financial audit of the department of public safety_part6

Chapter 3: Financial Audit other state agencies for services provided to those agencies for a fee. The amounts reported as net receivables were established based on management’s estimate of amounts collectible. Any residual balances outstanding between the governmental activities and business-type activities are reported in the government-wide financial statements as internal balances. Inventories Inventory of goods, materials, and supplies is valued at cost (first-in, first-out method). Inventory in the enterprise fund consists primarily of printing, construction, and sewing supplies to be used in the Correctional Industries Program. Capital Assets The accounting treatment over capital assets depends on whether the assets are used in governmental fund or proprietary fund operations and whether they are reported in the government-wide or fund financial statements. Capital assets include land, improvements to land, buildings, building improvements, vehicles, machinery, equipment, and all other tangible or intangible assets that are used in operations and that have initial useful lives extending beyond a single reporting period. When capital assets are purchased, they are capitalized and depreciated in the government-wide financial statements. Capital assets are recorded as expenditures of the current period in the governmental fund financial statements. Capital assets used in proprietary fund operations are accounted for on the same basis as in the government-wide financial statements. Capital assets are valued at cost where historical cost records are available and at estimated historical cost where no records exist. Donated capital assets are valued at their estimated fair value on the date received. Improvements to capital assets that materially add to the value or extend the life of the assets are capitalized. Other repairs and normal maintenance are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. This is trial version 42 www.adultpdf.com Chapter 3: Financial Audit The department has adopted the following capitalization policy: Minimum Capitalization Estimated Useful Life Asset Type Land improvements Buildings and improvements Furniture and equipment Motor vehicles Amount $ 100,000 100,000 5,000 5,000 Governmental 15 years 30 years 7 years 5 years Proprietary Not applicable 40 years 5 years 5 years Deferred Revenues Deferred revenues reported in governmental activities on the statement of net assets and in other governmental funds on the balance sheet arise when the department receives resources before it has a legal claim to them, as when grant monies are received prior to the incurrence of qualifying expenditures. In subsequent periods, when the department has a legal claim to the resources, the liability for the deferred revenue is removed from the statement of net assets and balance sheet and revenue is recognized. Due to Individuals Due to individuals represents assets held by the department primarily in an agency capacity for the inmate population. Accumulated Vacation It is the department’s policy to permit employees to accumulate earned but unused vacation and sick leave benefits. There is no liability for unpaid accumulated sick leave since sick leave is not convertible to pay upon termination of employment. All vacation pay is accrued when incurred in the government-wide and proprietary fund financial statements. A liability for these amounts is reported in the governmental funds only if they have matured, for example, as a result of employee resignations and retirements. Restricted Net Assets Net assets are restricted when constraints placed on net assets are imposed by grantors, contributors, or laws and regulations of authorizing governments. When both restricted and unrestricted net assets are available, the department generally applies unrestricted resources before restricted resources for expenses incurred. This is trial version www.adultpdf.com 43 Chapter 3: Financial Audit Appropriations Appropriations represent the authorizations granted by the State Legislature that permit a state agency, within established fiscal and budgetary controls, to incur obligations and to make expenditures. Appropriations are allotted quarterly. The allotted appropriations lapse if not expended by or encumbered at the end of the fiscal year. State allotted appropriations reported in the accompanying statement of activities and statement of revenues, expenditures, and changes in fund balances are shown net of lapsed appropriations related to previous years. Program Revenues Program revenues derive directly from the programs of the department or from parties outside of the department and are categorized as charges for services, operating grants and contributions, or capital grants and contributions. Charges for services – Charges for services include revenues based on exchange or exchange-like transactions. These revenues arise from charges to customers or applicants who purchase, use, or directly benefit from the goods, services, or privileges provided. Revenues in this category include fees charged for specific services, such as controlled substance registration fees, security service fees, and state law and court imposed crime victim compensation fees. Payments from other governments that are exchange transactions are also reported as charges for services. Operating grants and contributions – Program-specific operating and capital grants and contributions include revenues arising from mandatory and voluntary nonexchange transactions with other governments, organizations, or individuals that are restricted for use in a particular program. Governmental grants and assistance awards made on the basis of entitlement periods are recorded as intergovernmental receivables and revenues when