 1,128,432 Total assets at fair value $ 1,128,432 $ - $ - $ 1,128,432 The fair value measurement accounting literature establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels: Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Organization uses appropriate valuation techniques based on the available inputs to measure the fair value of its investments. When available, the Organization measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value. No Level 2 or 3 inputs were available to the Organization. Level 1 fair value measurements The fair value of mutual funds is based on quoted net asset values of the shares held by the Organization at year end on the active market where the funds are traded. 12

15 Notes to Financial Statements NOTE 5 INVENTORY The Organization s inventory as of June 30, 2017, consisted of the following: Amount Donated commodities $ 2,544,658 USDA/CDSS commodities 743,907 Purchased commodities 271,915 $ 3,560,480 NOTE 6 GRANT REVENUE Grant revenue is recognized when expenditures are incurred in accordance with the applicable grant agreements. The Organization also receives commodities from the USDA and CDSS, revenues for these contributions are recognized when the commodities are received. Grant revenue for the year ended June 30, 2017, consisted of the following: Agency or Organization Federal grants USDA commodities, distributed $ 3,309,805 USDA beginning inventory (1,038,941) USDA ending inventory 734,637 USDA commodities, received 3,005,501 USDA cost reimbursements 270,328 Department of Homeland Security 275,920 Fresno County Department of Public Health 26,011 California Nutrition Network 22,527 3,600,287 Nonfederal grants CDSS 1,690,128 Administrative cost reimbursements 164,404 First Five of Fresno County 2,214 California Nutrition Network 40,110 1,896,856 $ 5,497,143 Amounts received from grant agencies are subject to audit and adjustment by grantor agencies. Any disallowed claims, including amounts already collected, may constitute a liability of the Organization. There are no pending audit adjustments from grantor agencies at this time. 13

16 Notes to Financial Statements NOTE 7 FUNDRAISING AND DIRECT MAIL CAMPAIGNS The Organization conducts various fundraising events and direct mail campaigns. Revenue from fundraising and direct mail campaigns for the year ended June 30, 2017, is as follows: Event or Campaign Cultivation and acquisition mailings $ 991,690 Various 236,061 $ 1,227,751 NOTE 8 TEMPORARILY RESTRICTED NET ASSETS Donor restrictions on temporarily restricted net assets consist of the following at June 30, 2017: Food purchases $ 201,283 Related programs 183,641 $ 384,924 NOTE 9 EMPLOYEE RETIREMENT PROGRAM The Organization has a defined contribution retirement plan. Eligibility is based upon age and service requirements. Participants of the plan are allowed to make before-tax contributions and the Organization may make additional contributions to the plan on the participants behalf. Retirement expense for the year ended June 30, 2017, was $49,361. NOTE 10 LEASE COMMITMENTS The Organization leases office and warehouse space and office equipment under operating leases, which require certain minimum monthly rental payments. The leases vary in terms and expire between September 2017 and June The future minimum rental payments as of June 30, 2017, are as follows: Years ending June 30, 2018 $ 252, , ,561 $ 728,319 Total rent expense included in the statement of functional expenses for the year ended June 30, 2017, was $386,

17 Supplementary Information

18 Schedule of Expenditures of Federal Awards Year Ended June 30, 2017 Federal Grantor/Pass-through Grantor/Program Title Federal CFDA # Pass-through Entity Identifying # Federal Expenditures Food Distribution Cluster U.S. Department of Agriculture Passed through California State Department of Social Services: Emergency Food Assistance Program administrative costs /15-MOU $ 270,328 Emergency Food Assistance Program commodities /15-MOU ,309,805 Total Food Distribution Cluster 3,580,133 SNAP Cluster U.S. Department of Agriculture Passed through California Association of Food Banks: State Administrative Matching Grants for the Supplemental Nutrition Assistance Program ,527 Passed through the County of Fresno: State Administrative Matching Grants for the Supplemental Nutrition Assistance Program ,011 Total SNAP Cluster 48,538 Total U.S. Department of Agriculture 3,628,671 Other Programs U.S. Department of Homeland Security Direct Award: Emergency Food and Shelter National Board Program N/A 275,920 Total U.S. Department of Homeland Security 275,920 Total Expenditures of Federal Awards $ 3,904, See notes to schedule of expenditures of federal awards.

