DEERBROOK, INC.Non-Profit

FINDING 2021-001 ? Replacement Reserve Deposits Federal Agency: U.S. Department of Housing and Urban Development Pass through Entity: Not applicable Program Name: Section 811 Project Rental Assistance Contract Section 811 Capital Advance CFDA# and Program Expenditures: 14.181 ($ 57,042) 14.181 ($1,248,800) Award Number: N/A Federal Award Year: July 1, 2020 to June 30, 2021 Questioned Costs: N/A Condition Found: Eleven monthly deposits were made to the replacement reserve account instead of twelve. The replacement reserve deposits were short by $1,693. In addition, the replacement reserve funds and residual receipts funds are being held in the same bank account. Criteria: The regulatory agreement required that $1,693 be deposited in the replacement reserve account each month from July 2020 through June 2021. Replacement Reserve and Residual Receipts funds should be kept in separate bank accounts as required by HUD. Funds from these accounts can only be spent with approval from HUD. Cause: A new management agent was hired as of July 1, 2020. It is the policy of the Project to pay the monthly replacement reserve deposit on 1st day of the subsequent month. Therefore, the June 2021 payment was not paid until July 1, 2021. Possible Asserted Effect: The replacement reserve was underfunded by $1,693 for the year ended June 30, 2021. In addition, the replacement reserve and residual receipt funds were kept in one bank account. Repeat Finding: See Finding 2020-003 for a similar finding in the prior year. Recommendation: The replacement reserve shortage of $1,693 should be funded as soon as possible. Two bank accounts should be opened ? a replacement reserve and a residual receipt. The correct amount of funds should be transferred to each account. Management Response: The Project contracted with Keli Management, Inc. as of July 1, 2020 to provide property management services. It is policy of the Project the transfer the replacement reserve deposit on the 1st day of the subsequent month. The June 2021 replacement reserve deposit was made on July 1, 2021. A separate residual receipt account was established on September 30, 2021.

FINDING 2020-001 ? Material Adjustments Condition Found: During the course of the audit for the Project, we proposed journal entries to adjust the current year cash, accounts payable, tenant security deposits, gross rent potential, tenant assistance payments, vacancies, miscellaneous revenue, and various expense accounts. Criteria: Based on professional standards, identification by an auditor of a material misstatement in the financial statements under audit that was not initially identified by the entity's internal control is a strong indicator of a material weakness. Cause: The Project changed management companies on April 30, 2020. The prior management company did not provide adequate records to the new management company. HUD did not renew the management agent agreement with this provider so the management company changed again on July 1, 2020. The current management company provided the information they were able to collect for the fiscal year ended June 30, 2020. This did not include year-to-date information or detailed accounting records with corresponding support. Possible Asserted Effect: Because of the change in management companies, Deerbrook, Inc. was unable to provide year-to-date information. The financial information was recreated based on bank statement activity and monthly reports prepared for HUD. Because the aforementioned adjustments would have materially misstated the statement of financial position and statement of activities, we believe that this matter is a material weakness in the controls and practices of the Project. Repeat Finding: See Finding 2019-001 for a similar finding in the prior year. Recommendation: We recommend that the Project develop and implement procedures to properly record transactions before its records are submitted for audit. Management Response: The Project contracted with Keli Management, Inc. as of July 1, 2020 to provide property management services. The management team has upgraded the Project?s software. Current year activity is being recorded timely and monthly reconciliations are being performed. Keli Management, Inc. is providing financial information to the Board of Directors. In October 2020, Keli Management, Inc. also filed the outstanding reports, tenant certifications, and other required documents with HUD.

FINDING 2020-002 ? Material Compliance Issue Federal Agency: U.S. Department of Housing and Urban Development Pass through Entity: Not applicable Program Name: Section 811 Project Rental Assistance Contract Section 811 Capital Advance Program CFDA# and Program Expenditures: 14.181 ($ 66,392) 14.181 ($1,248,800) Award Number: N/A Federal Award Year: July 1, 2019 to June 30, 2020 Questioned Costs: N/A Condition Found: During our audit, we were unable to obtain supporting documentation to adequately test the following material and direct compliance requirements: Activities Allowed or Unallowed, Eligibility, Reporting, and Allowable Cost and Cost Principles. In addition, the June 30, 2019 audit report package and Federal Data Collection Form was not completed and filed timely. Criteria: The Uniform Guidance requires an auditor to perform enough audit procedures in order to be able to express an opinion on an entity?s compliance with the types of compliance requirements that could have a direct and material effect on the entity?s major federal programs. Cause: The Project changed management companies on April 30, 2020. The prior management company did not provide adequate records to the new management company. HUD did not renew the management agent agreement with this provider so the management company changed again on July 1, 2020. The current management company provided the information they were able to collect for the fiscal year ended June 30, 2020. This did not include year-to-date information or detailed accounting records with corresponding support, documentation to support the amounts of income and medical expenses included in tenant certifications, and reporting requirements. Possible Asserted Effect: We could not obtain enough supporting documentation in order to express an opinion on the following: Activities Allowed or Unallowed, Eligibility, Reporting, and Allowable Cost and Cost Principles. The Project did not comply with the Uniform Guidance Single Audit Reporting Package filing requirements. Repeat Finding: See Finding 2019-002 for a similar finding in the prior year. Recommendation: We recommend the current management keep adequate books, records, and documentation so audit procedures can be performed on all compliance requirements. Management Response: The Project contracted with Keli Management, Inc. as of July 1, 2020 to provide property management services. The management team has upgraded the Project?s software. Current year activity is being recorded timely, and monthly reconciliations are being performed. Keli Management, Inc. is providing financial information to the Board of Directors. In October 2020, Keli Management, Inc. also filed the outstanding reports, tenant certifications, and other required documents with HUD. The June 30, 2019 audit reporting package and Federal Data Collection Form was completed and filed in January 2021.

