CITY OF RAPID CITY FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT DECEMBER 31, 2016
-1-810 Quincy Street P.O. Box 3140, Rapid City, South Dakota 57709 Telephone (605) 342-5630 e-mail: ktllp@ktllp.com INDEPENDENT AUDITOR S REPORT Steve Allender, Mayor and Common Council City of Rapid City Rapid City, South Dakota Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component unit, each major fund, and the aggregate remaining fund information of the CITY OF RAPID CITY (the City), as of and for the year ended December 31, 2016, and the related notes to the financial statements, which collectively comprise the City s basic financial statements as listed in the table of contents. 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 opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component unit, each major fund, and the aggregate remaining fund information of the City, as of December 31, 2016, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Members of the American Institute of Certified Public Accountants and AICPA Division of Firms for Quality Control
-2- City of Rapid City Report on Required Supplementary Information Accounting principles generally accepted in the United States of America require that management s discussion and analysis, budgetary comparison, schedules of funding progress for retiree health insurance coverage information, and pension schedules on pages 3 through 10 and 63 through 70 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Report on Other Supplementary Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City s basic financial statements. The combining nonmajor fund financial statements on pages 71 through 90, are presented for purposes of additional analysis and are not a required part of the financial statements. The 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 on page 95 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 basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining nonmajor fund financial statements and schedule of expenditures of federal awards are fairly stated, in all material respects, in relation to the basic 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 March 19, 2018, on our consideration of the City 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 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 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 the City s internal control over financial reporting and compliance. March 19, 2018 KETEL THORSTENSON, LLP Certified Public Accountants
SINGLE AUDIT SECTION
-91-810 Quincy Street P.O. Box 3140, Rapid City, South Dakota 57709 Telephone (605) 342-5630 e-mail: ktllp@ktllp.com INDEPENDENT AUDITOR S REPORT 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 Steve Allender, Mayor and Common Council City of Rapid City Rapid City, South Dakota We have audited, in accordance with the 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 the governmental activities, the business-type activities, the aggregate discretely presented component unit, each major fund, and the aggregate remaining fund information of the City as of and for the year ended December 31, 2016, and the related notes to the financial statements, which collectively comprise the City s basic financial statements, and have issued our report thereon dated March 19, 2018. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the City'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 opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City s internal control. Accordingly, we do not express an opinion on the effectiveness of the City 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, 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 a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the City 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 as 2016-001 and 2016-002 to be material weaknesses. 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 deficiency described in the accompanying Schedule of Findings as 2016-003 to be a significant deficiency. Members of the American Institute of Certified Public Accountants and AICPA Division of Firms for Quality Control
-92- City of Rapid City Compliance and Other Matters As part of obtaining reasonable assurance about whether the City'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 an instance of noncompliance or other matters that is required to be reported under Government Auditing Standards and which is described in the accompanying Schedule of Findings as 2016-003. City s Response to Findings The City s response to the findings identified in our audit is described in the accompanying Schedule of Findings. The City s response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on the response. 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 results of that testing, and not to provide an opinion on the effectiveness of the City 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 City s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. As required by South Dakota Codified Law 4-11-11, this report is a matter of public record and its distribution is not limited. KETEL THORSTENSON, LLP Certified Public Accountants March 19, 2018
-93-810 Quincy Street P.O. Box 3140, Rapid City, South Dakota 57709 Telephone (605) 342-5630 e-mail: ktllp@ktllp.com INDEPENDENT AUDITOR S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE Steve Allender, Mayor and Common Council City of Rapid City Rapid City, South Dakota Report on Compliance for Each Major Federal Program We have audited the City s compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on the City s major federal program for the year ended December 31, 2016. The City's major federal program is identified in the summary of auditor s results section of the accompanying Schedule of Findings. Management s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts and grants applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for the City'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. Those standards and the 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 the City'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 for its major federal program. However, our audit does not provide a legal determination on the City's compliance. Opinion on the Major Federal Program In our opinion, the City complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended December 31, 2016. Other Matters The results of our auditing procedures disclosed an instance of noncompliance, which is required to be reported in accordance with the Uniform Guidance and which is described in the accompanying Schedule of Findings as 2016-004. Our opinion on the major federal program is not modified with respect to this matter. Members of the American Institute of Certified Public Accountants and AICPA Division of Firms for Quality Control
-94- City of Rapid City The City s response to the noncompliance finding identified in our audit is described in the accompanying Schedule of Findings. The City s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. Report on Internal Control over Compliance Management of the City 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 the City's internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the 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 the City 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 a 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 a 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 the internal control over compliance that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. We identified a certain deficiency in internal control over compliance, as described in the accompanying Schedule of Findings as 2016-004 that we consider to be a material weakness. The City s response to the internal control over compliance finding identified in our audit is described in the accompanying Schedule of Findings. The City s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. 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 the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. As required by South Dakota Codified Law 4-11-11, this report is a matter of public record and its distribution is not limited. KETEL THORSTENSON, LLP Certified Public Accountants March 19, 2018
-97- CITY OF RAPID CITY SCHEDULE OF FINDINGS FOR THE YEAR ENDED DECEMBER 31, 2016 A. SUMMARY OF AUDIT RESULTS 1. The Independent Auditor s Report expresses an unmodified opinion on the financial statements of the City. 2. Material weaknesses and significant deficiencies disclosed during the audit of the financial statements are reported in the Independent Auditor s Report 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. 3. One instance of noncompliance material to the financial statements of the City was disclosed during the audit. 4. A material weakness disclosed during the audit of the major federal award program is reported in the Independent Auditor s Report on Compliance for Each Major Program and on Internal Control over Compliance Required by the Uniform Guidance. 5. The auditor s report on compliance for the major federal award program for the City expresses an unmodified opinion. 6. Audit findings relative to the major federal award program for the City are reported in Part C of this schedule. 7. The program tested as a major program (or cluster) for 2016 was the Federal Transit Cluster (CFDA #20.507 and #20.526). 8. The threshold for distinguishing type A and B programs was $750,000. 9. The City was not determined to be a low risk auditee.
