HomeMy WebLinkAbout12-03-1984 ARTHUR
ANDERSEN
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CITY OF DENTON
Memorandum On Accounting Procedures, i
Internal Control And Related Matters
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PseeMber, ,. 1984
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ARTHUR AN1)ERSEN SC CO,
DAl,l,ns, TBXAS
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December 30 1984
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To the Honorable Mayor, 4'
City Council and City Manager
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City of Denton, Texasi
The d000mpanying memorandum includes suggestions for improvement
of accounting procedures and internal accounting control measures that came to
our attention as a result of our final examination of the City of Denton for
the ear ended 3e tembat 30, 1984, The matters discussed therein were
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considered by us during our examination and do not modify the opinion
expressed in our auditors ' report dated December 31 1984, on such financial
statements, o
In accordance with generally accepted auditing standards , and as
discussed in our audit arrangement letter of l±cbeuary 23, 1984, we made a +
review of the City' s system of internal accounting control for the purpose of I
providing a basis for reliance thereon in determining the nature, timing and
rr extent of the audit tests to be applied in connaettou ith our examination of
the City's 1984 financial statements, While ceresin m —era that came to our
attention during the review are prosanted in the accompanying memorandum for
the consideration of management , our review did not encompass 91.1 control t
procedures and techniques and was not designed for the purpose of making
detailed reoommendations,
'+ The accompanying memorandum also includes certain comments and
suggestions with respect to other financial and administrative matters that
came to our attention during the course of our final examination, These
' matters are offered as constructive suggestions for the consideration of
management as part of the ongoing process of modifying and improving +
accounting control and other financial and administrative practices and
t procedures, i
The accompanying memorandum 3s intended solely for the use of city {
management, and the office of Revenue Sharing, This restriction is not
intended to limit: the distribution of this letter and the accompanying 1
memorandum which, upon acceptance by the Office of Revenue Shar.{ng, are a
matter of public record,
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f' We would like to express our appreciation to the City Manager, the
various department heads and their staffs for the courtesies and cooperation
extended to our representatives during the course of their works We would be
pleased to discuss these suggestions and comments in greater detail or
otherwise assist in their implementation.
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Very truly yours,
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I N D E X
OVERALL MANAGEMENT CONTROLSS
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5, Lengthen Payroll Processing Cycle 5
„ Consider Adopting a Direct Deposit Payroll Systom
Employee Maeterfila Additions, Deletions and Modifications 6
Motor Pool Fund Records and Procedures 6
Review of Unrecorded Liabilities y j
Leases 8
' r Approval Procedures for Journal Entries
CASH AND INVESTMENT MANAGEMENTS
Check Limits 9
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Investment Records
ACCOUNTING VOR PROPERTY TAXF,St
Collection Efforts for Delinquent Taxes 10
UTILITY SYSTEMS
Interest Charged During Construction of Utility 11
Fixed Assets 12
Accounting for Utility System Entities Separately 12
Accounting for Meter Changes 13
Work Order Budget Versus Actual COMPdrieon
INTERNAL AUUIT FUNCTIONS
Into Audit Program 14
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COMMENTS REGARDING PRIOR YEAR RECOMMENDATIONS
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OVERALL MANAGEMENT CONTROtS
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Lengthen Payroll i
k processing Cycle The City hag plans in the near future to S
implement a more comprehensive labor
,, ., • ' I " distribution system. It is our understanding that this system will include
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the ability to enter employee time spent outside of their assigned division.
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It appears that implementation of this system will place an
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additional burden on the finance/payroll department since they will be
entering payroll hours on a more detailed level than at present. In addition,
it is expected that payroll processing time will increase,
In this regard, the City might consider lengthening the payroll
processing cycle, Presently, the City issues payroll checks on every other E
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Wednesday, All payroll hours incurred through the previous Sunday are
i included in the Wednesday payroll , This allows the finance/payroll department
and data processing a 2-1/2 days processing cycle, A S - 7 day cycia would
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not only reduce the burden on the finance/payroll department and data
c processing, but allow for more efficient investigation and correction of
errors,
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Consider Adopting a
' Deposit Payroll System
The City pays all employees by
M00118 of a payroll check, We
` <' recommend that the City consider a direct deposit payroll system (a "checkless 1
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_, payroll") whereby employee pay is deposited directly to their bank account,
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This recommendation would only be feasible if the payroll processing cycle is
lengthened, as the current 2-1/2 day cycle is too short for use of direct
deposit systems .
