[Federal Register Volume 61, Number 2 (Wednesday, January 3, 1996)]
[Rules and Regulations]
[Pages 104-114]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-93]
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DEPARTMENT OF AGRICULTURE
Rural Utilities Service
7 CFR Part 1773
RIN 0572-AA93
Policy on Audits of RUS Borrowers
AGENCY: Rural Utilities Service, USDA.
ACTION: Interim final rule with request for comments.
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SUMMARY: The Rural Utilities Service (RUS) hereby amends its
regulations on audits of RUS borrowers. This rule incorporates changes
to the audit regulations necessitated by the 1994 revision of
Government Auditing Standards (GAGAS), issued by the Comptroller
General of the United States, United States General Accounting Office
(GAO), effective for financial audits of periods ending on or after
January 1, 1995 and by Statement on Auditing Standards (SAS) No. 74,
[[Page 105]]
Compliance Auditing Considerations in Audits of Governmental Entities
and Recipients of Governmental Financial Assistance, issued by the
Auditing Standards Board of the American Institute of Certified Public
Accountants (AICPA), effective for fiscal periods ending after December
31, 1994.
This rule also clarifies the peer review requirements for certified
public accountants (CPA) performing audits of RUS borrowers.
DATES: This rule is effective January 3, 1996. This rule applies to
audits of periods ending on December 31, 1995, and thereafter.
Written comments must be received by RUS or carry a postmark or
equivalent no later than March 4, 1996.
ADDRESSES: Submit written comments to Ms. Roberta D. Purcell, Chief,
Technical Accounting and Auditing Staff, Borrower Accounting Division,
Rural Utilities Service, Ag Box 1523, room 2221-S, U.S. Department of
Agriculture, Washington, DC 20250, telephone number (202) 720-5227. RUS
requires a signed original and three copies of all comments (7 CFR part
1700). All comments will be made available for inspection at room 2234
South Building during regular business hours (7 CFR 1.27(b)).
FOR FURTHER INFORMATION CONTACT: Ms. Roberta D. Purcell, Chief,
Technical Accounting and Auditing Staff, Borrower Accounting Division,
Rural Utilities Service, Ag Box 1523, room 2221-S, U.S. Department Of
Agriculture, Washington, DC 20250, telephone number (202) 720-5227.
SUPPLEMENTARY INFORMATION:
Executive Order 12866
This interim rule has been determined to be not significant for the
purposes of Executive Order 12866 and therefore has not been reviewed
by the Office of Management and Budget (OMB).
Regulatory Flexibility Act Certification
The Administrator, RUS, has determined that the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.) does not apply to this rule.
Information Collection and Record Keeping Requirements
The reporting and recordkeeping requirements contained in the
interim rule were approved by the Office of Management and Budget (OMB)
pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35,
as amended) under control number 0572-0095.
Send questions or comments regarding this burden or any other
aspect of these collections of information, including suggestions for
reducing the burden, to F. Lamont Hepppe, Jr., Deputy Director, Program
Support Staff, Rural Utilities Service, Ag Box 1522, Washington, DC
20250-1522.
National Performance Review
This regulatory action is being taken as part of the National
Performance Review program to eliminate unnecessary regulations and
improve those that remain in force.
National Environmental Policy Act Certification
The Administrator, RUS, has determined that this rule will not
significantly affect the quality of the human environment as defined by
the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.).
Therefore, this action does not require an environmental impact
statement or assessment.
Catalog of Federal Domestic Assistance
The program described by this interim rule is listed in the Catalog
of Federal Domestic Assistance Programs under number 10.850--Rural
Electrification Loans and Loan Guarantees. This catalog is available on
a subscription basis from the Superintendent of Documents, the United
States Government Printing Office, Washington, DC 20402, (202) 512-
1800.
Executive Order 12372
This rule is excluded from the scope of Executive Order 12372,
Intergovernmental Consultation. A Notice of Final Rule entitled
Department Programs and Activities Excluded from Executive Order 12372
(50 FR 47034) exempts RUS electric loans and loan guarantees from
coverage under this Order.
Executive Order 12778
This rule has been reviewed under Executive Order 12778, Civil
Justice Reform. This rule: (1) Will not preempt any state or local
laws, regulations, or policies, unless they present an irreconcilable
conflict with this rule; (2) Will not have any retroactive effect; and
(3) Will not require administrative proceeding before parties may file
suit challenging the provisions of this rule.
Background
Part 1773 implements the standard RUS security instrument provision
requiring RUS borrowers to prepare and furnish to RUS, at least once
during each 12-month period, a full and complete report of its
financial condition, operations, and cash flows, in form and substance
satisfactory to RUS, audited and certified by an independent CPA,
satisfactory to RUS, and accompanied by a report of such audit, in form
and substance satisfactory to RUS. A report of the audit was defined in
Sec. 1773.1, General, to include the auditor's report, report on
compliance, report on internal controls and management letter.
On January 6, 1994, RUS published a final rule amending part 1773,
at 59 FR 657, that revised and clarified a provision of part 1773 that
requires a certified public accountant (CPA) to state whether an
electric borrower has complied with certain provisions of its loan and
security instruments. The January 6, 1994 final rule also incorporated
the illustrative management letter issued by the AICPA in a Technical
Practice Aid dated November 11, 1992.
This rule amends part 1773 to comply with the 1994 revision of
GAGAS. The 1994 revision of GAGAS adds three additional field work
standards. It also provides guidance on reporting, required
communications, and external quality control review.
The first additional standard requires CPAs to follow up on known,
material findings and recommendations from previous audits. This
standard is accomplished through compliance with Sec. 1773.32(a) and
Sec. 1773.33 of the current regulation.
The second additional standard requires CPAs to design their audits
to detect material noncompliance with contracts or grant agreements.
Section 1773.9, Disclosure of Irregularities and Illegal Acts, requires
CPAs to design the audit to include audit steps and procedures to
provide reasonable assurance of detecting errors, irregularities, and
illegal acts that could have a material effect on the financial
statement amounts and to extend audit procedures if there is an
indication that an irregularity may have occurred. This rule revises
the language of this section to include the supplemental standard to
design the audit to detect material noncompliance with contracts or
grant agreements as required by the 1994 revision of GAGAS.
The third additional standard requires CPAs to provide, in the
working papers, sufficient information to allow an experienced auditor
to locate the evidence supporting the CPA's significant conclusions and
judgments. Section 1773.6, Audit Agreement, requires the CPA and
borrower to enter into an audit agreement. Among the declarations that
must be included in the audit agreement is a statement that the CPA
will document the audit work
[[Page 106]]
performed in accordance with the professional standards of the AICPA
and part 1773. This rule revises this section to incorporate the
additional working paper requirements set forth in the 1994 revision of
GAGAS.
The 1994 revision of GAGAS requires the CPA to communicate the
auditor's responsibilities for consideration of internal controls and
compliance with laws and regulations and to contrast those
responsibilities with the additional procedures that could be performed
and the additional assurances or opinions on the internal control
structure or on compliance with laws and regulations that would result.
