The Audit Process

April 28, 2022

Did You Know?

The City of West Liberty has completed annual audits per the requirements by the State of Iowa based on the size of the City and City’s budgets. The current Fiscal Year 2020-2021 was completed in January 2022 and presented to the West Liberty City Council during a work session on February 15, 2022.

The Fiscal Year 2020-2021 included additional testing on the Fire and EMS funds by Bowman and Miller PC as requested by the Auditor of State. The additional testing of the financial transactions specific to the Fire and Ambulance fund provided no misappropriations or mismanagement of the funds.

All findings by the audit have been stated in the comments of the audit. This is not uncommon for any audit to have comments and instructions to correct with adjusting entries, create policy and procedure, and create internal controls.  The Fiscal Year 2020-2021 Audit, as all previous audits, has been filed with the Iowa Auditor of State and can be located on the Auditor of State website.

Additionally, an audit is typically $15,000 to $25,000 based on the size of West Liberty’s budget and projects. The fiscal year 2020-2021 had an additional cost of approximately $25,000, not including administrative personnel time to provide specific records for the additional testing of the Fire and EMS funds. In total the cost to complete the Fiscal Year 2020-2021 Audit cost the City of West Liberty Tax Payers $46,600.

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 (no change from previous law).
  • Cities with populations 2,000 and under are now required, at minimum, to complete either an annual examination or periodic examination. The new 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 will join 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 will be 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 li​sting 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.

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.