This would greatly reduce the City 's time and efforts of
y, printing, distributing and accounting for paychecks, In addition, direct
deposit allows the employees immediate access to their pay without the trouble
Of going to the bank to onsh or deposit a check. Ymployeee would continue to
receive the customary payroll stub explaining gross and net earnings,
Employee Masterfile Additions,
belet[one and Modification, Presently, both the personnel and
finance/payroll departments have access
to tho Employee Status Records,
It is our understanding that the finance/
r.' payroll department adds all Information related to raw hires to the Employee
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Statue Records, lnformation Input includes name and related Information,
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compensation rats, employee benefit and payroll and tax withholding status.
•,� In addition, Although the
g personnel department makes moat modifications and
deletes employees from the masterfila, the finance/payroll department also has
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the capability to perform these functions, '
The finance/payroll department is responsible for recording payroll
related transactions, Their ability to access reference files used in payroll
;.� processing places than in a position to conceal errors or irregularities ,
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We recommend limiting the capability to add, delete or modify Employee Status
Records to the personnel department. Clear identification of the department
responsible for making these changes would not only improve efficiency, but
the overall control environment as well.
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Motor Pool, Fund
Records and Preoed'irea The motor pool is a proprietary fund,
and as a result should record within its
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accounts fixed easel balances sad the related depreciation. During our review
of internal service funds , we noted that for the motor pool fund) although 1
r Y' assets were recorded within its accounts, no depreciation had been recorded j
within the fund for the fiscal year ending 1984.
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The City should maintain a depreciation schedule related to fixed I
assets recorded in the motor pool fund and should designate responsibility for
s ensuring that depreciation is booked in the general ledger correctly and on a
timely basis. Motor pool fund fixed asset accounting procedures should be
incorporated into the funds policies and procedures manual.
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Review of
' Unrecorded Liabilities The City does not perform tin extensive ( )
review of unrecorded liabilities at the
end of a reporting period. Currently, only invoices received after the end of
the period and dated prior to that period, Are set up as payables for
financial reporting purposes.
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This review should extend to invoices received and dated subsequent
to the period that are for goods or services rendered during the period being
reported, The City' s enterprise activities use the accrual method of E
accounting, and therefore, also require such procedures. The recording of
these liabilities would not only provide management wttb more accurate
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financial information for planning and analysis,
but will also aid management
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in determining more accurate rates for the utility system funds and user fees f
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charged by the internal service funds , ;
The City is acquiring more an
Leases
more of
f i , ite assets through leasing There were
several problems encountered during our review of lease commitments at
yearend, which are
as follows ;
1 . The accounting de.partmant was unable to readily obtain all
lease documents in order to determine their future lease
commitments. I
7. Once all lease agreements were accumulated, leagog payable
per the general ledger was not in agreement with the
leases outstanding.
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At yearend, the City had lease commitments of approximately
$580, 000. The proper recording and record retention of leases will become
I critical ss the City utilizes lease type arrangements more in the future . We
recommend the City compile and maintain a single, readily accessible record of
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all lease commitments . procedures for adding new leases to ouch a record and
for recording lease commitments and lease payments in the general lodger
iea and procedures manual currently
should be reflected in the accounting p
olic
being drafted. procedures procedures would strengthen management control over these
commitments .
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� Approval Procedures for
Journal Entries The City currently has policies and
procedures in place for the review and
recording of journal entries. However, during our review, several journal
entries were discoverod to have been recorded improperly in the general ledger
accounts and entries were made to various fund' s retained earnings/fund
balance throughout the year.
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Many of these entries were recurring in nature
We recommend that
management more closely scrutinize all journal entries. Because of the
recurring nature of several of the journal entries improperly recorded , we
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• i', also recommend that management closely review the standard journal entries
shoats now in use. These sheets should be expanded to include all recurring
journal entries related to the City' s oporations (i .o. $ payroll ,
depreciation) , in addition, we recommend that the standard journal entry
sheeta be reviewed and updated periodically, These procedures should result
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in more accurate financial information. {
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CASH AND INVESTMENT MANAGEMENT
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r' Check timitg The City has not developed maximum
dollar limitation on any of its checking
r accounts, We realize that a limitations of this type would be impractical on
the general fund account due to the size of the transactions and other
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existing eontrola. However, with respect to the other checking accounts for
which checks are issued in small amounts , specific dollar limitations printed
on the face of checks would protect the City from dose due to alterations Of
,; these checks. We , therefore , recommend that the City develop limits for its
checking accounts and print those on the face of the checks . For example, for
Illy an account for which checks are never issued for more than $500, the words
"Not valid for more than $500" could be printed on the chock,
investment Records During our review we noted that the
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City' s certificate of deposit records
were not current, The City' s records, in several cases , contained incorrect
interest rates and maturity dates. As a result of these discrepancies, tine
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City was improperly recordlnb interest revenue and interest receivable on r
investments during the early portion of fiscal 1984.