This communication must be with the board of directors. This rule
revises Sec. 1773.6 to include this required communication.
Section 1773.6 also requires the audit agreement to include a
statement that ``The borrower and CPA acknowledge that RUS regulations
provide that if the borrower fails to have an audit performed and
documented in compliance with GAGAS and this part, the borrower is in
violation of its security instrument with RUS''. In response to our
September 23, 1993, proposed rule, one CPA firm stated that this
language exceeds the applicable mortgage covenant and the following
language should be substituted ``The borrower and CPA acknowledge that
RUS will consider the borrower to be in violation of its security
instrument with RUS if the borrower fails to have an audit performed
and documented in compliance with GAGAS and 7 CFR part 1773. The
proposed rule published on September 23, 1993, did not include
revisions to Sec. 1773.6; therefore, we have incorporated the
aforementioned revision in this proceeding.
Section 1773.5, Qualifications of CPA, requires a CPA to submit to
a peer review of its accounting and audit practice every three years or
at such additional times as designated by the peer review executive
committee. Due to the increased number of peer reviews being performed,
many reviewers have experienced problems scheduling peer reviews within
the required time period. As a result, the AICPA extended the time
period to 42 months. RUS is, therefore, amending its requirement to
allow CPAs an additional six months to comply.
Similarly, the AICPA Board of Directors and the AICPA Council
approved the combination of the peer review program conducted by the
Private Companies Practice Section of the AICPA and the AICPA quality
review program effective for reviews performed April 3, 1995, and
thereafter. The AICPA Peer Review Board will conduct this program in
cooperation with the state CPA societies. Section 1773.5 has been
revised to reflect the changes necessitated by this merger.
The 1994 revision of GAGAS also provides guidance on external
quality control (peer) reviews. The CPA is required to provide a copy
of its most recent peer review report to those contracting for the
audit. Reciprocal peer reviews are prohibited; for example, an audit
organization is not permitted to review the organization that conducted
its most recent review. This interim rule revises Sec. 1773.5 to
incorporate the aforementioned change.
RUS's peer review requirement as currently set forth in Sec. 1773.5
does not allow individual CPAs that previously audited RUS borrowers as
part of a CPA firm to enter into private practice and audit RUS
borrowers without first obtaining a peer review. RUS is allowing the
Administrator of RUS to waive the peer review requirement for a period
of 18 months if the CPA meets certain proposed criteria set forth in
Sec. 1773.5(c)(7). The criteria established provides RUS with assurance
that the CPA has previously participated in establishing the quality
control standards for a CPA firm, the CPA has had responsibility for
the audit of an RUS borrower, and that a CPA firm is not reorganizing
for the sole purpose of evading the peer review requirement or
extending the time period for the performance of a peer review.
The 1994 revision of GAGAS requires the auditor's report to refer
to separate reports on compliance and on internal controls. Section
1773.31, Auditor's Report, requires the CPA to prepare a written report
covering all statements issued. This rule revises the language of this
section to incorporate the aforementioned change.
The 1988 revision of GAGAS required auditors to express positive-
negative assurance on compliance with laws and regulations in the
report on compliance and to identify the categories of controls
considered significant in the report on the internal control structure.
These requirements were eliminated in the 1994 revision of GAGAS.
Section 1773.32, Report on Compliance, requires the CPA to prepare a
written report on compliance with applicable laws, regulations, and
contracts as required by GAGAS. This rule removes the positive-negative
assurance requirement from the report on compliance. Similarly,
Sec. 1773.33, Report on Internal Controls, requires the CPA to prepare
a written report on the borrower's internal control structure and the
assessment of control risk made as part of the financial statement
audit as required by GAGAS. This rule deletes the requirement to
identify the categories of controls considered significant in the CPA's
report on the internal control structure.
Section 1773.34, Management Letter, specifies the minimum
requirements for the CPA's management letter. Among these is the
requirement for the CPA to state whether the information submitted to
RUS in its most recent December 31 RUS Form 7, Financial and
Statistical Report; Form 12, Operating Report--Financial; or Form 479,
Financial and Statistical Report for Telephone Borrowers, is in
agreement with the borrower's records. This rule would clarify that the
CPA's statement must indicate whether the most recent December 31 RUS
Form 7, 12, or 479 agrees with the borrower's ``audited'' records.
The CPA is also required by Sec. 1773.34 to comment when
depreciation rates for electric borrowers are not in compliance with
RUS requirements. This rule clarifies the requirement that the CPA
comment when the depreciation rates used by the borrower for each
primary plant account are not within the range established for that
particular account by RUS Bulletin 183-1, Depreciation Rates and
Procedures, or by the requirements of the state regulatory body having
jurisdiction over the borrower's depreciation rates.
Also included in Sec. 1773.34 is a requirement for the CPA to
comment on the adequacy of the borrower's controls over materials and
supplies. As part of the comment, RUS requires the presentation of a
``Detailed Schedule of Inventory Differences.'' RUS is eliminating this
schedule as it does not provide information that is beneficial to the
users of the financial statements. The above changes are also reflected
in the revision of Appendix C to Part 1773--Illustrative Independent
Auditor's Management Letter.
In February 1995, the Auditing Standards Board issued SAS No. 74,
Compliance Auditing Considerations in Audits of Governmental Entities
and Recipients of Governmental Financial Assistance, effective for
fiscal periods ending after December 31, 1994. SAS No. 74 supersedes
SAS No. 68, Compliance Auditing Applicable to Governmental Entities and
Other Recipients of Governmental Financial Assistance. In conjunction
with the issuance of SAS No. 74 and the 1994 revision of GAGAS, the
AICPA also revised its illustrative reports in the Audit and Accounting
Guide, Audits of State and Local Governmental Units, thereby
necessitating the changes in the
[[Page 107]]
sample reports contained in Appendix A to Part 1773--Sample Auditor's
Report for an Electric Cooperative and Appendix B to Part 1773--Sample
Auditor's Report for a Class A or B Commercial Telephone Company.
RUS has determined that, for a number of reasons, good cause exists
to make this rule effective immediately on an interim basis. Notice and
comment prior to the effective date is impractical, unnecessary and
contrary to the public interest. RUS loan documents and implementing
regulations generally require that each borrower provide RUS with an
annual audit report, prepared by an independent CPA within 120 days of
the ``as of'' audit date. To meet this deadline for audits of financial
statements prepared as of December 31, 1995, audits must be undertaken
immediately. In conducting the audit and preparing the report, CPAs are
required to comply with the provisions of GAGAS and with the provisions
of this part 1773. As a result of changes in GAGAS, there are currently
inconsistencies between GAGAS and this part 1773; therefore, CPAs must
be immediately advised of the applicable audit requirements and any
inconsistencies between GAGAS and part 1773 must be resolved. If the
inconsistencies are not resolved, borrowers could be placed in
technical default under their loan documents with both the government
and private co-lenders. Any failure to comply with loan documents can
of course affect borrowers access to and cost of capital. Moreover,
borrowers could be forced to incur additional audit expense absent an
immediate reconciliation of RUS audit requirements. Such consequences
are not in the interests of the RUS program, the borrowers or the
people they serve. In addition, many of the changes implemented by this
rule were previously subjected to notice and comment prior to being
issued by GAO. Consequently, further notice and comment is unnecessary.
