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Item 4HCity of Southlake, Texas MEMORANDUM February 27, 2008 TO: Shana Yelverton, City Manager FROM: Sharen Jackson, Finance Director SUBJECT: Authorize a professional services agreement with Weaver and Tidwell, L.L.P., for audit services. Action Requested: Approval of Weaver and Tidwell L.L.P. professional services agreement. Background Information: City Charter requires the City at the close of each fiscal year have an independent audit performed by a Certified Public Accountant. The objective of the audit is the expression of an opinion as to whether the financial statements are fairly presented, in all material respects, in conformity with GAAP- generally accepted accounting principles. Weaver and Tidwell will also provide a report on internal control related to the financial statements and compliance with laws, regulations, and the provisions of contracts or grant agreements. Financial Considerations: The total amount is not to exceed $80,000. Citizen Input/ Board Review: None required Legal Review: Not considered necessary- standard agreement. Alternatives: None Supporting Documents: Professional Service Agreement Staff Recommendation: Approve professional services contract with Weaver and Tidwell L.L.P. WEAVER 1. TIDWELL February 18, 2008 L L. P Statistical section. CERTIFIED PUBLIC To the Honorable Mayor and ACCOUNTANTS AND CONSULTANTS Members of the City Council City of Southlake 1400 Main Street Southlake, Texas 76092 We are pleased to confirm our understanding of the services we are to provide the City of Southlake, Texas for the year ended September 30, 2007. We will audit the financial statements of the governmental activities, the business -type activities, each major fund, and the aggregate remaining fund information, which collectively comprise the basic financial statements of the City of Southlake, Texas as of and for the year ended September 30, 2007. Also, the document we submit to you will also include the following additional information that will be subjected to the auditing procedures applied in our audit of the basic financial statements: 1. Combining and individual fund financial statements and schedules. 2. Schedules of capital assets used in the operation of governmental funds. The document submitted will also include the following required supplementary information on which we will apply limited procedures in accordance with auditing standards generally accepted in the United States of America: 1. Management's Discussion and Analysis. 2. Budgetary Comparison Schedules. 3. Condition Rating of Street System. The document submitted will also include the following additional information that will not be subjected to the auditing procedures applied in our audit of the basic financial statements, and for which our auditor's report will disclaim an opinion. 1. Introductory section. Tla.-e ,...were j'oe 2. Statistical section. 222'I Ad , )V D) c Slulp /400 9??.4W),I J70 W W W.WFAVERAN DTI DWELL COM AN INDEPENDENT MEMBER OF OFFICES IN BAKER TILLY INTERNATIONAL DALLAS FORT WORTH HOUSTON City of Southlake February 18, 2008 Page 2 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 accounting principles generally accepted in the United States of America 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. Our audit will be conducted in accordance with U.S. generally accepted auditing standards and the standards for financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, and will include tests of the accounting records of the City of Southlake, Texas, and other procedures we consider necessary to enable us to express such an opinion. If our opinion on the financial statements 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. We will also provide a report (that does not include an opinion) on internal control related to the financial statements and compliance with laws, regulations, and the provisions of contracts or grant agreements, noncompliance with which could have a material effect on the financial statements as required by Government Auditing Standards. This report will include a statement that the report is intended solely for the information and use of the audit committee, management, and specific legislative or regulatory bodies and is not intended to be and should not be used by anyone other than these specified parties. Management Responsibilities Management is responsible for establishing and maintaining internal control and for compliance with laws, regulations, contracts, and agreements. In fulfilling this responsibility, estimates and judgments by management 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 authorizations and recorded properly to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles. City of Southlake February 18, 2008 Page 3 Management is responsible for making all financial records and related information available to us. 