Attachment 3Town of Los Gatos
Presentation to The Audit Committee
December 10, 2018
Presented by: Ahmed Badawi, CPA
Partner
BADAWI&ASSOCIATL...)
ATTACHMENT 3
Badawi & Associates
Audit of the
Town of Los Gatos
Agenda
Engagement Team
Deliverables and Scope of the Audit
Areas of Primary Emphasis
e Auditors Report and Financial Statements
Required Communications
v New Accounting Standards
Conclusion & Discussion/Questions
2
Engagement Team
3
Engagement Team
Information Technology
Robert Wucher
CISA, CISM, CRISC
Engagement
Partner
Ahmed Badawi,
CPA
Manager
Mitesh Desai,
CPA
Quality Control Reviewer
Monica Singhai
CPA
Staff
Tony Zhu, CPA
Staff
Samantha Michel
4
Deliverables and Scope of the Audit
Report of Independent Auditors on Town of Los Gatos Basic Financial
Statements (BFS).
o Report on Internal Control Over Financial Reporting and on
Compliance and Other Matters.
• Agreed -Upon Procedures Report on Appropriation Limit Schedule.
• Communications With Those Charged With Governance.
Letter used to summarize communication of various significant
matters to those charged with governance.
Areas of Primary Audit Emphasis
• The risk of management override of controls is addressed by the following procedures:
• Assignment of audit staff based on consideration of audit risk.
a Procedures to incorporate an element of unpredictability in the audit from period to period.
0 Consideration of the selection and application of significant accounting principles.
O Examination of journal entries.
0 Review of accounting estimates for bias.
ka Evaluation of business rationale for unusual transactions.
O Evaluation of the appropriateness of fraud -related inquiries performed
Revenues & Receivables (Tax, Grants, Notes and Others): Improper revenue
recognitions
Confirm/validate property taxes, sales taxes, franchise taxes & other significant
revenues/receivables.
Performed testing of licenses, permits and fees revenues
Pension and OPEB: Complex accounting
• Reviewed management's journal entries for pension and OPEB
• Agreed amounts recorded to reports provided by CaIPERS and Town's Actuary
• Tested the census data used by CaIPERS and Town's Actuary
• Obtained reports from CaIPERS auditors regarding plan assets and census data
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7
Auditors Report
Unmodified opinion
Audit performed in accordance with Generally
Accepted Auditing Standards, and Government
Auditing Standards
e Financial statements are fairly presented in all material
respects
Significant accounting policies have been consistently
applied
Estimates are reasonable
Disclosures are properly reflected in the financial
statements
8
Gove rent -Wise
$120,000,000
$100,000,000
$80,000,000
$60,000,000
$40,000,000
$20,000,000
$-
o f piai Staternent
Assets and Deferred Outflows of Resources
'i 2016
■ 2017
20181
Cash &
Investments
$72,738,950
$73,682,924
$73,975,308
Receivables
$4,047,174
$3,143,917
$3,523,990
Other Assets
$17,161
$24,963
$28,011
Capital
Assets
$93,383,855
$96,265,652
$102,098,729
Deferred
Outflow of
Resources
$6,648,152
$15,666,410
$19,177,172
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Government -Wide Financial Statements
$60,000,000
$50,000,000
$40,000,000
$30,000,000
$20,000,000
$10,000,000
$-
Liabilities and Deferred Inflows of Resources
MIII
Accounts
Payable and
Accrued
Expenses
■ 2016
$4,236,248
Deposits and
Unearned
Revenues
Net Pension
Liability
Claims Payable
and
Compensated
Absences
Net OPEB
Obligation
Deferred Inflow
of Resources
$10,268,782
$33,382,870
$3,493,379
$2,694,576
$10,244,931
■ 2017
$2,931,918
7 2018
$5,885,240
$11,008,399
$47,271,733
$3,868,320
$897,603
$5,778,114
$11,313,174
$53,204,508
$4,049,304
$11,165,000
$3,923,918
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Government -Wide Financial Statements
$120,000,000
$100, 000, 000
$80,000,000
$60,000,000
$40,000,000
$20,000,000
$-
2018
Net Investment in
Capital Assets
$93,383,855
$96,265,652
$102,098,729
Net Position
Restricted
$6,386,014
$5,627,707
$6,992,747
Unrestricted
$12,744,637
$15,134,420
$170,590
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Government -Wide Financial Statements
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$-
Changes in Net Position
$5,983,376
$735,857
2016
2017
2018
Government -Wide Financial Statements
$35,000,000
$30,000,000
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
$-
Net Cost of Service to Tax Revenue
2016
2017
2018
■ Net Cost of Service
$20,846,448
$28,789,589
$28,803,164
▪ Tax Revenue
$25,521,022
$28,399,621
$28,567,313
Unrestricted Fund Balance
Total Expenditures
Unrestricted Fund Balance as
a % of Total Expenditures
General Fund
Expenditure Coverage
2016 2017 2018
$ 29,574,272
$ 36,165,995
81.77%
$ 29,180,624 $ 30,428,684
$ 34,542,602 $ 37,014,345
84.48% 82.21%
Number of months 10 10 10
GFOA recommendation
2-4
Measure of Town's ability to operate with no revenues using available fund balance.