List of Subjects in 7 CFR Part 1773
Accounting, Electric power, Loan programs--communications, Loan
programs--energy, Reporting and recordkeeping requirements, Rural
areas, Telecommunications.
For the reasons set forth in the preamble, RUS hereby amends 7 CFR
chapter XVII as follows:
PART 1773--POLICY ON AUDITS OF RUS BORROWERS
1. The authority citation for Part 1773 continues to read as
follows:
Authority: 7 U.S.C. 901 et seq.; 7 U.S.C. 1921 et seq.; Pub. L.
103-354, 108 Stat. 3178 (7 U.S.C. 6941 et seq.).
2. Section 1773.1 is amended by revising paragraph (c) to read as
follows:
Sec. 1773.1 General.
* * * * *
(c) This part complies with the 1994 revision of Government
Auditing Standards, issued by the Comptroller General of the United
States, United States General Accounting Office.
* * * * *
3. Section 1773.5 is amended by revising paragraph (c) to read as
follows:
Sec. 1773.5 Qualifications of CPA.
* * * * *
(c) Peer review requirement. The CPA must belong to and participate
in a peer review program, and must have undergone a satisfactory peer
review of the accounting and audit practice conducted by an approved
peer review program under paragraph (c)(4) of this section, unless a
waiver is granted under paragraph (c)(7) of this section. The reviewing
organization must not be affiliated with or have had its most recent
peer review conducted by the organization currently being reviewed
(reciprocal reviews). After the initial peer review has been performed,
the CPA must undergo a peer review of the accounting and audit practice
within 42 months of the previous ``as of'' peer review date or at such
additional times as designated by the peer review executive committee.
(1) A CPA that receives an unqualified peer review report will be
satisfactory to RUS provided that the CPA meets the other criteria set
forth in this section.
(2) If a CPA receives a qualified or adverse peer review report,
the CPA must undergo a second peer review within 18 months of the date
of the qualified or adverse report. A CPA that receives an unqualified
second peer review report will be satisfactory to RUS provided that the
CPA meets the other criteria set forth in this section.
(3) A CPA that receives a second qualified or adverse peer review
report will not be satisfactory to RUS.
(4) Approved peer review programs. The following peer review
programs are approved by RUS:
(i) The peer review programs conducted by the AICPA;
(ii) The peer review program conducted by the regulated audit
program group of the National Conference of CPA Practitioners; and
(iii) An independent peer review program that, in RUS's
determination, requires its members to:
(A) Ensure that the CPA can legally engage in the practice of
certified public accounting;
(B) Adhere to the quality control standards established by the
AICPA;
(C) Submit to peer reviews of the CPA's accounting and audit
practice every 42 months or at such additional times as designated by
its own executive committee; and
(D) Ensure that all professionals in the firm, including CPAs and
nonCPAs, take part in the qualifying continuing professional education
requirements of GAGAS, as set forth in paragraphs (c)(4)(iii)(D)(1) and
(c)(4)(iii)(D)(2). A qualified continuing professional education course
is one which meets the standards of the AICPA.
(1) An auditor responsible for planning, directing, conducting, or
reporting on government audits must complete, every two years, at least
eighty hours of continuing education and training which contributes to
the auditor's professional proficiency. At least twenty hours must be
completed in any one year of the two-year period; and
(2) An individual responsible for planning, directing, and
conducting substantial portions of the field work, or reporting on the
government audit must complete at least 24 of the 80 hours of
continuing education and training in subjects directly related to the
government environment and to government auditing. If the audited
entity operates in a specific or unique environment, auditors must
receive training that is related to that environment.
(5) Notification. The CPA must notify the Director, BAD, in
writing, of participation in a peer review program. RUS will notify the
CPA within 60 days of receipt of this notice if the selected peer
review program is acceptable.
(6) Submission of reports. The CPA must submit to the Director,
BAD, a copy of any peer review report and accompanying letter of
comment, if any, within 60 days of the date such report and letter of
comment are released by the peer review group.
(i) If the peer review report indicates that a follow-up review
will be made, the CPA must submit subsequent reports to the Director,
BAD, within 60 days of the date such reports are released by the peer
review group.
(ii) A peer review report must be submitted to the Director, BAD,
at least once every 42 months, or more frequently, if required by the
peer review program.
(iii) A copy of the peer review report, accompanying letter of
comment, and the partners' inspections must be made available to OGC,
upon request.
[[Page 108]]
(7) Waiver of the peer review requirement.
(i) A CPA may request that the Administrator, RUS, waive the peer
review requirement. To be eligible for a waiver, the following criteria
must be met:
(A) The firm has been in existence for less than 1 year from the
date of the request and has not been previously organized under a
different name;
(B) One of the partners organizing the firm has previously, within
18 months preceding the request, worked for a firm that has been peer
reviewed and the partner was partner-in-charge of audits of RUS
borrowers in the previous firm;
(C) The firm has enrolled in an approved peer review program; and
(D) The firm agrees to have the peer review conducted within 18
months of the date of the RUS waiver.
(ii) Waiver requests must address each of the criteria in paragraph
(c)(7)(i) of this section and should be submitted to the Director,
Borrower Accounting Division.
* * * * *
4. Section 1773.6 is amended by revising paragraph (a) to read as
follows:
Sec. 1773.6 Audit agreement.
(a) An audit agreement must be entered into between the CPA and the
borrower. The audit agreement must set forth the auditor's
responsibilities in a financial statement audit, including the
responsibilities for testing and reporting on internal controls and
compliance with laws and regulations and the nature of any additional
testing of internal controls and compliance required by laws and
regulations. These responsibilities should be contrasted with the
additional procedures that could be performed that would result in
additional assurances or opinions on the internal control structure and
compliance with laws and regulations. The audit agreement must also
include the following:
(1) The borrower and the CPA acknowledge that the audit is being
performed and the auditor's report, report on compliance, report on
internal controls, and management letter is being issued in order to
enable the borrower to comply with the provisions of RUS's security
instrument;
(2) The borrower and CPA acknowledge that RUS will consider the
borrower to be in violation of its security instrument with RUS if the
borrower fails to have an audit performed and documented in compliance
with GAGAS and this part;
(3) The CPA represents that he/she meets the requirements under
this part to be satisfactory to RUS;
(4) The CPA will perform the audit and will prepare the auditor's
report, report on compliance, report on internal controls, and
management letter in accordance with the requirements of this part;
(5) The CPA will document the audit work performed in accordance
with GAGAS, the professional standards of the AICPA, and the
requirements of this part;
(6) The CPA will make all audit-related documents, including
auditor's reports, workpapers, and management letters available to RUS
or its representatives (OGC and GAO), upon request, and will permit the
photocopying of all audit-related documents; and
(7) The CPA will follow the requirements of reporting
irregularities and illegal acts as outlined in Sec. 1773.9.