entitlement occurs. All other federal reimbursement-type grants are recorded as intergovernmental receivables and revenues when the related expenditures or expenses are incurred. Intrafund and Interfund Transactions Significant transfers of financial resources between activities included within the same fund are offset within that fund. Transfers of revenues from funds authorized to receive them to funds authorized to expend them have been recorded as transfers in the basic financial statements. This is trial version 44 www.adultpdf.com Chapter 3: Financial Audit Note 3 – Restatement During the current year, the department discovered that certain capital assets were not recorded in its capital assets inventory system as of June 30, 2004. These capital assets had a carrying value of $4,354,152, net of accumulated depreciation of $1,611,489 at June 30, 2004. The recording of these assets resulted in the following adjustments to net assets for the governmental activities at June 30, 2004: Net assets as of June 30, 2004, as previously reported Addition of capital assets, net of accumulated depreciation Net assets as of June 30, 2004, as restated Governmental Activities $ 82,456,696 4,354,152 $ 86,810,848 Note 4 – Budgeting and Budgetary Control Revenue estimates are provided to the State Legislature at the time of budget consideration and are revised and updated periodically during the fiscal year. Amounts reflected as budgeted revenues and budgeted expenditures in the statement of revenue and expenditures – budget and actual (budgetary basis) – general fund are derived primarily from acts of the State Legislature and from other authorizations contained in other specific appropriation acts in various Session Laws of Hawaiÿi. To the extent not expended or encumbered, general fund appropriations generally lapse at the end of the fiscal year for which the appropriations were made. The State Legislature specifies the lapse date and any other particular conditions relating to terminating the authorization for other appropriations such as those related to the special revenue funds. Encumbrances are recorded obligations in the form of purchase orders or contracts. The department records encumbrances at the time purchase orders or contracts are awarded and executed. Encumbrances outstanding at fiscal year-end are reported as reservations of fund balances since they do not constitute expenditures or liabilities. For purposes of budgeting, the department’s budgetary fund structure and accounting principles differ from those utilized to present the governmental fund financial statements in conformity with U.S. generally accepted accounting principles (GAAP). The department’s annual budget is prepared on the modified accrual basis of accounting with several differences, principally related to: (1) the encumbrance of purchase order and contract obligations, (2) the recognition of certain receivables, and (3) special revenue fund operating grant accruals and deferrals. These differences represent a departure from GAAP. The following schedule reconciles the budgetary amounts to the amounts presented in accordance with GAAP for the general fund for the fiscal year ended June 30, 2005: This is trial version www.adultpdf.com 45 Chapter 3: Financial Audit Excess of revenues over expenditures and other uses – actual on budgetary basis Reserved for encumbrances at fiscal year-end Expenditures for liquidation of prior fiscal year encumbrances Lapsed appropriations related to prior years Reserved for receivables Net change in unreserved liabilities Net adjustment for commissary revenue accrual Net change in fund balance - GAAP basis $ 971,923 9,430,783 (6,816,025) (1,421,954) 151,794 37,337 5,078 $ 2,358,936 Note 5 – Cash and Cash Equivalents Cash in State Treasury The state director of finance is responsible for the safekeeping of all moneys paid into the state treasury. The state director of finance pools and invests any monies of the State, which in the director’s judgment, are in excess of amounts necessary for meeting the immediate requirements of the State. Legally authorized investments include obligations of, or guaranteed by, the U.S. government, obligations of the State, federally-insured savings and checking accounts, time certificates of deposit, and repurchase agreements with federally-insured financial institutions. The State established a policy whereby all unrestricted and certain restricted cash is invested in the State’s investment pool. Cash accounts that participate in the investment pool accrue interest based on the average weighted cash balances of each account. For demand or checking accounts and time certificates of deposit, the State requires that the depository banks pledge collateral based on daily available bank balances. The use of daily available bank balances to determine collateral requirements results in the available balances being under-collateralized at various times during the fiscal year. All securities pledged as collateral are held either by the state treasury or by the State’s fiscal agents in the name of the State. For the purposes of the statement of cash flows, cash and cash equivalents includes cash in state treasury. Interest Rate Risk - As a means of limiting its exposure to fair value losses arising from rising interest rates, the State’s investment policy generally limits maturities on investments to not more than five years from the date of investment. Credit Risk - The State’s investment policy limits investments to state and U.S. Treasury securities, time certificates of deposit, U.S. government or agency obligations, repurchase agreements, commercial paper, bankers’ acceptances, and money market funds and student loan resource securities maintaining a Triple-A rating. 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