The City' s detailed records of certificates of deposit should be
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updated on a regular basis , so as to reflect the correct interest rates ,
, f ' maturity dal:ea and principal amounts , This will result in a more accurate
recording of interest revenue and accrued interest receivable on investments ,
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L' ACCOUNTING FOR PROPERTY TAXES
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Collection Efforts for
Delinquent Taxes During fiscal year 1.984, a larger
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portion of peat due personal property
d�z,ftr,r " Vf` taxes are reaching the statute of limitations. As mentioned in the prior year
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management letter, it is vital to continue collection efforts as Failure to do
so results in lost tax dollars to the City. � .
Taxes are currently billed during November and become delinquent in
February. The City' s collection efforts consist of a second billing during
Met'. Beginning in fiscal year 1984, every July both delinquent personal and
property taxes are turned over to a contracted attorney for collection,
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As uncollected or delinquent tax and asaessment payments represent a
finaaeiAI lose to the City, we recommend that the City continually search for
�yf . ways of achieving a more efficient and active means of pursuing delinquent
taxes and assessments.
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UTILITY SYSTEM 1
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Interest Charged During
Construction of Utility
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Fixed Assets
._ An important consideration relative to
tj' 1r ; enterprise funds is to recognize all
capital costs of property and plant used, This is necessary to ensure that
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all costs associated with a particular service are borne by the users and not
by the general property taxpayer, The City presently expenses interest costs
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as incurred , rather than capitalizing the interest costs during construction
of the `utilit y
y property, Thus the interest coat may not be passed on to the I
4' future users of the property.
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�Y We recommend that the City consider adopting the poliuy and provide
the necessary procedures to capitalize interest costa on future utility
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construction projects, In October 1984, the City received $2U million from
the sale of revenue bonds for capital construction over the next 5 years
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i generating higher interest revenue and expense. This interest is required to
be capitalized during the construction period in accordance with FASB No, 62,
Capitalization of Interest Cost in Situations Involving Certain Tax—Exempt
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Borrowinge.
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, t= Accounting for Utility f
<< System Entities Separately In prior years, the City reported in
their Comprehensive Annual Financial
Report (CAFR) the combined results of its ur,ility system, which is comprised
of the electric fund and the water and sewer fund, For the fiscal year ending
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1984, supplemental information was included in the CAFR which reflected the
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results of operations of the two separate components of the utility system,
Difficulties were encountered in isolating each component 's debt and
Y retained earnings. It is our understanding that the problem stemmed largely
�f�xw from the debt refunding that took place during fiscal 1983 for the utility
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system and possibly the restatement of the fiscal 1482 financial statements,
Separate reporting of utility operations provide management with
valuable information for financial analysis purposes. We recommend that steps f
be taken to evaluate the difficulties we encountered in isolating each utility
;; so that financial information can be easily obtained upon request,
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k Accounting for Meter Changes The City hag encountered problems in its
utility system billings due to meters
being replaced. Meters are frequently replaced between monthly readings
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without properly logging tho affect of the conversion on the subsequent ;
's}y reading, This results in erroneous billings to customers and unreliable
information in the accounting system, r
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Management will need to establish procedures and make necessary
I system changes to allow proper tracking of customer usage in order to prevent
' - erroneous readings and billings in the future.
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work order Budget
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Versus Actual Comparison As discussed in the prier years ' {
management letter, there is still a lack
of sufficient data and procedures to monitor differences between budgeted and
actual costs for utility construction and maintenance work orders, Status
reports or completion reports are not prepared, reviewed or signed by the
project or utility director, Work orders may be significantly overrun without
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J authorization and problems may not be reported on a timely basis,
R We recommend, for work orders over a certain budgeted amount ,
periodic status and completion reports he completed and reviewed by
(�,}� appropriate management personnel. The preparation of these reports will
', enhance managements ' control over major wort-, order activities ,
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' INTERNAL AUDIT FUNCTION
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internal Audit Program As noted in the prior year management
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letter, the City presently does not have
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Z", lr" anyone with financial expertise readily available to perform special financial
analysis independent of the finance department•. Also, the financial
�o ';lj,. j operations of the City is beginning to reach a level in both volume and
!i complexity which may warrant an internal audit function.