* * * * *
5. Section 1773.9 is amended by revising paragraphs (a) and (b) to
read as follows:
Sec. 1773.9 Disclosure of irregularities and illegal acts.
(a) In accordance with GAGAS, the CPA must design audit steps and
procedures to provide reasonable assurance of detecting errors,
irregularities, illegal acts, and noncompliance with the provisions of
contracts or grant agreements that could have a direct and material
effect on financial statement amounts.
(b) If there is an indication that an irregularity may have
occurred or evidence concerning the existence of a possible instance of
noncompliance with the provisions of contracts or grant agreements that
could have a material direct or indirect effect on the financial
statements, the CPA must extend audit steps and procedures to obtain
sufficient, competent evidential matter to determine whether, in fact,
an irregularity or an instance of noncompliance has occurred and the
effect on the borrower's financial statements.
* * * * *
6. Section 1773.31 is revised to read as follows:
Sec. 1773.31 Auditor's report.
The CPA must prepare a written report on comparative balance
sheets, statements of revenue and patronage capital (or income and
retained earnings, depending upon the structure of the borrower) and
statements of cash flows. This report must be signed by the CPA, cover
all statements presented, and refer to the separate reports on internal
controls and on compliance with laws and regulations issued in
conjunction with the auditor's report.
7. Section 1773.32 is amended by revising paragraph (a) to read as
follows:
Sec. 1773.32 Report on compliance.
(a) As required by GAGAS, the CPA must prepare a written report on
the tests performed for compliance with applicable laws, regulations,
contracts, and grants. This report must be signed by the CPA and must
contain the status of known but uncorrected significant or material
findings and recommendations from prior audits that affect the current
audit objective.
* * * * *
8. Section 1773.33 is revised to read as follows:
Sec. 1773.33 Report on internal controls.
As required by GAGAS, the CPA must prepare a written report on the
borrower's internal control structure and the assessment of control
risk made as part of the financial statement audit. This report must be
signed by the CPA and must include, as a minimum:
(a) The scope of the CPA's work to obtain an understanding of the
borrower's internal control structure and in assessing the control
risk;
(b) A description of the reportable conditions noted which include
material weaknesses identified as a result of the CPA's work in
understanding and assessing the control risk; and
(c) The status of known but uncorrected, significant or material
findings and recommendations from prior audits that affect the current
audit objective.
9. Section 1773.34 is amended by removing paragraphs (d)(1),
(d)(2), and (d)(3) and revising paragraphs (e)(1)(iii), (e)(2)(iii),
and (g) to read as follows:
Sec. 1773.34 Management letter.
* * * * *
(e) * * *
(1) * * *
(iii) The requirement for a borrower to prepare and furnish
mortgagees annual financial and statistical reports on the borrower's
financial condition and operations. The CPA must state whether the
information represented by the borrower as having been submitted to RUS
in its most recent December 31 RUS Form 7 or Form 12 is in agreement
with the borrower's audited records, and must comment on any exceptions
noted. If the borrower represents that an amended report has been filed
as of December 31, the comments must relate to the amended report.
(2) * * *
(iii) The requirement for a borrower to prepare and furnish
mortgagees annual
[[Page 109]]
financial and statistical reports on the borrower's financial condition
and operations. The CPA must state whether the information represented
by the borrower as having been submitted to RUS in its most recent
December 31 RUS Form 479 is in agreement with the borrower's audited
records, and must comment on any exceptions noted. If the borrower
represents that an amended report has been filed as of December 31, the
comments must relate to the amended report;
* * * * *
(g) Depreciation rates. For electric borrowers, comment when the
depreciation rates used in computing monthly accruals are not in
compliance with RUS requirements (See RUS Bulletin 183-1, Depreciation
Rates and Procedures), which require the use of depreciation rates that
are within the ranges established by RUS for each primary plant
account, or with the requirements of the State regulatory body having
jurisdiction over the borrower's depreciation rates; and
* * * * *
10. In Appendix A to Part 1773 Exhibits 1 through 6 are revised to
read as follows:
Appendix A to Part 1773--Sample Auditor's Report for an Electric
Cooperative
* * * * *
Exhibit 1--Sample Auditor's Report
Certified Public Accountants, 1600 Main Street, City, State
24105, The Board of Directors, Center County Electric Cooperative:
Independent Auditor's Report
We have audited the accompanying balance sheets of Center County
Electric Cooperative as of December 31, 19X9 and 19X8, and the
related statements of revenue and patronage capital, and cash flows
for the years then ended. These financial statements are the
responsibility of Center County Electric Cooperative's management.
Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted
auditing standards and Government Auditing Standards issued by the
Comptroller General of the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Center County Electric Cooperative as of December 31, 19X9 and 19X8,
and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting
principles.
In accordance with Government Auditing Standards, we have also
issued a report dated March 2, 19X0, on our consideration of Center
County Electric Cooperative's internal control structure and a
report dated March 2, 19X0, on its compliance with laws and
regulations.
Certified Public Accountants
March 2, 19X0
Exhibit 2--Sample Report on Compliance When, Based on Assessments
of Materiality and Audit Risk, the CPA Concluded It Was Not
Necessary to Perform Tests of Compliance With Laws and Regulations
Certified Public Accountants, 1600 Main Street, City, State
24105, The Board of Directors, Center County Electric Cooperative:
We have audited the financial statements of Center County
Electric Cooperative as of and for the years ended December 31, 19X9
and 19X8, and have issued our report thereon dated March 2, 19X0.
We conducted our audits in accordance with generally accepted
auditing standards and the Government Auditing Standards, issued by
the Comptroller General of the United States. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement.
Compliance with laws, regulations, contracts, and grants
applicable to Center County Electric Cooperative is the
responsibility of Center County Electric Cooperative's management.
As part of our audit, we assessed the risk that noncompliance with
certain provisions of laws, regulations, contracts, and grants could
cause the financial statements to be materially misstated. We
concluded that the risk of such material misstatement was
sufficiently low that it was not necessary to perform tests of
Center County Electric Cooperative's compliance with such provisions
of laws, regulations, contracts, and grants.
This report is intended for the information of the audit
committee, management, the Rural Utilities Service, and supplemental
lenders. However, this report is a matter of public record and its
distribution is not limited.
Certified Public Accountants
March 2, 19X0
Exhibit 3--Sample Report on Compliance When, Based on Assessments
of Materiality and Audit Risk, the CPA Performed Compliance Testing
and Found No Reportable Instances of Noncompliance
Certified Public Accountants, 1600 Main Street, City, State
24105, The Board of Directors, Center County Electric Cooperative:
We have audited the financial statements of Center County
Electric Cooperative as of and for the years ended December 31, 19X9
and 19X8, and have issued our report thereon dated March 2, 19X0.
We conducted our audits in accordance with generally accepted
auditing standards and Government Auditing Standards, issued by the
Comptroller General of the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement.
Compliance with laws, regulations, contracts, and grants
applicable to Center County Electric Cooperative is the
responsibility of Center County Electric Cooperative's management.
