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1975REPORT ON INTERNAL ACCOUNTING CONTROLS AND COMPLIANCE MATTERS Honorable Members in Council City of Bangor, Maine We have examined the Revenue Sharing Fund Statement of Changes in Available Funds and Statement of Obligations Incurred, and have compared the financial data included on the Bureau of the Census Form RS -9 with the audited records of the City of Bangor, Maine for the year ended December 31, 1975• Our report thereon is qualified as it pertains to Exhibit C for the reasons set forth therein. Our examination was made in accordance with generally accepted auditing standards and the "Audit Guide and Standards for Revenue Sharing Recipients" issued by the Office of Revenue Sharing, U.S. Department of the Treasury, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circum- stances. As part of our examination, we made a study of those internal account- ing and administrative control procedures and compliance matters that we considered relevant to the criteria established by the Office of Revenue Sharing as set forth in Section V.D. of its "Guide." The objective of internal accounting control is to provide reasonable, but not absolute, assurance as to the safe -guarding of.assets against loss from unautho- rized use or disposition, and the reliability of financial records for preparing financial statements and maintaining accountability for assets. We understand that the objective of those administrative control procedures comprehended in the Office of Revenue Sharing's criteria is to provide similar assurance as to compliance with its related requirements. The concept of reasonable assurance recognizes that the cost of a system of internal control should not exceed the benefits derived and also recognizes that the evaluation of these factors necessarily requires estimates and judgments by management. There are inherent limitations that should be recognized in considering the potential effectiveness of any system of internal control. In the performance of most control procedures, errors can result from misunderstanding of instructions, mistakes of judgment, carelessness or other personal factors. Control procedures whose effectiveness depends upon segregation of duties can be circumvented by collusion. Similarly, control procedures can be circumvented intentionally by management with respect either to the execution and recording.of transactions or with respect to the estimates and judgments required in the preparation of financial statements. Further, projection of any evaluation of internal control to future periods is subject to the risk that the procedures may become inadequate because of changes in conditions, and that the degree of compliance with the procedures may deteriorate. We understand that procedures in conformity with the criteria referred to in the first paragraph of this report are considered by the Office of Revenue Sharing to be adequate for its purposes in determining the adequacy of internal control and compliance with laws and regulations applicable to the revenue sharing program, and that procedures that are not in conformity therewith indicate some inadequacy for such purposes. Based on this understanding and on our study, we believe that the City of Bangor's procedures were adequate for the purposes of the Office of Revenue Sharing except for conditions described below which we believe are weak- nesses in relation to the revenue sharing program. Page 2 REPORT ON INTERNAL ACCOUNTING CONTROLS AND COMPLIANCE MATTERS Part 1 - Internal Control As part of our annual examination of the financial statements of the City of -Bangor for the year ended December 31, 1975, we issued our report on internal control matters under separate letter dated September 8, 1976. Since Federal Revenue Sharing expenditures are intermingled with other expenditures of a priority category, listed below are excerpts from our letter which either directly or.indirectly pertain to Federal Revenue Sharing Funds. Internal Audit We noted during our examination that the audit department of the City concerned itself primarily with a detail review of cash receipts and disbursements which we understand included field examinations of various City departments. We commend the City on the increased effort in this area, however, we suggest that. the internal audit function to be per- formed by the audit department is more encompassing in scope than the aforementioned procedure. We suggest that the internal audit function should be designed and structured for the purpose of conducting internal examinations of the City's financial statements. Accordingly, such an examination would include (in addition to field audits of cash receipts and disbursements of the various departments) analysis of various revenue, expense and balance sheet accounts, review of.the underlying system of internal control throughout the City's accounting system, and review of the City's financial statements for presentation in accordance with generally accepted accounting principles.and compliance with charter and State law. We recommend, therefore, that the audit department expand its function to include the aforementioned audit procedures. Cash - Control Over Facsimile Plate and Unused Checks During our review we noted that the City signs its checks with a facsimile plate. This machine is kept in the Treasury department, and the key is, kept in the vault and is accessible to any person who is allowed in the vault itself. Furthermore, no log is kept on the number of checks being processed by this machine. Also, we noted that unused checks are stored on open shelves in the computer room. The combination of the preceding items puts the City's funds in a potentially vulnerable situation. We strongly recommend that: (a) the Treasury department maintain a log of checks signed. This log should, at a minimum, show the beginning number and the ending number on the check machine counter for each run. Further, this log should be reviewed by the City Treasurer or his assistant daily to insure the integrity. of sequence of the numbers and the relationship of the number of checks signed to the number of checks on the warrants. .(b) The unused checks should be kept under lock and key with access available only to limited personnel. Purchasing Section 3.3 of the Purchasing Regulations states that all purchases of $650.00 and over are to be approved by the City Manager. Section 3.2.4 further states that purchases of $2,000 or more will be approved by the Finance Committee prior to award. During our review, we examined three disbursements for repairs to motor pool equipment. Two of those examined were approximately $1,000 each, the requisitions of which did not bear evidence of Manager approval. The other requisition examined 1'a je 3 REPORT ON INTERNAL ACCOUNTING CONTROLS AND COMPLIANCE MATTERS Purchasing (Continued) was for an amount in excess of $2,000 which also did not bear evidence of Manager approval nor Finance Committee approval. We were informed that due to the urgency of most repair.s to the City's heavy equipment that the motor pool had been delegated the authority to take immediate action on the repairs. We feel that while this procedure is justified under the circumstances, the fact :remains that there appears to be a definite violation of the regulations. We recommend, therefore, that. (a) the above policy. (and any similar policies) be clearly outlined as exceptions .in the regulations and (b) the City Manager and the Finance Committee approve all such purchases even if it is on an "after -the -fact" basis. The purchasing regulations as they now exist also indicate that the aforementioned approval requirements also apply to such items as electricity, insurance, etc.; yet, we noted that there was no evidence of the required approvals being made. We suggest that the purchasing regulations be reviewed and revised to encompass such expenditures. Part II - Compliance As part of our examination we made a study of the compliance matters as prescribed in Section V.D. of the "Guide" for the year ended December 31, 1975. Our study of compliance, which related to the criteria cited above, disclosed no conditions which we consider matters of non-compliance.