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. We will advise you about appropriate accounting principles and their application and will advise you in the preparation of your financial statements, but the responsibility for the financial statements remains with you. As part of our engagement, we may propose standard, adjusting, or correcting journal entries to your financial statements. You are responsible for reviewing the entries and understanding the nature of any proposed entries and the impact they have on the financial statements. That responsibility includes the establishment and maintenance of adequate records and effective internal control over financial reporting, the selection and application of accounting principles, and the safeguarding of assets. Management is responsible for adjusting the financial statements to correct material misstatements and for confirming to us in 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 aggregate, to the financial statements taken as a whole. You are responsible for the design and implementation of programs and controls to prevent and detect fraud, and for informing us about all known or suspected fraud affecting the government involving (a) management, (b) employees who have significant roles in internal control, and (c) others where the fraud could have a material effect on the financial statements, You are also responsible for informing us of your knowledge of any allegations of fraud or suspected fraud 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 entity 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. As part of the audit, we will prepare a draft of your financial statements and related notes. In accordance with Government Auditing Standards, you will be required to review and approve those financial statements prior to their issuance and have a responsibility to be in a position in fact and appearance to make an informed judgment on those financial statements. Further, you are required to designate a qualified management -level individual to be responsible and accountable for overseeing our services. City of Southlake February 18, 2008 Page 4 Audit Procedures — General An audit includes 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 areas to be tested. We will plan and perform the audit to obtain reasonable rather than absolute assurance about whether the financial statements are free of material misstatement, whether from errors, fraudulent financial reporting, misappropriation of assets, or violations of laws or governmental regulations that are attributable to the entity or to acts by management or employees acting on behalf of the entity. 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 may exist and 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. However, we will inform you of any material errors that come to our attention, and we will inform you of any fraudulent financial reporting or misappropriation of assets that comes to our attention. We will also inform you of any violations of laws or governmental regulations that come to our attention, unless clearly inconsequential. Our responsibility as auditors is limited to the period covered by our audit and does not extend to matters that might arise during any later periods for which we are not engaged as auditors. Our procedures will include tests of documentary evidence supporting the transactions recorded in the accounts, 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 individuals, 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. Identifying and ensuring that the City of Southlake, Texas complies with laws, regulations, contracts, and agreements is the responsibility of management. As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we will perform tests of City of Seagoville's compliance with applicable laws and regulations and the provisions of contracts and agreements. However, the objective of our audit will not be to provide an opinion on overall compliance and we will not express such an opinion. City of Southlake February 18, 2008 Page 5 Audit Procedures— Internal Control 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 Southlake's financial statements. We will obtain an understanding of the design of the relevant controls and whether they have been placed in operation, and we will assess control risk. Tests 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 the financial statements and to preventing and detecting misstatements resulting from illegal acts and other noncompliance matters that have a direct and material effect on the financial statements. Tests of controls are required only if control risk is assessed below the maximum level. Our tests, if performed, will be less in 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. An audit is not designed to provide assurance on internal control or to identify reportable conditions. However, we will inform the governing body or audit committee 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 non - reportable conditions or other matters involving internal control, if any, as required by Government Auditing Standards. Audit Administration, Fees, and Other We understand that your employees will prepare all schedules and confirmations we request and will locate any invoices selected by us for testing. City of Southlake February 18, 2008 Page 6 The workpapers for this engagement are the property of Weaver and Tidwell, L.L.P. and constitute confidential information. However, pursuant to authority given by law or regulation, we may be requested to make certain audit documentation available to federal agencies providing direct or indirect funding or the U. S. General Accounting 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 documentation will be provided under the supervision of Weaver and Tidwell, L.L.P. 