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2006 City Records Audit Client Copy LOWENTHAL SINGLETON WEBB & WILSON PROFESSIONAL ASSOCIATION David A. Lowenthal, CPA Thomas E. Singleton, CPA Patricia L. Webb, CPA Thomas G. Wilson, CPA Audrey M. Odermann, CPA CERTIFIED PUBLIC ACCOUNTANTS 900 Massachusetts, Suite 301 Lawrence, Kansas 66044-2868 Phone: (785) 749-5050 Fax: (785) 749-5061 E-mail: Iswwcpa@lswwcpacom Abram M. Chrislip, CPA Members of American Institute and Kansas Society of Certified Public Accountants November 6, 2006 City Commission City of Salina 300 West Ash Street Salina, KS 67402 We are pleased to confirm our understanding of the services we are to provide the City of Salina, Kansas for the year ended December 31,2006. We will audit the financial statements of the governmental activities, the business- type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information, which collectively comprise the entity's basic financial statements, of the City of Salina, Kansas as of and for the year ended December 31, 2006. The document we submit to you will include the following supplementary information required by generally accepted accounting principles that will be subjected to certain limited procedures, but will not be audited: Management's Discussion and Analysis Also, the document we submit to you will include the following additional information that will be subjected to the auditing procedures applied in our audit of the financial statements upon which we will provide an opinion in relation to the basic financial statements. 1. Schedule of expenditures of federal awards. 2. Combining and individual non-major fund financial statements and schedules. The following additional information accompanying the basic financial statements will not be subject to the auditing procedures applied in our audit of the financial statements, and for which our auditors report will disclaim an opinion; (1) introductory section and (2) statistical section. Audit Objectives The objective of our audit is the expression of an opinion as to whether your financial statements are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles and to report on the fairness of the additional information referred to in the first paragraph when considered in relation to the financial statements taken as a whole. The objective also includes reporting on- · Internal control related to the financial statements and compliance with the provisions of applicable laws, regulations, contracts, agreements and grants, noncompliance with which could have a material effect on the financial statements in accordance with Government Auditing Standards. · Internal control related to major programs and an opinion (or disclaimer of opinion) on compliance with laws, regulations, and the provisions of contracts or grant agreements that could have a direct and material affect on each major program in accordance with the Single Audit Act Amendments of 1996 and OMS Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. The reports on internal control and compliance will each include a statement that the report is intended for the information and use of management, the mayor and city commission, federal awarding agencies, and if applicable, pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. g:ldi.....\3 digh dienls\709. salina. city ol\2OO6\engagemenl _ 06.doc City Commission November 6, 2006 Page 2 Our audit will be conducted in accordance with U.S. generally accepted auditing standards; the Kansas Municipal Audit Guide, the standards for financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; the Single Audit Act Amendments of 1996; and the provisions of OMS Circular A-133, and will include tests of accounting records, a determination of major program(s) in accordance with Circular A-133, and other procedures we consider necessary to enable us to express such an opinion and to render the required reports. If our opinion on the financial statements or the Single Audit compliance opinion is other than unqualified, we will fully discuss the reasons with you in advance. If, for any reason, we are unable to complete the audit or are unable to form or have not formed an opinion, we may decline to express an opinion or to issue a report as a result of this engagement. Management Responsibilities Management is responsible for establishing and maintaining effective internal control and for compliance with the provisions of applicable law, regulations, contracts, agreements, and grants. In fulfilling this responsibility, estimates and judgments by managements are required to assess the expected benefits and related costs of the controls. The objectives of internal control are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that federal award programs are managed in compliance with applicable laws and regulations and the provisions of contracts and grant agreements. Managements is responsible for making all financial records and related information available to us, including any significant vendor relationships in which the vendor has the responsibility for program compliance. We understand that you will provide us with such information required for our audit and that you are responsible for the accuracy and completeness of that information. Management's responsibilities include adjusting the financial statements to correct material misstatements and for confirming to us the representation letter that the effects of any uncorrected misstatements aggregated by us during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregated, to the financial statements taken as a whole. You are responsible for establishing and maintaining internal controls, including monitoring ongoing activities; for the selection and application of accounting principles; and for the fair presentation in the financial statements of the respective financial position of the governmental actives, the business-type activities, the aggregated discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Salina, Kansas, and the respective changes in financial position and, where applicable, cash flows in conformity with U.S. generally accepted accounting principles. You are responsible for the design and implementation of programs and controls to prevent and detect fraud, and for informing us about all know or suspected fraud or illegal acts affecting the government involving (1) management, (2) employees who have significant roles in internal control, and (3) other where the fraud or illegal acts could have a material effect on the financial statements. Your responsibilities include informing us of you knowledge of any allegations of fraud or suspected fraud or illegal acts affecting the government received in communications from employees, former employees, grantors, regulators, or others. In addition, you are responsible for identifying and ensuring that the entities complies with applicable laws and regulations and for taking timely and appropriate steps to remedy any fraud, illegal acts, violations of contracts or grant agreements, or abuse that we may report. Additionally, as required by OMS Circular A-133, it is management's responsibility to follow up and take corrective action on reported audit findings and to prepare a summary schedule of prior audit findings and a corrective action plan. The summary schedule of prior audit findings should be available for our review. We may prepare a general ledger trial balance for use during the audit. Our preparation of the trial balance will be limited to formatting information in the City's general ledger into a working trial balance. Further you are required to designate a qualified management-level individual to be responsible and accountable for overseeing our services. Audit Procedures-General An audit included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; therefore, our audit will involve judgment about the number of transactions to be examined and the test areas to be tested. We will plan and perform the audit to obtain reasonable rather than absolute assurance about ENGAGEMENT LETTER 06.DOC City Commission November 6, 2006 Page 3 whether the financial statements are free of material misstatements, whether from (1) errors, (2) fraudulent financial reporting, (3) misappropriate of assets, or (4) violations of laws or governmental regulation that are attributable to the entity or to acts by management or employees acting on behalf of the entity. Because the determination of abuse is subjective, Government Auditing Standards, do not expect auditors to provide reasonable assurance of detecting abuse. As required by the Single Audit Act Amendments of 1996 and OMB Circular A-133, our audit will include tests of transactions related to major federal award programs for compliance with applicable laws and regulations and the provisions of contracts and agreements. Because an audit is designed to provide reasonable, but not absolute assurance and because we will not perform a detailed examination of all transactions, there is a risk that material misstatements or non compliance may exist and may not be detected by us. In addition, an audit is not designed to detect immaterial misstatements or violations of laws or governmental regulations that do not have a direct and material effect on the financial statements or major programs. However, we will inform you of any material errors and fraudulent financial reporting or misappropriation of assets that come to our attention. We will also inform you of any violations of laws or governmental regulations that come to our attention, unless clearly inconsequential. We will include such matters in the reports required for a Single Audit. Our responsibility as auditors is limited to the period covered by our audit and does not extend to any later periods for which we are not engaged as auditors. Our procedures will include test of documentary evidence supporting the transaction recorded in the account, and may include tests of the physical existence of inventories, and direct confirmation of receivables and certain other assets and liabilities by correspondence with selected individual, creditors, and financial institutions. We will request written representations from your attorneys as part of the engagement, and they may bill you for responding to this inquiry. At the conclusion of our audit, we will also require certain written representations from you about the financial statements and related matters. Audit Procedures- Internal Controls In planning and performing our audit, we will consider the internal control sufficient to plan the audit in order to determine the nature, timing, and extent of our auditing procedures for the purpose of expressing our opinions on the City of Salina, Kansas's financial statements and on its compliance with requirements applicable to major programs. We will obtain and understanding of the design of the relevant controls and whether they have been placed in operation, and we will assess control risk. Test of controls may be performed to test the effectiveness of certain controls that we consider relevant to preventing and detecting errors and fraud that are material to financial statements and to preventing and detecting misstatements resulting from illegal act and other noncompliance matters that have a direct and material effect on the financial statements. Test of controls relative to the financial statements are required only if control risk is assessed below the maximum level. Our tests, if performed will be less scope than would be necessary to render an opinion on internal control and, accordingly, no opinion will be expressed in our report on internal control issued pursuant to Government Auditing Standards. As required by OMB Circular A-133, we will perform tests of controls over compliance to evaluate the effectiveness of the design and operation of controls that we consider