As part of obtaining reasonable assurance about whether the
financial statements are free of material misstatement, we performed
tests of Center County Electric Cooperative's compliance with
certain provisions of laws, regulations, contracts, and grants.
However, the objective of our audit of the financial statements was
not to provide an opinion on overall compliance with such
provisions. Accordingly, we do not express such an opinion.
The results of our tests disclosed no instances of noncompliance
that are required to be reported herein under Government Auditing
Standards.
This report is intended for the information of the audit
committee, management, the Rural Utilities Service, and supplemental
lenders. However, this report is a matter of public record and its
distribution is not limited.
Certified Public Accountants
March 2, 19X0
Exhibit 4--Sample Report on Compliance When, Based on Assessments
of Materiality and Audit Risk, the CPA Performed Compliance Testing
and Found Reportable Instances of Noncompliance
Certified Public Accountants, 1600 Main Street, City, State
24105, The Board of Directors, Center County Electric Cooperative:
We have audited the financial statements of Center County
Electric Cooperative as of and for the years ended December 31, 19X9
and 19X8, and have issued our report thereon dated March 2, 19X0.
We conducted our audits in accordance with generally accepted
auditing standards and Government Auditing Standards, issued by the
Comptroller General of the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement.
Compliance with laws, regulations, contracts, and grants
applicable to Center County Electric Cooperative is the
responsibility of Center County Electric Cooperative's management.
As part of obtaining reasonable assurance about whether the
financial statements are free of material misstatement, we preformed
tests of Center County Electric Cooperative's compliance with
certain provisions of laws, regulations, contracts, and grants.
However, the objective of our audit of the financial
[[Page 110]]
statements was not to provide an opinion on overall compliance with
such provisions. Accordingly, we do not express such an opinion.
The results of our tests disclosed instances of noncompliance
that are required to be reported herein under Government Auditing
Standards for which the ultimate resolution cannot presently be
determined. Accordingly, no provision for any liability that may
result has been recognized in Center County Electric Cooperative's
19X9 and 19X8 financial statements.
[Include paragraphs describing the instances of noncompliance
noted.]
We considered these instances of noncompliance in forming our
opinion on whether Center County Electric Cooperative's 19X9 and
19X8 financial statements are presented fairly, in all material
respects, in conformity with generally accepted accounting
principles, and this report does not effect our report dated March
2, 19X0, on those financial statements.
This report is intended for the information of the audit
committee, management, the Rural Utilities Service, and supplemental
lenders. However, this report is a matter of public record and its
distribution is not limited.
Certified Public Accountants
March 2, 19X0
Exhibit 5--Sample Report on Internal Controls When Reportable
Conditions Were Found
Certified Public Accountants, 1600 Main Street, City, State
24105, The Board of Directors, Center County Electric Cooperative:
We have audited the financial statements of Center County
Electric Cooperative as of and for the years ended December 31, 19X9
and 19X8, and have issued our report thereon dated March 2, 19X0.
We conducted our audits in accordance with generally accepted
auditing standards and Government Auditing Standards, issued by the
Comptroller General of the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement.
The management of Center County Electric Cooperative is
responsible for establishing and maintaining an internal control
structure. In fulfilling this responsibility, estimates and
judgements by management are required to assess the expected
benefits and related costs of internal control structure policies
and procedures. The objectives of an internal control structure are
to provide management with reasonable, but not absolute, assurance
that the assets are safeguarded against loss from unauthorized use
or disposition, and that transactions are executed in accordance
with management's authorization and recorded properly to permit the
preparation of financial statements in accordance with generally
accepted accounting principles. Because of inherent limitations in
any internal control structure, errors or irregularities may
nevertheless occur and not be detected. Also, projection of any
evaluation of the structure to future periods is subject to the risk
that procedures may become inadequate because of changes in
conditions or that the effectiveness of the design and operation of
policies and procedures may deteriorate.
In planning and performing our audit of the financial statements
of Center County Electric Cooperative for the years ended December
31, 19X9 and 19X8, we obtained an understanding of the internal
control structure. With respect to the internal control structure,
we obtained an understanding of the design of relevant policies and
procedures and whether they have been placed in operation, and we
assessed control risk in order to determine our auditing procedures
for the purpose of expressing our opinion on the financial
statements and not to provide an opinion on the internal control
structure. Accordingly, we do not express such an opinion.
We noted certain matters involving the internal control
structure 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 structure that, in our
judgement, 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.
[Include paragraphs to describe the reportable conditions noted.]
A material weakness is a reportable condition in which the
design or operation of one or more of the specific internal control
structure elements does not reduce to a relatively low level the
risk that errors or irregularities in amounts that would be material
in relation to the financial statements being audited may occur and
not be detected within a timely period by employees in the normal
course of performing their assigned functions.
Our consideration of the internal control structure would not
necessarily disclose all matters in the internal control structure
that might be reportable conditions and, accordingly, would not
necessarily disclose all reportable conditions that are also
considered to be material weaknesses as defined above. However, we
believe none of the reportable conditions described above is a
material weakness.
We also noted other matters involving the internal control
structure and its operation that we have reported to the management
of Center County Electric Cooperative in a separate letter dated
March 2, 19X0.
This report is intended for the information of the audit
committee, management, the Rural Utilities Service, and supplemental
lenders. However, this report is a matter of public record, and its
distribution is not limited.
Certified Public Accountants
March 2, 19X0
Exhibit 6--Sample Report on Internal Controls When No Reportable
Conditions Were Found
Certified Public Accountants, 1600 Main Street, City, State
24105, The Board of Directors, Center County Electric Cooperative:
We have audited the financial statements of Center County
Electric Cooperative, as of and for the years ended December 31,
19X9 and 19X8, and have issued our report thereon dated March 2,
19X0.
We conducted our audits in accordance with generally accepted
auditing standards and Government Auditing Standards, issued by the
Comptroller General of the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement.
The management of Center County Electric Cooperative is
responsible for establishing and maintaining an internal control
structure. In fulfilling this responsibility, estimates and
judgements by management are required to assess the expected
benefits and related costs of internal control structure policies
and procedures. The objectives of an internal control structure are
to provide management with reasonable, but not absolute, assurance
that assets are safeguarded against loss from unauthorized use or
disposition, and that transactions are executed in accordance with
management's authorization and recorded properly to permit the
preparation of financial statements in accordance with generally
accepted accounting principles. Because of inherent limitations in
any internal control structure, errors or irregularities may
nevertheless occur and not be detected. Also, projection of any
evaluation of the structure to future periods is subject to the risk
that procedures may become inadequate because of changes in
conditions or that the effectiveness of the design and operation of
policies and procedures may deteriorate.
In planning and performing our audit of the financial statements
of Center County Electric Cooperative for the years ended December
31, 19X9 and 19X8, we obtained an understanding of the internal
control structure. With respect to the internal control structure,
we obtained an understanding of the design of relevant policies and
procedures and whether they have been placed in operation, and we
assessed control risk in order to determine our auditing procedures
for the purpose of expressing our opinion on the financial
statements and not to provide an opinion on the internal control
structure. Accordingly, we do not express such an opinion.