Other Financial Information
Town's Annual Pension Contributions
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$-
rJ Miscellaneous
■ Safety
$2,223,782
$1,586,129
$2,407,496
$1,738,150
$2,669,133
$1,951,711
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Pension Plan
Town's CaIPERS Miscellaneous (Pension Plan Funded Status
$120,000,000
$100,000,000
$80,000,000
$60,000,000
$40,000,000
$20,000,000
$-
Plan Assets
Pension Liability
Net Pension Liability
6/30/2016
(2015 Measurement Date)
$66,390,878
■ 6/30/2017
(2016 Measurement Date)
$64,652,531
$89,600,121
$92,546,421
$23,209,243
$27,893,890
6/30/2018
(2017 Measurement Date)
$69,680,823
$100,469,377
$30,788,554
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$100,000,000
$80,000,000
$60,000,000
$40,000,000
$20,000,000
$-
Pension Plan
Town's CaIPERS Safety Pension Plan Funded Status
Plan Assets
Pension Liability
6/30/2016
(2015 Measurement Date)
■ 6/30/2017
(2016 Measurement Date)2
6/30/2018
(2017 Measurement Date)2
$63,308,241 $73,508,145
$57,781,270 $77,159,113
$63,355,816
Net Pension
Liability
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$80,000,000
$60,000,000
$40,000,000
$20,000,000
$-
Pension Plan
Town's CaIPERS Total Pensions Plan Sensitivity to
Discount Rate (2017 Measurement Date)
Miscellaneous
6.15%
■ 7.15%®
8.15%
$43,929,077
Safety
Total Net Pension Liability
$34,416,889
$30,788,554
$19,959,680
$78,345,966
$22,415,954
$12,605,789
$53,204,508
$32,565,469
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Other Postemployment Benefits
$4,500,000
$4,000,000
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$11500, 000
$1,000,000
$500,000
$-
Town's Annual OPEB Contributions
2016
2017
■ AOC
$2,443,424
$3,869,169
2018
$2,935,313
20
Other Postemployment Benefits
$30,000,000
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
$-
■ as of 6/30/15
■ as of 6/30/16
as of 6/30/17
Town's OPEB Funded Status
Plan Assets
$8,238,000
$9,964,000
$13,608,000
Actuarial Liability
$20,977,000
$23,301,000
$24,773,000
Unfunded Liability
$12,739,000
$13,337,000
$11,165,000
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Other Postemployment Benefits
Town's OPEB Plan Sensitivity to Discount Rate
(2017 Measurement Date)
$16,000,000
$14,000,000
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$-
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Other Postemployment Benefits
$14,000,000
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$-
Town's OPEB Plan Sensitivity to Healthcare Trend Rate
(2017 Measurement Date)
6.5%-3.0%
7.5% - 4.0%
8.5% - 5.0%
NOL
$8,871,000
$11,165,000
$13,584,000
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Required Communications
0 Our Responsibi
U.S GAAS
lity Under
Opinion on whether financial
statements are fairly stated in
accordance with U.S GAAP
Evaluate internal control over
financial reporting including tone
at the top
Evaluate compliance with laws,
contract and grants
Ensure financial statements are
clear and transparent
Communicate with the governing
body
4 Management Responsibility
Management is responsible for the
financial statements
Establish and maintain internal control
over financial reporting
Making all financial records available to
us
Adjust the financial statements to
correct material misstatements
Establish internal control to prevent
and detect fraud
Inform us of all known and suspected
fraud
Comply with laws and regulations
Take corrective action on audit findings
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Required Communications
Independence
Timing of the Audit
It is our responsibility to maintain
independence
We will maintain our
independence by strict adherence
to the AICPA and the Board of
Accountancy rules and regulations
No other services performed that
could affect our independence
/ Audit was performed in the time
frame communicated to the Town
in our engagement letters
Required Communications
Significant Accounting
Policies and Unusual
Transactions
Management Judgment
and Accounting
Estimates
The Town adopted the following new pronouncements during
/the year:
GASB Statement No. 75
GASB Statement No. 81
GASB Statement No. 85
GASB Statement No. 86
Significant management estimates impacting the financial
/ statements include the following:
Useful lives of Capital Assets
Pension Plans
Claims Paybale
OPEB Obligation
Required Communications
0 Sensitive Disclosures The most sensitive disclosures
affecting the Town's financial
statements are as follow:
Summary of Significant
Accounting Policies
Cash and Investments
Capital Assets
Defined Benefit Pension Plan
Other Post Employment Benefits
0 Difficulties Encountered in
Performing the Audit
No difficulties were encountered
/ during our audit
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Required Communications
Significant Audit Adjustments
and Unadjusted Differences
Considered by Management to
be Immaterial
Potential Effect on the Financial
Statements of Any Significant
Risks and Exposures
There were adjustments and
reclassifying entries during the
course of the audit. Management
has posted all proposed audit
adjustments .
No significant risks or exposures
were identified. Legal matters and
potential liabilities are disclosed in
the financial statements
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Required Communications
Disagreement with We are pleased to report that
Management there were no disagreements
g g
with management
Deficiencies in Internal
Control over Financial
Reporting
No material weaknesses
/ identified during our audits
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Required Communications
Representations
Requested of
Management
We will be requesting certain
representations from
management that will be
included in the management
representation letter.
Management / We are not aware of any
Consultation with Other significant accounting or
Accountants auditing matters for which
management consulted with
other accountants
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Required Communications
o Other Material Written � � Other than the engagement
Communications
Material Uncertainties
Related to Events and
Conditions
Fraud and illegal Acts
letters and management
representation letters, there
have been no other
significant communications
There were no material
uncertainties relating to
events and conditions
We have not become aware
of any instances of fraud or
illegal acts, which was not
disclosed by the Town
New Accounting Standards
• Statement 83 — Certain Asset Retirement Obligations
• Statement 88 — Certain Disclosures Related To Debt, Including Direct Borrowings
and Direct Placements
• Statement 84 — Fiduciary Activities
• Statement 90 — Majority Equity Interests —an amendment of GASB Statements No.
14 and No. 61
• Statement 87 — Leases
• Statement 89 — Accounting for Interest Cost Incurred before the End of a
Construction Period
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Thank You
For Allowing Us to Provide Audit Services
to the Town of Los Gatos
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