} Aj Due to the above, we believe that a position of internal auditor
would be beneficial to both the Council and the administration. The efforts
of the internal auditor should be directed toward accomplishing the followings
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Irti} (a) Ensure compliance with eatnblished City policies, methods
! and procedures on a current basis ;
(b) Ascertain the extent to which the assets of the City are
accounted for and safeguarded against loss ;
(c) Determine the reliability of financial and other statistical
data within the City;
(d) Disclose 'unsatisfactory performance of personnel and
procedures ; and
Prepare recommendations for improvements for consideration
E and action by City officials .
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The internal audit function should be directed not only to the
operations within the City but also should extend to those operating agencies
to which the City makes grants but which are not a part of the normal
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operations of the City and , where possible, should also extend to those
fr ! „ agencies responsible for the collection of City revenues such as the City
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rrf The activities of the internal audit function should be controlled by
written operating policies. Also, the audit plans should be documented in
If L, work programs which identify the audit tasks to be performed for each area of
review,
The internal auditor should report the results of each of the reviews
+ by way of a written audit report, He/sh3 should disclose the scope of the ;
review, the audit findings, and the comments of the persons responsible for
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the area reviewed relative to the audit findings,
While not all inclusive , the following areas should receive reviews
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purchasing and accounts ,
pa able ' '
` •• payroll ;
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Cash disbursements;
a'r - Sales and use tax returns ;
' — Bank reconciliations ; t
`txr Controls over automated systems and data processing ; 4
Cash roediptal
Control over movable property and equipment ; and
Grant administration and compliance,
tl'Y�k•'.L,�:, ..,..' ter:;e.,. . ..4.':¢as., . .., . .
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COMMENTS REGARDING PRIOR YEAR RECOMMENDATIONS
During the past year, the City has taken steps to further {
strengthen its system of internal accounting control , We support manage-
ment in this continuing effort , Based on our discussion with management and
limited review of implementations, the status of prior year' s recommendations
are as follower
rt,4 Y•;1 Suggestion In Adoption
Suggestion Implemented Process belayed f
1, PRELIMINARY AUDIT WORK
Overall Management
Controls-
Communication 1
Ci Among Departments X
r;, Policies and
Procedures
i, Manual X
` r; Conflict"of-Interest
Policy X
Financial
4 Management X
;5 Internal Audit
' Function X
EDP Systems Controls
5 and Related Matters
Systems Planning X i
' Use of Report Writer X J
Remote Terminals X
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Checking of Input X
? Fixed Asset Records X
Utility Matters
{, t PURPA Reporting No i
longer
hl appli"
' cable
Reconciliation
of Purchases
and Sales X
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In Adoption
suggestion Implemented Process Delayed
Internal Control Matters
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Access to Inventory X
s.' Access to
Administration
t ±„ c Building X
Control of Forms X
Uncollectible Accounts X
Mileage Reimbursements X
t Expense Advances X
Bidding Procedures X
Purchase Order
�+ Referencing X
Other Matters
f Municipal Court X
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Accounting
r > Information Delays X a
Finance Department
Staffing X
i Work Storage Areas X .�
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Motor 4'001 X
Inventory Management X
Travel and
Entertainment Log X
5 Travel and
+ i Entertainment j
' Expense
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Documentation X
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Suggestion In Adoption i
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Suggestion
19T eat Led Process Delayed
TT. FINAL AUDIT WORK
�jr+4t; Accounting for !
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f' '� Collection Efforts X I
Accounting Method X
Property Tax
vlr Reconciliations X
+?' Recording of Tax
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Levy X �
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Utility Matters ;
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t Customer Accounts
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Receivable X
yn. : Y Work Order Budget 1
Al Versus Actual ,
' Comparison
,f Utility Asset X
Retirements X
��. Other Matters f
^ Bank ReOonciliatione X
#, Cash Disbursements X i
t Fixed Assets and
f Long-'Term Debt
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