Our consideration of the internal control structure would not
necessarily disclose all matters in the internal control structure
that might be material weaknesses under standards established by the
American Institute of Certified Public Accountants. A material
weakness is a condition in which the design or operation of one or
more of the specific internal control structure elements does not
reduce to a relatively low level the risk that errors or
irregularities in amounts that would be material in relation to the
financial statements being audited may occur
[[Page 111]]
and not be detected within a timely period by employees in the normal
course of performing their assigned functions. We noted no matters
involving the internal control structure and its operations that we
consider to be material weaknesses as defined above.
However, we noted other matters involving the internal control
structure and its operation that we have reported to the management
of Center County Electric Cooperative in a separate letter dated
March 2, 19X0.
This report is intended for the information of the audit
committee, management, the Rural Utilities Service, and supplemental
lenders. However, this report is a matter of public record, and its
distribution is not limited.
Certified Public Accountants
March 2, 19X0
* * * * *
11. In Appendix B to Part 1773, Exhibits 1 through 6 are revised to
read as follows:
Appendix B to Part 1773--Sample Auditor's Report for a Class A or B
Commercial Telephone Company
* * * * *
Exhibit 1--Sample Auditor's Report
Certified Public Accountants, 1600 Main Street, City, State 24105,
The Board of Directors, Center Telephone Company:
Independent Auditor's Report
We have audited the accompanying balance sheets of Center
Telephone Company as of December 31, 19X9 and 19X8, and the related
statements of revenue and patronage capital, and cash flows for the
years then ended. These financial statements are the responsibility
of Center Telephone Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted
auditing standards and Government Auditing Standards issued by the
Comptroller General of the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Center Telephone Company as of December 31, 19X9 and 19X8, and the
results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
In accordance with Government Auditing Standards, we have also
issued a report dated March 2, 19X0, on our consideration of Center
Telephone Company's internal control structure and a report dated
March 2, 19X0, on its compliance with laws and regulations.
Certified Public Accountants
March 2, 19X0
Exhibit 2--Sample Report on Compliance When, Based on Assessments
of Materiality and Audit Risk, the CPA Concluded It Was Not
Necessary to Perform Tests of Compliance With Laws and Regulations
Certified Public Accountants, 1600 Main Street, City, State
24105, The Board of Directors, Center Telephone Company
We have audited the financial statements of Center Telephone
Company as of and for the years ended December 31, 19X9 and 19X8,
and have issued our report thereon dated March 2, 19X0.
We conducted our audits in accordance with generally accepted
auditing standards and the Government Auditing Standards, issued by
the Comptroller General of the United States. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement.
Compliance with laws, regulations, contracts, and grants
applicable to Center Telephone Company is the responsibility of
Center Telephone Company's management. As part of our audit, we
assessed the risk that noncompliance with certain provisions of
laws, regulations, contracts, and grants could cause the financial
statements to be materially misstated. We concluded that the risk of
such material misstatement was sufficiently low that it was not
necessary to perform tests of Center Telephone Company's compliance
with such provisions of laws, regulations, contracts, and grants.
This report is intended for the information of the audit
committee, management, the Rural Utilities Service, and supplemental
lenders. However, this report is a matter of public record and its
distribution is not limited.
Certified Public Accountants
March 2, 19X0
Exhibit 3--Sample Report on Compliance When, Based on Assessments
of Materiality and Audit Risk, the CPA Performed Compliance Testing
and Found No Reportable Instances of Noncompliance
Certified Public Accountants, 1600 Main Street, City, State
24105, The Board of Directors, Center Telephone Company:
We have audited the financial statements of Center Telephone
Company as of and for the years ended December 31, 19X9 and 19X8,
and have issued our report dated March 2, 19X0.
We conducted our audits in accordance with generally accepted
auditing standards and Government Auditing Standards, issued by the
Comptroller General of the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement.
Compliance with laws, regulations, contracts, and grants
applicable to Center Telephone Company is the responsibility of
Center Telephone Company's management. As part of obtaining
reasonable assurance about whether the financial statements are free
of material misstatement, we performed tests of Center Telephone
Company's compliance with certain provisions of laws, regulations,
contracts, and grants. However, the objective of our audit of the
financial statements was not to provide an opinion on overall
compliance with such provisions. Accordingly, we do not express such
an opinion.
The results of our tests disclosed no instances of noncompliance
that are required to be reported herein under Government Auditing
Standards.
This report is intended for the information of the audit
committee, management, the Rural Utilities Service, and supplemental
lenders. However, this report is a matter of public record and its
distribution is not limited.
Certified Public Accountants
March 2, 19X0
Exhibit 4--Sample Report on Compliance When, Based on Assessments
of Materiality and Audit Risk, the CPA Performed Compliance Testing
and Found Reportable Instances of Noncompliance
Certified Public Accountants, 1600 Main Street, City, State
24105, The Board of Directors, Center Telephone Company:
We have audited the financial statements of Center Telephone
Company as of and for the years ended December 31, 19X9 and 19X8,
and have issued our report thereon dated March 2, 19X0.
We conducted our audits in accordance with generally accepted
auditing standards and Government Auditing Standards, issued by the
Comptroller General of the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement.
Compliance with laws, regulations, contracts, and grants
applicable to Center Telephone Company is the responsibility of
Center Telephone Company's management. As part of obtaining
reasonable assurance about whether the financial statements are free
of material misstatement, we preformed tests of Center Telephone
Company's compliance with certain provisions of laws, regulations,
contracts, and grants. However, the objective of our audit of the
financial statements was not to provide an opinion on overall
compliance with such provisions. Accordingly, we do not express such
an opinion.
The results of our tests disclosed instances of noncompliance
that are required to be reported herein under Government Auditing
Standards for which the ultimate resolution cannot presently be
determined. Accordingly, no provision for any liability that may
result has been recognized in Center Telephone Company's 19X9 and
19X8 financial statements.
[Include paragraphs describing the instances of noncompliance
noted.]
We considered these instances of noncompliance in forming our
opinion on whether Center Telephone Company's 19X9
[[Page 112]]
and 19X8 financial statements are presented fairly, in all material
respects, in conformity with generally accepted accounting
principles, and this report does not effect our report dated March
2, 19X0, on those financial statements.
This report is intended for the information of the audit
committee, management, the Rural Utilities Service, and supplemental
lenders. However, this report is a matter of public record and its
distribution is not limited.
Certified Public Accountants
March 2, 19X0
Exhibit 5--Sample Report on Internal Controls When Reportable
Conditions Were Found
Certified Public Accountants, 1600 Main Street, City, State
24105, The Board of Directors, Center Telephone Company:
We have audited the financial statements of Center Telephone
Company as of and for the years ended December 31, 19X9 and 19X8,
and have issued our report thereon dated March 2, 19X0.
We conducted our audits in accordance with generally accepted
auditing standards and Government Auditing Standards, issued by the
Comptroller General of the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement.