-98- CITY OF RAPID CITY SCHEDULE OF FINDINGS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 2016 B. Findings Financial Statement Audit Material Weaknesses Finding No. 2016-001: Internal Controls/Financial Statement Preparation Federal Program Affected: None Compliance Requirement: Not Applicable Questioned Costs: None Condition and Cause: The City has a lack of adequate internal controls in the following areas: a. The City does not have a process in place to timely reconcile and review capital asset activity throughout the year. The City did not reconcile 2016 capital asset activity until several months after year end. b. The Deputy Finance Officer has access to the general ledger, can prepare and post journal entries, and can handle signed checks of the primary checking account of the City, has access to the manual check stock, and maintains the signature stamp for such accounts. c. The financial statements were not prepared or reviewed timely by the Finance Office personnel. When financial statements were provided, we identified and corrected errors in the government-wide adjustments, fund statements, and the statements of cash flows. d. Some reconciling schedules, including interfund loans and interfund transfers, did not agree to the general ledger. Criteria and Effect: a. A reconciliation of capital asset information should be performed frequently throughout the year. Failure to implement a frequent process for accounting for and reviewing capital assets, resulted in the City having a late filing of their annual report to the federal clearinghouse and State of South Dakota. b. Proper segregation of duties results in adequate internal control over the safeguarding of assets and the reliability of financial records and reporting. Without proper segregation of duties, an intentional or unintentional error could go undetected resulting in a misappropriation of assets or inaccurate records. c. Accurate financial reporting is important to the City. The City s financial statements are provided to numerous granting agencies and current and future debt providers. Errors identified during the audit process were corrected in the accompanying financial statements. d. Reconciling schedules and subsidiaries should support the figures in the general ledger. Repeat Finding from Prior Year: Yes with modifications, prior year finding 2015-001. Recommendation: a. The capital asset information should be reconciled throughout the year by the Grants Manager and reviewed by the Finance Officer for accuracy. b. The Deputy Finance Officer should not have access to signed checks or the signature stamp. c. The financial statements and note disclosures should be prepared by the Grants Manager and reviewed by the Finance Officer for technical accuracy and completeness by June 1 each year. d. Supporting schedules and subsidiary listings should be prepared by the Grants Manager, or applicable City personnel, and reviewed by the Finance Officer prior to the completion of the financial statements by June 1. Such review should ensure that the schedules/listings agree to the general ledger. Response/Corrective Action Plan: The City agrees with the above finding. See Corrective Action Plan.
-99- CITY OF RAPID CITY SCHEDULE OF FINDINGS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 2016 B. Findings Financial Statement Audit (Continued) Material Weaknesses (Continued) Finding No. 2016-002: Audit Adjustments Federal Program Affected: None Compliance Requirement: All Questioned Costs: None Condition and Cause: During the audit process, we recorded material audit adjustments. Additionally, we posted several reclassification entries with no effect on net income. Other entries were proposed as part of the audit, but were not recorded due to the overall insignificance on the financial statements. The Finance Officer has a lack of adequate review over the year-end process. Criteria and Effect: The City s financial statements are provided to numerous granting agencies and lenders. The City does not have adequate internal controls to ensure the identification and accurate recording of all year-end balances. Recommendation: We recommend the City post all adjustments prior to audit fieldwork. Additionally, subsidiary listings should exist to support such balances and be reviewed as part of the review of the financial statements. Repeat Finding from Prior Year: Yes, prior year finding 2015-002. Response/Corrective Action Plan: The City agrees with the above finding. See Corrective Action Plan. Significant Deficiencies Finding No. 2016-003: Negotiable Certificates of Deposit Federal Program Affected: None Compliance Requirement: Not applicable Questioned Costs: None Condition and Cause: The City is invested in negotiable certificates of deposit. Criteria and Effect: SDCL 4-5-6 indicates the types of investments that the City may invest public funds. Based on 4-5-6, the City is in violation of State law. Recommendation: We recommend that the City re-evaluate their investment policy and invest these funds in investments allowed by SDCL 4-5-6. Repeat Finding from Prior Year: Yes, prior year finding 2015-004. Response/Corrective Action Plan: The City agrees with the above finding. See Corrective Action Plan.
-100- CITY OF RAPID CITY SCHEDULE OF FINDINGS (CONCLUDED) FOR THE YEAR ENDED DECEMBER 31, 2016 C. Findings and Questioned Costs Major Federal Program Audit Material Weakness Finding No. 2016-004: Audit Package Late Filing Federal Program Affected: Federal Transit Cluster (CFDA #20.507 and #20.526) Compliance Requirement: Reporting Questioned Costs: None Condition and Cause: The annual report filing to the federal clearinghouse, including the data collection form, will be filed late due to significant issues encountered with a software conversion and failure to implement a process of timely accounting for capital asset activity. Criteria and Effect: Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards requires the City, if it expends more than $750,000 of federal funds, to submit the audit reporting package and data collection form to the federal audit clearinghouse within nine months after year-end. The City was not in compliance with such requirement, which could lead to a reduction in future funding from granting agencies. Recommendation: The City should ensure accuracy of year-end financial information to ensure timely submission of reports. Repeat Finding from Prior Year: Yes, prior year finding 2015-005. Response/Corrective Action Plan: The City agrees with the above finding. See Corrective Action Plan.
MANAGEMENT RESPONSE