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 of information contained therein to others, including other governmental agencies. We agree that any dispute between you and Weaver and Tidwell, L.L.P., relating to this engagement, this agreement, or the breach of it, shall, if negotiations and other discussion fail be first submitted to mediation in accordance with the provisions of the Commercial Mediation Rules of the American Arbitration Association ( "AAA ") then in effect before resorting to arbitration. We agree to conduct the mediation in good faith and make reasonable efforts to resolve any dispute by mediation. Failure or refusal by either party to mediate shall not in any way affect any subsequent arbitration, We agree to conduct the mediation in Dallas, Texas, or another mutually agreed upon location. If the dispute is not resolved by mediation, the dispute shall be subject to binding arbitration under the Dispute Resolution Rules for Professional Accounting and Related Services Disputes of the AAA and judgment on the award rendered by the arbitrator may be entered in any court of competent jurisdiction. The arbitration shall be heard before one or more arbitrators selected in accordance with these rules. The parties agree to conduct the arbitration in Dallas, Texas, or another mutually agreed upon location. The arbitrator may only award actual damages and may not award consequential, exemplary, or punitive damages. The prevailing party in any arbitration or litigation shall be entitled to recover from the other party reasonable attorney and expert witness fees, court costs, and the administrative costs, fees, and expenses of the AAA, as the case may be, incurred in the same, in addition to any other relief that may be awarded. Notwithstanding the provisions of the immediately preceding paragraph, neither we nor you shall be compelled to arbitrate any dispute between us which arises out of or is related to any claim asserted against either of us by a third parry unless the third party (whether one or more) agrees to join the arbitration or can be compelled to join it. City of Southlake February 18, 2008 Page 7 In the unlikely event that circumstances occur which we in our sole discretion believe could create a conflict with either the ethical standards of our firm or the ethical standards of our profession in continuing our engagement, we may suspend our services until a satisfactory resolution can be achieved or we may resign from the engagement. We will notify you of such conflict as soon as practicable, and will discuss with you any possible means of resolving them prior to suspending our services. Our fee for these services will be at our standard hourly rates plus out -of- pocket costs (such as report reproduction, typing, postage, travel, copies, telephone, etc.). We estimate that our fees for this engagement will be approximately $80,000. Our standard hourly rates vary according to the degree of responsibility involved and the experience level of the personnel assigned to your audit. Our invoices for these fees will be rendered each month as work progresses and are payable on presentation. 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. Government Auditing Standards require that we provide you with a copy of our most recent quality control review report. Our 2004 peer review report accompanies this letter. As of the date of this letter, our 2007 peer review report is not available. We will provide an amendment to this letter providing our 2007 peer review report, when it becomes available for public inspection. We appreciate the opportunity to be of service to the City of Southlake, Texas 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, 0'aa , WEAVER AND TIDWELL, L.L,P. City of Southlake February 18, 2008 Page 8 Up a 'I , f This letter correctly sets forth the understanding of the City of Southlake, Texas. Title: Date: ROKANE QUINCY COLFAX _M- CITIES GRANDVMV W.%LLA WAL1A LIO5F_�L;iKE WCNATCHEE 0 YAKPI IA OTHELLO LE MASTER SL DANIELS PLLC ACCOUNTING To the Partners of Weaver and Tidwell, LLP AND and the Center for Public Company Audit Fi rms Peer Review Committee (AINS LTING We have reviewed the system of quality control for the accounting and auditing practice of srltvn.r5 Weaver and Tidwell, LLP (the firm) applicable to non -SEC issuers in effect for the year ended May 31, 2004. The firm's accounting and auditing practice applicable to SEC issuers was not reviewed by as since the Public Company Accounting Oversight Board ( PCAOB) is responsible for inspecting that portion of the firm's accounting and auditing practice in AsEMNER OF accordance with PCAOB requirements. A system of quality control encompasses the firm's organizational structure and the policies adopted and procedures established to provide it T€ IE with reasonable assurance of complying with professional standards. The elements of qu control are described in the Statements on Quality Control Standards issued by the American MAJLAC1rI V Institute of Certified Public Accountants (the AICPA). Th design of the system, and compliance with it, are the responsibilities of the firm. Our responsibility is to express an N opinion on the design of the system, and the firm's compliance with that system based on our review. Our review was conducted in accordance with standards established by the Peer Review Committee of the Center for Public Company Audit Firms and included procedures to plan and perform the review that are summarized in the attached description of the peer review process. Our review would not necessarily disclose all weaknesses in the system of quality control or all instances of lack of compliance with it since it was based on selective tests. 