The management of Center Telephone Company is responsible for
establishing and maintaining an internal control structure. In
fulfilling this responsibility, estimates and judgements by
management are required to assess the expected benefits and related
costs of internal control structure policies and procedures. The
objectives of an internal control structure are to provide
management with reasonable, but not absolute, assurance that the
assets are safeguarded against loss from unauthorized use or
disposition, and that transactions are executed in accordance with
management's authorization and recorded properly to permit the
preparation of financial statements in accordance with generally
accepted accounting principles. Because of inherent limitations in
any internal control structure, errors or irregularities may
nevertheless occur and not be detected. Also, projection of any
evaluation of the structure to future periods is subject to the risk
that procedures may become inadequate because of changes in
conditions or that the effectiveness of the design and operation of
policies and procedures may deteriorate.
In planning and performing our audit of the financial statements
of Center Telephone Company for the years ended December 31, 19X9
and 19X8, we obtained an understanding of the internal control
structure. With respect to the internal control structure, we
obtained an understanding of the design of relevant policies and
procedures and whether they have been placed in operation, and we
assessed control risk in order to determine our auditing procedures
for the purpose of expressing our opinion on the financial
statements and not to provide an opinion on the internal control
structure. Accordingly, we do not express such an opinion.
We noted certain matters involving the internal control
structure 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 structure that, in our
judgement, 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.
[Include paragraphs to describe the reportable conditions noted.]
A material weakness is a reportable condition in which the
design or operation of one or more of the specific internal control
structure elements does not reduce to a relatively low level the
risk that errors or irregularities in amounts that would be material
in relation to the financial statements being audited may occur and
not be detected within a timely period by employees in the normal
course of performing their assigned functions.
Our consideration of the internal control structure would not
necessarily disclose all matters in the internal control structure
that might be reportable conditions and, accordingly, would not
necessarily disclose all reportable conditions that are also
considered to be material weaknesses as defined above. However, we
believe none of the reportable conditions described above is a
material weakness.
We also noted other matters involving the internal control
structure and its operation that we have reported to the management
of Center Telephone Company in a separate letter dated March 2,
19X0.
This report is intended for the information of the audit
committee, management, and Rural Utilities Service, and supplemental
lenders. However, this report is a matter of public record, and its
distribution is not limited.
Certified Public Accountants
March 2, 19X0
Exhibit 6--Sample Report on Internal Controls When No Reportable
Conditions Were Found
Certified Public Accountants, 1600 Main Street, City, State
24105, The Board of Directors, Center Telephone Company:
We have audited the financial statements of Center Telephone
Company, as of and for the years ended December 31, 19X9 and 19X8,
and have issued our report thereon dated March 2, 19X0.
We conducted our audit in accordance with generally accepted
auditing standards and Government Auditing Standards, issued by the
Comptroller General of the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement.
The management of Center Telephone Company is responsible for
establishing and maintaining an internal control structure. In
fulfilling this responsibility, estimates and judgements by
management are required to assess the expected benefits and related
costs of internal control structure policies and procedures. The
objectives of an internal control structure are to provide
management with reasonable, but not absolute, assurance that assets
are safeguarded against loss from unauthorized use or disposition,
and that transactions are executed in accordance with management's
authorization and recorded properly to permit the preparation of
financial statements in accordance with generally accepted
accounting principles. Because of inherent limitations in any
internal control structure, errors or irregularities may
nevertheless occur and not be detected. Also, projection of any
evaluation of the structure to future periods is subject to the risk
that procedures may become inadequate because of changes in
conditions or that the effectiveness of the design and operation of
policies and procedures may deteriorate.
In planning and performing our audit of the financial statements
of Center Telephone Company for the years ended December 31, 19X9
and 19X8, we obtained an understanding of the internal control
structure. With respect to the internal control structure, we
obtained an understanding of the design of relevant policies and
procedures and whether they have been placed in operation, and we
assessed control risk in order to determine our auditing procedures
for the purpose of expressing our opinion on the financial
statements and not to provide an opinion on the internal control
structure. Accordingly, we do not express such an opinion.
Our consideration of the internal control structure would not
necessarily disclose all matters in the internal control structure
that might be material weaknesses under standards established by the
American Institute of Certified Public Accountants. A material
weakness is a condition in which the design or operation of one or
more of the specific internal control structure elements does not
reduce to a relatively low level the risk that errors or
irregularities in amounts that would be material in relation to the
financial statements being audited may occur and not be detected
within a timely period by employees in the normal course of
performing their assigned functions. We noted no matters involving
the internal control structure and its operations that we consider
to be material weaknesses as defined above.
However, we noted other matters involving the internal control
structure and its operation that we have reported to the management
of Center Telephone Company in a separate letter dated March 2,
19X0.
This report is intended for the information of the audit
committee, management, the Rural Utilities Service, and supplemental
lenders. However, this report is a matter of public record, and its
distribution is not limited.
Certified Public Accountants
March 2, 19X0
* * * * *
12. Appendix C to Part 1773 is revised to read as follows:
[[Page 113]]
Appendix C to Part 1773--Illustrative Independent Auditor's
Management Letter
RUS requires that CPAs auditing RUS borrowers provide a
management letter in accordance with Sec. 1773.34. This letter must
be signed by the CPA, bear the same date as the auditor's report,
and be addressed to the borrower's board of directors.
Illustrative Independent Auditor's Management Letter
March 15, 19X6
Board of Directors, [Name of Borrower], [City, State].
We have audited the financial statements of [Name of Borrower]
for the year ended December 31, 19X5, and have issued our report
thereon dated March 15, 19X6. We conducted our audit in accordance
with generally accepted auditing standards, Government Auditing
Standards issued by the Comptroller General of the United States,
and 7 CFR part 1773, Policy on Audits of Rural Utilities Service
(RUS) Borrowers. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.
In planning and performing our audit of the financial statements
of [Name of Borrower] for the year ended December 31, 19X5, we
considered its internal control structure in order to determine our
auditing procedures for the purpose of expressing an opinion on the
financial statements and not to provide assurance on the internal
control structure.
A description of the responsibility of management for
establishing and maintaining the internal control structure and the
objectives of and inherent limitations in such a structure is set
forth in our independent auditors' report on the internal control
structure dated March 15, 19X6, and should be read in conjunction
with this report.
Our consideration of the internal control structure would not
necessarily disclose all matters in the internal control structure
that might be material weaknesses under standards established by the
American Institute of Certified Public Accountants.
A material weakness is a condition in which the design or
operation of the specific internal control structure elements does
not reduce to a relatively low level the risk that errors or
irregularities in amounts that would be material in relation to the
financial statements being audited may occur and not be detected
within a timely period by employees in the normal course of
performing their assigned functions. However, we noted no matters
involving the internal control structure and its operation that we
consider to be a material weakness as defined above. [If a material
weakness was noted, refer the reader to the independent auditors'
report on internal control structure.]
