Completing financial audits and establishing appropriate internal controls are essential to maintaining financial health in your community. There are various requirements cities should be aware of regarding when an audit or financial examination is needed and how to file related reports with the state. Also, cities need to review audit and examination findings and implement any recommendations the auditor makes.
When Audits are Required
Chapter 11 of the Code of Iowa details when audits or examinations are required:
- Cities with a population over 2,000 must have an audit every year.
- Cities with populations 2,000 and under are required, at minimum, to complete either an annual examination or periodic examination. The system is based on annual budgeted expenditures:
- Cities with $1 million or more in budgeted expenditures for two consecutive years must complete an annual examination.
- Cities with less than $1 million in budgeted expenditures are in a pool of such cities and pay an annual fee to the State Auditor’s office; this fee will pay for the periodic examination, which each city is required to complete at least once every eight years.
*Cities less than 2,000 may opt out of the new system by completing an annual audit or examination.
The Auditor of State’s office provides a listing of each city and their audit, annual examination or periodic examination requirement based on the fiscal year to be audited or examined.
An audit required under state law must be completed within nine months of the end of the fiscal year to be audited. This deadline can be extended by the state auditor at the request of the city in writing, provided the failure to meet the deadline was not intentional and not contrary to the public interest. If a community qualifies for an audit due to a population increase, an audit is required for the fiscal year in which the census information is certified.
Request for Proposal Process
When a full audit is required, the city must use a written Request for Proposals (RFP) process before hiring an auditor. A private auditor can be used, but the person doing the audit must be a certified public accountant (CPA) and must be able to complete the audit using the State Auditor’s guidelines. A sample RFP is available on the Auditor of State’s Web site.
Those required to do an annual examination must also use an RFP process as required by the Auditor of State. Such cities will be able to use either the Auditor of State’s office or a CPA to conduct the examination. The Auditor’s Office has supplied a sample RFP for annual examination cities.
The Auditor of State’s office will administer the periodic examination pool, including the RFP process to select CPA firms. If a periodic examination city elects to have an annual audit or examination, the city would not be subject to the periodic examination fee.
Fees for Periodic Examination Pool
Cities that will join the periodic examination pool will be required to pay an annual fee to the Auditor of State. The fees are based upon budgeted expenditures:
| Budgeted Expenditures | Fee |
|---|---|
| Under $100,000 | $200 |
| $100,000-Less than $250,000 | $550 |
| $250,000-Less than $500,000 | $800 |
| $500,000-Less than $750,000 | $1,200 |
| $750,000 or more | $1,500 |
Periodic examination cities should budget to pay the yearly fee to the Auditor of State, which is due March 31.
Annual Examination Costs
Cities meeting the requirement for an annual examination should budget for the cost of an annual examination. The number of hours and hourly rates to complete an annual examination will vary. Additional examination costs cities will incur include State Auditor’s office or CPA firm travel expenses and the statutory filing fee payable to the State Auditor.
Filing an Audit or Examination
By state law, the audit, annual examination and periodic examination reports must be filed with the State Auditor’s office. There is a filing fee for audits and annual examinations to cover administrative costs. While periodic examinations must also be filed, there is no associated fee. Fees for audits and annual examinations are based on the amount of budgeted expenditures as indicated:
| Budgeted Expenditures in Millions of Dollars | Fee Amount |
|---|---|
| Under 1 | $100 |
| At least 1 but less than 3 | $175 |
| At least 3 but less than 5 | $250 |
| At least 5 but less than 10 | $425 |
| At least 10 but less than 25 | $625 |
| 25 and over | $850 |
In addition to two copies of the audit or examination report and filing fee, cities must file a copy of the CPA firm’s per diem audit billing and a copy of the news release or media notification that an audit has been completed. Electronic filings for the audit or examination must be emailed in PDF file format to SubmitReports@aos.iowa.gov.
Audit Findings
Auditors are required to report on internal control and statutory compliance findings. When weaknesses in internal control or noncompliance with statutes are noted, the auditor includes a finding and recommendations as to how the city should correct the finding. The city is given the opportunity to respond to the finding and recommendation, which is included in the audit report. In the cases where embezzlement or theft is suspected, the CPA firm is required to immediately notify the state auditor.
The audit is not a “safe harbor” and auditors are not part of the city’s system of internal control. In accordance with generally accepted auditing standards, it is management’s responsibility to design and implement programs and controls to prevent, deter and detect fraud including setting the proper tone, creating and maintaining a culture of honesty and ethics, and establishing appropriate controls.
The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.
Establishing Policies and Procedures
Without established policies and procedures, city employees have no authoritative guidance as to how certain issues and/or transactions should be handled. Additionally, the lack of authoritative guidance could result in statutory noncompliance. There are many situations in which independent auditors may recommend policies to address an apparent weakness in internal control or to address statutory compliance. Common examples of policies include but are not limited to:
- Investment policy required by Chapter 12B of the Code of Iowa.
- Policies to address use of city-owned credit cards, cellular phones, vehicles and/or other city-owned equipment.
- Policies to protect electronic data processing systems.
- Personnel policies for employee compensation and benefits.
- Policies to address expenditure of public funds and/or to document public purpose consistent with Article III, Section 31 of the Constitution of the State of Iowa (public funds may only be spent for the public benefit).
- Policies to address utility operations such as collection of delinquent utility accounts.
The city’s independent auditor may have examples of policies and should be able to provide direction as to what the policy and procedures should encompass. However, independent auditors generally should not draft policy or procedures as part of the audit process. Cities may also contact the League of Cities or neighboring cities for samples to use when drafting policies and procedures to fit your city’s specific circumstances.