FINDING 2020-003 ? Replacement Reserve Deposits Federal Agency: U.S. Department of Housing and Urban Development Pass through Entity: Not applicable Program Name: Section 811 Project Rental Assistance Contract Section 811 Capital Advance CFDA# and Program Expenditures: 14.181 ($ 66,392) 14.181 ($1,248,800) Award Number: N/A Federal Award Year: July 1, 2019 to June 30, 2020 Questioned Costs: N/A Condition Found: The reserve for replacement deposits, totaling $20,313 were not transferred to the account for the year ended June 30, 2020. In addition, $3,386 is due to the replacement reserve account for the year ended June 30, 2019. A total of $23,699 is due to the replacement reserve account. In addition, the replacement reserve and residual receipts accounts were combined into one bank account titled operational savings. Criteria: The regulatory agreement required that $1,693 to be deposited in the replacement reserve account each month from July 2019 through June 2020. Replacement Reserve and Residual Receipts funds should be kept in separate bank accounts as required by HUD. Funds from these accounts can only be spent with approval from HUD. Cause: A new management agent was hired as of May 1, 2019. The company did not transfer the replacement reserve deposits for May 2019 through June 2020. In addition, the management agent changed banks and combined the replacement reserve and residual receipts accounts into one bank account in July 2019. Possible Asserted Effect: The replacement reserve was underfunded by $20,313 and $3,386 for the years ended June 30, 2020 and 2019, respectively. The cumulative total due to the replacement reserve fund is $23,699. In addition, the replacement reserve and residual receipt funds were kept in one bank account. Repeat Finding: See Finding 2019-003 for a similar finding in the prior year. Recommendation: The overall replacement reserve shortage of $23,699 should be funded as soon as possible. Two bank accounts should be opened ? a replacement reserve and a residual receipt. The correct amount of funds should be transferred to each account. Management Response: The Project contracted with Keli Management, Inc. as of July 1, 2020 to provide property management services. The new management company discovered that replacement reserve deposits were not made for all of fiscal year 2020 and two months of fiscal year ended June 30, 2019. In fiscal year 2021, Keli Management, Inc. was added as a signer to the existing bank accounts. The Project began using the replacement reserve bank account. Fourteen months of replacement reserve deposits totaling $23,699 were deposited into this account on October 5, 2020. The residual receipt account will be activated when needed.

FINDING 2020-004 ? Residual Receipts Deposit Federal Agency: U.S. Department of Housing and Urban Development Pass through Entity: Not applicable Program Name: Section 811 Project Rental Assistance Contract Section 811 Capital Advance CFDA# and Program Expenditures: 14.181 ($ 66,392) 14.181 ($1,248,800) Award Number: N/A Federal Award Year: July 1, 2019 to June 30, 2020 Questioned Costs: N/A Condition Found: The $11,792 of surplus cash at June 30, 2019 was not deposited into the residual receipts account within ninety days. Criteria: According to HUD?s guidelines, a Project must deposit surplus cash due to residual receipts within ninety days after the fiscal period ends (REAC submission due date). Cause: Project management did not transfer the surplus cash of $11,792 from the operating account to the residual receipts account. The prior management company did not calculate surplus cash at June 30, 2019. Surplus cash was not calculated until the June 30, 2019 audit was completed in January 2021. Possible Asserted Effect: The Project held excess cash and did not make the required residual receipts deposit. $11,792 of surplus cash was due to the residual receipts account for the year ended June 30, 2019. Repeat Finding: There was not a similar finding in the prior year. Recommendation: Surplus cash was recalculated at June 30, 2020. The Project should make a $32,164 deposit to residual receipts for the year ended June 30, 2020. The Project should wait for further instructions from HUD for the residual deposit that was due for June 30, 2019. Management Response: A new management company was hired July 1, 2020. They were not given adequate records to timely calculate the Project?s surplus cash position at June 30, 2020. Management will work with HUD and transfer $32,164 from operating to residual receipts based on the June 30, 2020 surplus cash calculation when funds are available. The Project will wait for further instructions to determine if the $11,972 due at June 30, 2019 should be deposited into the residual receipts account.