7 CFR 1773.34 requires comments on specific aspects of the
internal control structure, compliance with specific RUS loan and
security instrument provisions, and other additional matters. We
have grouped our comments accordingly. In addition to obtaining
reasonable assurance about whether the financial statements are free
from material misstatements, at your request, we performed tests of
specific aspects of the internal control structure, of compliance
with specific RUS loan and security instrument provisions, and of
additional matters. The specific aspects of the internal control
structure, compliance with specific RUS loan and security instrument
provisions, and additional matters tested include, among other
things, the accounting procedures and records, materials control,
compliance with specific RUS loan and security instrument provisions
set forth in 7 CFR 1773.34 (e)(1), [for telephone borrowers, 7 CFR
1773.34 (e)(2)], related party transactions, and depreciation rates.
[For electric borrowers:] The additional matters tested also include
a schedule of deferred debits and credits, upon which we express an
opinion. In addition, our audit of the financial statements also
included the procedures specified in 7 CFR 1773.38-.45. Our
objective was not to provide an opinion on these specific aspects of
the internal control structure, compliance with specific RUS loan
and security instrument provisions, or additional matters, and
accordingly, we express no opinion thereon.
No reports (other than our independent auditors' report, our
independent auditors' compliance report, and our independent
auditors' report on the internal control structure, all dated March
15, 19X6) or summary of recommendations related to our audit have
been furnished to management.
Our comments on specific aspects of the internal control
structure, compliance with specific RUS loan and security instrument
provisions, and other additional matters as required by 7 CFR
1773.34 are presented below.
Comments on Certain Specific Aspects of the Internal Control Structure
We noted no matters regarding [Name of Borrower]'s internal
control structure and its operation that we consider to be a
material weakness as previously defined with respect to:
--The accounting procedures and records [list other comments];
--The process for accumulating and recording labor, material, and
overhead costs, and the distribution of these costs to construction,
retirement, and maintenance or other expense accounts [list other
comments]; and
--The materials control [list other comments].
Comments on Compliance With Specific RUS Loan and Security Instrument
Provisions
Management's responsibility for compliance with laws,
regulations, contracts, and grants is set forth in our independent
auditors' report on compliance dated March 15, 19X6, and should be
read in conjunction with this report. At your request, we have
performed the procedures enumerated below with respect to compliance
with certain provisions of laws, regulations, and contracts. The
procedures we performed are summarized as follows:
--Procedure performed with respect to the requirement to maintain
all funds in institutions whose accounts are insured by an Agency of
the Federal government:
1. Obtained information from financial institutions with which
[Name of Borrower] maintains funds that indicated that the
institutions are insured by an Agency of the Federal government.
--Procedures performed with respect to the requirement for a
borrower to obtain written approval of the mortgagee to enter into
any contract for the operation or maintenance of property, or for
the use of mortgaged property by others [see 1773.34 (e)(2)(i) for
additional telephone borrower requirements in accordance with 7 CFR
1773.34 (e)] for the year ended December 31, 19X5 of [Name of
Borrower]:
1. Obtained and read a borrower prepared schedule of new written
contracts entered into during the year for the operation or
maintenance of its property, or for the use of its property by
others as defined in Sec. 1773.34 (e)(1)(ii) [Sec. 1773.34 (e)(2)(i)
for telephone borrowers]
2. Reviewed Board of Director minutes to ascertain whether
board-approved written contracts are included in the borrower-
prepared schedule.
3. Noted the existence of written RUS [and other mortgagee]
approval of each contract listed by the borrower.
--Procedure performed with respect to the requirement to submit RUS
Form 7 or Form 12 [Form 479 for telephone borrowers] to the RUS:
1. Agreed amounts reported in Form 7 or Form 12 [Form 479 for
telephone borrowers] to [Name of Borrower]'s records.
The results of our tests indicate that, with respect to the
items tested, [Name of Borrower] complied, except as noted below, in
all material respects, with the specific RUS loan and security
instrument provisions referred to below. With respect to items not
tested, nothing came to our attention that caused us to believe that
[Name of Borrower] had not complied, in all material respects, with
those provisions. The specific provisions tested, as well as any
exceptions noted, include the requirements that:
--The borrower maintains all funds in institutions whose accounts
are insured by an Agency of the Federal government [list all
exceptions];
--The borrower has obtained written approval of the RUS [and other
mortgagees] to enter into any contract for the operation or
maintenance of property, or for the use of mortgaged property by
others as defined in Sec. 1773.34 (e)(1)(ii) [Sec. 1773.34 (e)(2)(i)
for telephone borrowers] [list all exceptions]; and
--The borrower has submitted its Form 7 or Form 12 [Form 479 for
telephone borrowers] to the RUS and the Form 7 or Form 12 [Form 479
for telephone borrowers], Financial and Statistical Report, as of
December 31, 19X5, represented by the borrower as having been
submitted to RUS is in agreement with the [Name of Borrower]'s
audited records in all material respects [list all exceptions].
Comments on Other Additional Matters
In connection with our audit of the financial statements of
[Name of Borrower],
[[Page 114]]
nothing came to our attention that caused us to believe that [Name
of Borrower] failed to comply with respect to:
--The reconciliation of subsidiary plant records to the controlling
general ledger plant accounts addressed at 7 CFR 1773.34 (c)(1)
[list all exceptions];
--The clearing of the construction accounts and the accrual of
depreciation on completed construction addressed at 7 CFR 1773.34
(c)(2) [list all exceptions];
--The retirement of plant addressed at 7 CFR 1773.34 (c)(3) and (4)
[list all exceptions];
--Sales of plant material, or scrap addressed at 7 CFR 1773.34
(c)(5) [list all exceptions];
--The disclosure of material related party transactions, in
accordance with Statement of Financial Accounting Standards No. 57,
Related Party Transactions, for the year ended December 31, 19X5, in
the financial statements referenced in the first paragraph of this
report addressed at 7 CFR 1773.34 (f) [list all exceptions]; and
--For electric borrowers only: depreciation rates addressed at 7 CFR
1773.34 (g) [list all exceptions].
For Electric Borrowers Only: Detailed Schedule of Deferred Debits and
Deferred Credits
Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The detailed schedule
of deferred debits and deferred credits required by 7 CFR 1773.34
(h) and provided below is presented for purposes of additional
analysis and is not a required part of the basic financial
statements. This information has been subjected to the auditing
procedures applied in our audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
[The detailed schedule of deferred debits and deferred credits would
be included here. The total amount of deferred debits and deferred
credits as reported in the schedule must agree with the totals
reported on the Balance Sheet under the specific captions of
``Deferred Debits'' and ``Deferred Credits''. Those items that have
been approved, in writing, by RUS should be clearly indicated.]
This report is intended solely for the information and use of
the board of directors, management, and the RUS and supplemental
lenders. However, this report is a matter of public record and its
distribution is not limited.
Certified Public Accountants
Dated: December 19, 1995.
Jill Long Thompson,
Under Secretary, Rural Economic and Community Development.
[FR Doc. 96-93 Filed 1-2-96; 8:45 am]
BILLING CODE 3410-15-P