relevant to preventing or detecting material noncompliance requires applicable to each major federal award program. However, our test will be less in scope that would be necessary to render an opinion on those controls and, accordingly, no opinion will be expressed in our report on internal control issued pursuant to OMB Circular A-133. An audit is not designated to provide assurance on internal control or to identify reportable conditions. However, we will inform the governing body of any matters involving internal control and its operation that we consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control that, in our judgment, could adversely affect the entity's ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements. We will also inform you of any nonreportable conditions or other matters involving internal control, if any. As required by Government Auditing Standards and OMB Circular A-133. ENGAGEMENT LETTER OS.DOC City Commission November 6, 2006 Page 4 Audit Procedures-Compliance Our audit will be conducted in accordance with the standards referred to in the section titled Audit Objectives. As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we will perform tests of the City of Salina, Kansas's compliance with applicable laws and regulations and the provisions of contracts and agreements, including grant agreements. However, the objective of those procedures will not to provide an opinion on overall compliance and we will not express such an opinion in our report on compliance issued pursuant to Government Auditing Standards. OMS Circular A-133 requires that we also plan and perform the audit to obtain reasonable assurance about whether the auditee has complied with applicable laws and regulations and the provisions of contracts and grant agreements applicable to major programs. Our procedures will consist of the applicable procedures described in the OMB Circular A-133 Compliance Supplement for the types of compliance requirements that could have a direct and material effect on each of the City of Salina, Kansas's major programs. The purpose of those procedures will be to express an opinion on the City of Salina, Kansas's compliance with requirements applicable to each of its major programs in our report on compliance issued pursuant to OMS Circular A-133. Audit Administration, Fee and Other When delivered to the City of Salina, Kansas, the audit reports and financial statements produced in connection with this engagement letter are public records and may be used (a) to fulfill the requirements of continuing disclosure under SEC rule 15c2-12, (b) as inserts or incorporated by reference in offering documents issued by the City of Salina, Kansas, and (c) for any lawful purpose of the City of Salina, Kansas, all without subsequent consent from us. Any official statements in connection with debt issuances which include the above mentioned audit reports and financial statements shall contain the following: "Our independent auditor has not been engaged to perform and has not performed, since the date of its report included herein, any procedures on the financial statements addressed in that report. The independent auditor also has not performed any procedures relating to this official statement." At the conclusion of this engagement, we will complete the appropriate sections of and sign the Data Collection Form that summarizes our audit findings. We will provide copies of our reports; however it is managements responsibility to submit the reporting package ( including financial statements, schedule of expenditures of federal awards, summary schedule of prior auditing findings, auditors reports and a corrective action plan) along with the Data Collection Form to the designated federal clearinghouse and, if appropriate, to pass-through entities. The Data Collection Form and the reporting package must be submitted with in the earlier of 30 days after receipt of the auditors' reports or nine months after the end of the audit period, unless a longer period is agreed to in advance by the cognizant or oversight agency for audits. At the conclusion of the engagement, we will provide information to management as to where the reporting packages should be submitted and the number to submit. The audit documentation for this engagement is our property and constitutes confidential information. However, pursuant to authority given by law or regulation, we may be requested to make certain audit documentation available to, a federal agency providing direct or indirect funding, or U.S. Government Accountability Office for purposes of a quality review of the audit, to resolve audit findings, or to carry out oversight responsibilities. We will notify you of any such request. If requested, access to such audit documentation will be provided under the supervision of the firm personnel. Furthermore, upon request, we may provide copies of selected audit documentation to the aforementioned parties. These parties may intend, or decide, to distribute the copies or information contained therein to other, including other governmental agencies. The audit documentation for this engagement will be retained for a minimum of five years after the report release or for any additional period requested by the appropriate federal or state agencies. If we are aware that a federal awarding agency, pass-through entity, or auditee is contesting and audit finding, we will contact the party (ies) contesting the audit finding for guidance prior to destroying the audit documentation. In the interest of facilitating our services to your organization, we may communicate by facsimile transmission or send electronic mail over the Internet. Such communications may include information that is confidential to your organization. Our firm employs measures in the use of facsimile machines and computer technology designed to maintain data security. While we will use our best efforts to keep such communications secure