19 Notes to Schedule of Expenditures of Federal Awards June 30, 2017 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The accompanying schedule of expenditures of federal awards (Schedule) includes the federal grant activity of Community Food Bank (the Organization) reported on the accrual basis of accounting for the year ended June 30, The information in this Schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Because the Schedule presents only a selected portion of the operations of the Organization, it is not intended to, and does not, present the financial position, changes in net assets, or cash flows of the Organization. Program costs The Organization s expenditures are recognized following the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. Subrecipients The Organization does not pass through funds to subrecipients. Indirect costs The Organization has elected not to use the 10-percent de minimis indirect cost rate allowed under the Uniform Guidance. 17

20 Single Audit Reports

21 Report of Independent Auditors on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards To the Board of Directors Community Food Bank We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Community Food Bank (a nonprofit organization), which comprise the statement of financial position as of June 30, 2017, and the related statements of activities, functional expenses, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated February 23, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Community Food Bank s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Community Food Bank s internal control. Accordingly, we do not express an opinion on the effectiveness of Community Food Bank s internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described in the accompanying schedule of findings and questioned costs, we identified certain deficiencies in internal control that we consider to be material weaknesses and significant deficiencies. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. We consider the deficiencies described in the accompanying schedule of findings and questioned costs as items , , , and to be material weaknesses. 19

22 A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We consider the deficiencies described in the accompanying schedule of findings and questioned costs as items and to be significant deficiencies. Compliance and Other Matters As part of obtaining reasonable assurance about whether Community Food Bank s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Community Food Bank s Response to Findings Community Food Bank s response to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs and in a management corrective action plan. Community Food Bank s response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. Purpose of This Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the result of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Fresno, California February 23,

23 Report of Independent Auditors on Compliance for the Major Federal Program and Report on Internal Control Over Compliance Required by the Uniform Guidance To the Board of Directors Community Food Bank Report on Compliance for the Major Federal Program We have audited Community Food Bank s compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on the Community Food Bank s major federal program for the year ended June 30, Community Food Bank s major federal program is identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations and the terms and conditions of its federal awards applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for the Community Food Bank s major federal program based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about Community Food Bank s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance on the major federal program. However, our audit does not provide a legal determination of Community Food Bank s compliance. 21

24 Opinion on the Major Federal Program In our opinion, Community Food Bank complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on the major federal program for the year ended June 30, Report on Internal Control Over Compliance The management of Community Food Bank is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered Community Food Bank s internal control over compliance with the types of requirements that could have a direct and material effect on the major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for the major federal program and to test and report on internal control over compliance in accordance with Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Community Food Bank s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that have not been identified. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, we identified a deficiency in internal control over compliance, as described in the accompanying schedule of findings and questioned costs as item , that we consider to be a significant deficiency. Community Food Bank s response to the internal control over compliance findings identified in our audit is described in the accompanying schedule of findings and questioned costs. Community Food Bank s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. 22

25 The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Fresno, California February 23,

26 Schedule of Findings and Questioned Costs June 30, 2017 Financial Statements Type of auditor's report issued on whether the finanical statements audited were prepared in accordance with GAAP: Internal control over financial reporting: Material weakness(es) identified? X Yes No Significant deficiency(ies) identified? X Yes No Noncompliance material to financial statements noted? Yes X No Federal Awards Internal control over major federal programs: Section I - Summary of Auditor's Results Unmodified Material weakness(es) identified? Yes X No Significant deficiency(ies) identified? X Yes No Any audit findings disclosed that are required to be reported in accordance with section 2 CFR (a)? X Yes No Indentification of Major Federal Program Type of Auditor's Report Issued on Compliance for CFDA Number Name of Federal Program/Cluster Major Federal Program Food Distribution Cluster U.S. Department of Agriculture - Emergency Food Assistance Program - Administrative Costs U.S. Department of Agriculture - Emergency Food Assistance Program - Commodities Unmodified Dollar threshold used to distinguish between Type A and Type B programs: $750,000 Auditee qualified as "low-risk auditee"? X Yes No 24