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 that 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 applicable to the non -SEC issuers of Weaver and Tidwell, LLP in. effect for the year ended May 31, 2004, has been designed to meet the requirements of the quality control standards for an accounting and auditing practice established by the AICPA, and was complied with during the year then ended to provide the firm with reasonable assurance of complying with applicable professional standards. Spokane, Washington September 15, 2004 NAMED 2001 FIRM OF THE YEAR BY THE WASHINGTON SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS Attachment to the Peer Review Report of Weaver and Tidwell, LLP Description of the Peer Review Process Overview Firms enrolled in the AICPA Center for Public Company Audit Firms (the Center) Peer Review Program have their system of quality control periodically reviewed by independent peers, These reviews are system and compliance oriented with the objectives of evaluating whether; The reviewed firm's system of quality control for its accounting and auditing practice applicable to non -SEC issuers has been designed to meet the requirements of the Quality Control Standards established by the AICPA. The reviewed firm's quality control policies and procedures applicable to non -SEC issuers were being complied with to provide the firm with reasonable assurance of complying with professional standards. A peer review is based on selective tests and directed at assessing whether the design of and compliance with the firm's system of quality control for its accounting and auditing practice applicable to non -SEC issuers provides the firm with reasonable, not absolute, assurance of complying with professional standards. Consequently a peer review on the firm's system of quality control is not intended to, and does not, provide assurance with respect to any individual engagement conducted by the firm or that none of the financial statements audited by the firm should be restated. The Center's Peer Review Committee (PRC) establishes and maintains peer review standards. At regular meetings and through report evaluation task farces, the PRC considers each peer review, evaluates the reviewer's competence and performance, and examines every report, letter of comments, and accompanying response from the reviewed firm that states its corrective action plan before the peer review is finalized, The Center's staff plays a key role in overseeing the performance of peer reviews working closely with the peer review teams and the PRC. Once the PRC accepts the peer review reports, letters of comments, and reviewed firms' responses, these documents are maintained in a file available to the public. In some situations, the public file also includes a signed undertaking by the firm agreeing to specific follow -up action requested by the PRC. Firms that perform_ audits or play a substantial role in the audit of one or more SEC issuers, as defined by the Public Company Accounting Oversight Board (PCAOB), are required to be registered with and have their accounting and auditing practice applicable to SEC issuers inspected by the PCAOB. Therefore, we did not review the firm's accounting and auditing practice applicable to SEC issuers. Page 2 Planning the Review for the Firm's Accounting and Auditing Practice Applicable to Non -SEC Issuers To plan the review of Weaver and Tidwell, LLP, we obtained an understanding of (1) the nature and extent of the firm's accounting and auditing practice, and (2) the design of the firm's system of duality control sufficient to assess the inherent and control risks implicit in its practice, Inherent risks were assessed by obtaining an understanding of the firm's practice, such as the industries of its clients and other factors of complexity in serving those clients, and the organization of the fmn's personnel into practice units. Control risks were assessed by obtaining an understanding of the design of the firm's system of quality control, including its audit methodology, and monitoring procedures. Assessing control risk is the process of evaluating the effectiveness of the reviewed firm's system of quality control in preventing the performance of engagements that do not comply with professional standards,. Performing the Review for the Firm's Accounting and Auditing Practice Applicable to Non -SEC Issuers Based on our assessment of the combined level of inherent and control risks, we identified practice units and selected engagements within those units to test for compliance with the firm's system of quality control, The engagements selected for review included engagements performed under the Gover - 77711ent Auditing Standards and audits of Employee Benefit Plans. The engagements selected for review represented a cross - section of the firm's accounting and auditing practice with emphasis on higher -risk engagements. The engagement reviews included examining working paper files and reports and interviewing engagement persommel. The scope of the peer review also included examining selected administrative and personnel files to determine compliance with the firm's policies and procedures for the elements of quality control pertaining to independence, integrity, and objectivity, personnel management; and acceptance and continuance of clients and engagements. Prior to concluding the review, we reassessed the adequacy of scope and conducted a meeting with firm management to discuss our findings a - ad recommendations.