in accordance with our obligations under applicable laws and professional standards, you recognize and accept that we have no control ENGAGEMENT LETTER OS.DOC City Commission November 6,2006 Page 5 over the unauthorized interception of these communications once they have been sent and consent to our use of these electronic devices during this engagement. Our audit engagement ends on delivery of our audit report. Any follow-up services that might be required will be a separate, new engagement. The terms and conditions of that new engagement will be governed by a new, specific engagement letter for that service. You may request that we perform additional services not contemplated by this engagement letter. If this occurs, we will communicate with you regarding the scope of the additional services and the estimated fees. We also may issue a separate engagement letter covering the additional services. In the absence of any other written communication from us documenting such additional services, our services will continue to be governed by the terms of this engagement letter. During the term of this engagement, we will comply with the provisions of K.S.A. 44-1030. Our fee these services include out-of-pocket costs (such as report reproduction typing, postage, travel, copies, telephone, etc.). We agree that our gross fee, including expenses, will not exceed $35,500. Our invoices for these fees will be rendered each month as work progresses and are payable on presentation. In accordance with our firm policies, work may be suspended if your account becomes overdue and may not be resumed until your account is paid in full. If we elect to terminate our services for nonpayment, our engagement will be deemed to have been completed upon written notification of termination, even if we have not completed our report. You will be obligated to compensate us for all time expended and to reimburse us for all out-of-pocket cost through the date of termination. The above fee is based on anticipated cooperation from your personnel and the assumption that unexpected circumstances will not be encountered during the audit. If significant additional time is necessary, we will discuss it with you and arrive at a new fee estimate before we incur the additional costs. Governmental Auditing Standards require that we provide you with a copy of our most recent external peer review report and any letter of comment, and subsequent peer review reports and letters of comment received during the period of the contract. Our 2003 peer review report accompanies this letter. We appreciate the opportunity to be of service to the City of Salina, Kansas and believe this letter accurately summarizes the significant terms of our engagement. If you have any questions, please let us know. If you agree with the terms of our engagement as described in this letter, please sign the enclosed copy and return it to us. Very truly yours, LOWENTHAL, SINGLETON, WEBB & WILSON Professional Association Ce~~d Public Accountants l (<\: " · \ 0--' By~< \;"-- < - AUdrey;). Odermann, CPA RESPONSE: This le~rrectly sets forth the understanding of the City of Salina, Kansas. By: (V~- Ie;) ~ Title: Mayor Date: November 27. 2006 ENGAGEMENT LETTER 06DOC . I ~ staffordsrestervelt Stafford & Westervelt, Chartered Certified Public Accountants Offices in Chanute, Independence, Parsons and Pittsburg, Kansas Rogers, Arkansas To the Shareholders Lowenthal, Singleton, Webb & Wilson, Professional Association We have reviewed the system of quality control for the accounting and auditing practice of Lowenthal, Singleton, Webb & Wilson, Professional Association (the firm) in effect for the year ended June 30, 2003. A system of quality control encompasses the firm's organizational structure and the policies adopted and procedures established to provide it with reasonable assurance of conforming with professional standards. The elements of quality control are described in the Statements on Quality Control Standards issued by the American Institute of Certified Public Accountants (AICP A). The design of the system and compliance with it are the responsibility of the firm. Our responsibility is to express an opinion on the design of the system, and the firm's compliance with the system based on our review. Our review was conducted in accordance with standards established by the Peer Review Board of the AICP A. In performing our review, we obtained an understanding of the system of quality control for the firm's accounting and auditing practice. In addition, we tested compliance with the firm's quality control policies and procedures to the extent we considered appropriate. These tests covered the application of the firm's policies and procedures on selected engagements. Because'our review was based on selective tests, it would not necessarily disclose all weaknesses in the system of quality control or all instances of lack of compliance with it. Because there are inherent limitations in the effectiveness of any system of quality control, departures from the system may occur and not be detected. Also, projection of any evaluation of a system of quality control to future periods is subject to the risk that the system of quality control may become inadequate because of changes in conditions, or because the degree of compliance with the policies or procedures may deteriorate. In our opinion, the system of quality control for the accounting and auditing practice of Lowenthal, Singleton, Webb & Wilson, Professional Association in effect for the year ended June 30,2003, has been designed to meet the requirements of the quality control standards for an accounting and auditing practice established by the AICP A and was complied with during the year then ended to provide the firm with reasonable assurance of conforming with professional standards. .~ ~\ w'i;8-~ Independence, Kansas July 3, 2003 ciLJhJ \ Members of the American Institule or Certified Public Accountants