27 Schedule of Findings and Questioned Costs June 30, 2017 Section II - Financial Statement Findings Finding Donated commodities were not reconciled or properly valued (material weakness in internal control over financial reporting). Criteria - A reconciliation of the receipts, distributions, and ending inventory of donated commodities is performed and reviewed and approved by management on a monthly basis. At year end, donated commodities are revalued at the new rate as reported by Feeding America. Condition - The receipt and distribution of donated inventory was not accurately reconciled to the general ledger. In addition, management was unaware of the requirement to revalue donated inventory at year end. Context - As part of our donated inventory testing, we noted that the receipts and distributions of donated inventory were not reconciled to the general ledger, resulting in a material adjustment of approximately $2.5 million for receipts and distribution. In addition, discussions with management determined they were unaware of the requirement to revalue the receipts, distributions, and ending inventory at year end which resulted in another $1.9 million adjustment to donated receipts and distributions. Effect - Inventory, revenue, and expense could be materially misstated and go undetected and uncorrected due to error or fraud. Cause - Management failed to perform a monthly reconciliation of the donated inventory sub ledger and was unaware of the requirement to revalue donated ending inventory at year end. Recommendation - We recommend management perform a monthly reconciliation of the donated inventory sub ledger to the general ledger and investigate any material variances. In addition, we recommend management revalue the receipts, distributions, and ending inventory of donated commodities at year end. Management's Response - In December of 2016, our Director of Finance resigned and we were not able to fill the position until August of During the eight-month transition, the Finance Analyst stepped into the lead role in the finance department as she had done in the previous transition between Directors of Finance. During , Community Food Bank converted to a new ERP system, which included a new inventory management module. The Director of Finance had been the lead on the project prior to his leaving, and the COO took over the lead role for the inventory module in December of The system conversion took place mid-march of 2017, and it was later discovered that the reconciliation of the general ledger to the sub ledger did not take place after the conversion. We are in agreement with the recommendation, and the Accounting Manager has implemented a monthly reconciliation of the donated inventory sub ledger to the general ledger. Upon finding any discrepancies we investigate and make necessary adjustments. We will also revalue the receipts, distributions, and ending inventory of donated commodities at year end. Finding Internal control procedures not properly implemented over payroll cycle (material weakness in internal control over financial reporting). Criteria - Time cards are approved by an appropriate manager prior to payroll being entered. A reconciliation of hours paid, expenses incurred, and subsequent entry into the general ledger is performed, reviewed, and approved by management. 25

28 Schedule of Findings and Questioned Costs June 30, 2017 Condition - An employee was approving their own time card and payroll reconciliations were not being performed accurately. Context - As part of internal control testing procedures over payroll, it was noted that one employee was approving their own time card for the year. In addition, review of payroll supporting documentation noted inconsistencies in the amounts recorded. Findings included: PTO hours per the timecard approval report did not agree to the PTO hours per the payroll register and total hours worked per timecards did not agree to total hours worked per the payroll register. Effect - Payroll expense could be materially misstated and go undetected and uncorrected due to error or fraud. Cause - Management was not aware that the employee was signing their own time card. Personnel responsible to perform the payroll reconciliation was inept at the responsibility and management was not reviewing and approving the work being performed. Recommendation - We recommend the Organization implement formal control activities surrounding the payroll cycle in order to avoid any material misstatement related to payroll expense and/or fraud. Management's Response - We are in agreement with the recommendations, and the Accounting Manager has put the proper controls in place for approval online time cards and time off requests. We have digital time cards and each employee s time card is approved by his or her immediate supervisor. The CEO s time reporting is approved by the COO. The Accounting Manager is also reviewing and auditing the bi-monthly posting of payroll to the general ledger. The reconciliations are also reviewed by the CAO. Finding Monthly subsidiary ledger reconciliations are not being consistently performed (material weakness in internal control over financial reporting). Criteria - A reconciliation of all subsidiary ledgers is performed, reviewed, and approved by management on a monthly basis. Condition - Monthly reconciliations were not being performed for all subsidiary ledgers, resulting in errors in financial reporting. Context - As part of our internal control testing and walkthrough procedures, it was noted that monthly reconciliations were not being performed regularly for all subsidiary ledgers, in particular accounts receivable, accounts payable, prepaid expenses, net assets and inventory. Effect - Error or fraud could go undetected and uncorrected and materially misstate the financial statements. Cause - Personnel responsible to perform the monthly reconciliations did not have the time capacity to perform these procedures. Recommendation - We recommend management prepare detailed reconciliations for all subsidiary ledgers on a monthly basis, including a formal process of review and approval of each reconciliation. Management's Response - In the absence of the Director of Finance, monthly balance sheet reconciliations were not current. The Accounting Manager is now performing monthly balance sheet reconciliations. Any material discrepancies are resolved on a monthly basis. The reconciliations are also reviewed by the CAO. Finding Recognition of expenses in an improper period (significant deficiency in internal control over financial reporting). Criteria - In accordance with the accrual basis of accounting, expenses are accrued in the period the good or service is provided. 26

29 Schedule of Findings and Questioned Costs June 30, 2017 Condition - Expenses were not properly accrued in the period the good or service was provided. Context - As part of our accounts payable search for unrecorded liabilities testing, we noted $69,000 in which goods and/or services were received/performed were not accrued at year end. Effect - Current liabilities and expenses could be understated in the current year and expenses could be overstated in the subsequent year. Cause - Management failed to record the current liability for the expenses incurred in the current year when invoices were received in the subsequent year. Recommendation - We recommend that management implement a process to review the subsequent receipt of invoices after year end to determine the proper period to record the liability and expense. Management's Response - Year-end procedures have been changed to include a review of all invoices received the following month by the Accounting Manager prior to posting. This review will ensure expenses, and the corresponding liability, will be recorded in the proper period at year end. Finding Improper capitalization of a period cost (significant deficiency in internal control over financial reporting). Criteria - In accordance with generally accepted accounting principles, expenses related to repairs and maintenance should be expensed as incurred. Condition - Expenses related to repairs and maintenance were improperly capitalized. Context - As part of our testing of fixed asset additions, it was noted that management capitalized approximately $76,000 of expenses related to repairs and maintenance. Effect - Fixed assets could be overstated and expenses could be understated over the life of the asset capitalized. Cause - Management improperly capitalized repairs and maintenance expense. Recommendation - We recommend management follow the Organization's capitalization policy and generally accepted accounting principles by expensing repairs and maintenance as incurred. Management's Response - During the vacancy of the Director of Finance, the Organization s capitalization policy was not properly followed. Management has reviewed the Organization s capitalization policy with the appropriate department managers and upon their review and approval of invoices, they will recommend the appropriate determination of the expense of capitalization. The Accounting Manager will give a final approval prior to the transaction being posted. Finding Lack of segregation of duties in the manual journal entry process (material weakness in internal control over financial reporting). Criteria - All manual journal entries are reviewed and approved by an individual above the person preparing the entry. Condition - Manual journal entries were not reviewed and approved by a separate individual from the one preparing the entry. Context - As part of our journal entry testing, we noted several instances in which manual journal entries were not properly reviewed and approved by someone other than the individual who prepared the journal entry. 27

30 Schedule of Findings and Questioned Costs June 30, 2017 Effect - The financial statements could be materially misstated and go undetected and uncorrected due to error or fraud. Cause - Management failed to review and approve manual journal entries prior to entry by the preparer. Recommendation - We recommend that an individual other than the preparer of the manual journal entry review and approve all journal entries prior to posting. Management's Response - The Accounting Manager has implemented the recommended process. All manual journal entries prepared by Finance staff positions will be reviewed by the Accounting Manager. Manual journal entries prepared by the Accounting Manager will be reviewed by the CAO prior to posting. Questioned Costs - None reported. Section III - Federal Award Findings and Questioned Costs Finding Special tests and provisions (significant deficiency in internal control over compliance) CFDA Program Number Name/Cluster Various Food Distribution Cluster Federal Agency/Pass-through Entity U.S. Department of Agriculture/California State Department of Social Services Federal Award Number / Award Year Criteria - The Food Distribution Cluster Regulation 7 CFR section (a) states accurate and complete records must be maintained with respect to the receipt, distribution/use, and inventory of USDA foods. Condition - Accurate records were not maintained with respect to the receipt, distribution/use, and inventory of USDA foods. Context - Reperformance of the USDA foods inventory reconciliation showed inaccuracies in the record of receipts and distributions of USDA foods. Ending USDA commodity inventory was overstated by approximately $3,000, USDA commodity revenue was overstated by $32,000, and USDA commodity expense and adjustments were overstated by $29,000. Effect - Inaccurate and incomplete records of USDA foods inventory could result in the improper distribution or loss of USDA foods, and the Organization is liable for the value of the food or replacement of the food in kind. Cause - Personnel responsible to perform the USDA foods inventory failed to maintain accurate and complete records. Recommendation - We recommend personnel perform USDA foods reconciliation monthly and management review and approve the reconciliation to ensure the reconciliation was performed accurately. Management's Response - The Accounting Manager has implemented a new receiving process on USDA commodities. All receipts and distributions are reviewed monthly and the costs for each item are confirmed monthly on the CDMS online website. A complete cycle count of all USDA commodities is performed monthly and all ending inventory amounts are reconciled to the general ledger

31 Summary Schedule of Prior Audit Findings June 30, 2017 None reported. 29

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