FINDING 2019-001 ? Material Adjustments Condition Found: During the course of the audit for the Project, we proposed journal entries to adjust the current year cash, accounts receivable- HUD, accounts payable, accrued expenses, gross rent potential, tenant assistance payments, vacancies, miscellaneous revenue, and various expense accounts. Criteria: Based on professional standards, identification by an auditor of a material misstatement in the financial statements under audit that was not initially identified by the entity's internal control is a strong indicator of a material weakness. Cause: The Project changed management companies on April 30, 2019. The prior management company did not provide adequate records to the new management company. HUD did not renew the management agent agreement with this provider so the management company changed again on July 1, 2020. The current management provided the information they were able to collect for the fiscal year ended June 30, 2019. This did not include year-to-date information or detailed accounting records with corresponding support. Possible Asserted Effect: Because of the change in management companies, Deerbrook, Inc. was unable to provide year-to-date information. The financial information was recreated based on bank statement activity and monthly reports prepared for HUD. Because the aforementioned adjustments would have materially misstated the statement of financial position and statement of activities, we believe that this matter is a material weakness in the controls and practices of the Project. Repeat Finding: There was not a similar finding in the prior year. Recommendation: We recommend that the Project develop and implement procedures to properly record transactions before its records are submitted for audit. Management Response: The Project contracted with Keli Management, Inc. as of July 1, 2020 to provide property management services. The management team has upgraded the Project?s software. Current year activity is being recorded timely, and monthly reconciliations are being performed. Keli Management, Inc. is providing financial information to the Board of Directors. In October 2020, Keli Management, Inc. also filed the outstanding reports, tenant certifications, and other required documents with HUD.

FINDING 2019-002 ? Material Compliance Issue Federal Agency: U.S. Department of Housing and Urban Development Pass through Entity: Not applicable Program Name: Section 811 Project Rental Assistance Contract Section 811 Capital Advance Program CFDA# and Program Expenditures: 14.181 ($ 68,741) 14.181 ($1,248,800) Award Number: N/A Federal Award Year: July 1, 2018 to June 30, 2019 Questioned Costs: N/A Condition Found: During our audit, we were unable to obtain supporting documentation to adequately test the following material and direct compliance requirements: Activities Allowed or Unallowed, Eligibility, Reporting, and Allowable Cost and Cost Principles. Criteria: The Uniform Guidance requires an auditor to perform enough audit procedures in order to be able to express an opinion on an entity?s compliance with the types of compliance requirements that could have a direct and material effect on the entity?s major federal programs. Cause: The Project changed management companies on April 30, 2019. The prior management company did not provide adequate records to the new management company. HUD did not renew the management agent agreement with this provider so the management company changed again on July 1, 2020. The current management provided the information they were able to collect for the fiscal year ended June 30, 2019. This did not include year-to-date information or detailed accounting records with corresponding support, documentation to support the amounts of income and medical expenses included in tenant certifications, and reporting requirements. Possible Asserted Effect: We could not obtain enough supporting documentation in order to express an opinion on the following: Activities Allowed or Unallowed, Eligibility, Reporting, and Allowable Cost and Cost Principles. Repeat Finding: There was not a similar finding reported in the prior year. Recommendation: We recommend the current management keep adequate books, records, and documentation so audit procedures can be performed on all compliance requirements. Management Response: The Project contracted with Keli Management, Inc. as of July 1, 2020 to provide property management services. The management team has upgraded the Project?s software. Current year activity is being recorded timely, and monthly reconciliations are being performed. Keli Management, Inc. is providing financial information to the Board of Directors. In October 2020, Keli Management, Inc. also filed the outstanding reports, tenant certifications, and other required documents with HUD.

FINDING 2019-003 ? Replacement Reserve Deposits Federal Agency: U.S. Department of Housing and Urban Development Pass through Entity: Not applicable Program Name: Section 811 Project Rental Assistance Contract Section 811 Capital Advance CFDA# and Program Expenditures: 14.181 ($ 68,741) 14.181 ($1,248,800) Award Number: N/A Federal Award Year: July 1, 2018 to June 30, 2019 Questioned Costs: N/A Condition Found: The reserve for replacement was not fully funded for the year ended June 30, 2019. The May and June deposits totaling $3,386 were not made. In addition, the replacement reserve and residual receipts accounts were combined into bank account titled operational savings. Criteria: The regulatory agreement required that $1,693 to be deposited in the replacement reserve account each month from July 2018 through June 2019. Cause: A new management agent was hired as of May 1, 2019. The company did not transfer the replacement reserve deposits for May 2019 and June 2019. In addition, the management agent changed banks and combined the replacement reserve and residual receipts accounts into one bank account. Possible Asserted Effect: The replacement reserve was underfunded by $3,386 for the year ended June 30, 2019. Replacement Reserve and Residual Receipts funds should be kept in separate bank accounts as required by HUD. Funds from these accounts can only be spent with approval from HUD. Repeat Finding: There was not a similar finding in the prior year. Recommendation: The replacement reserve shortage of $3,386 should be funded as soon as possible. Two bank accounts should be opened ? a replacement reserve and a residual receipt. The correct amount of funds should be transferred to each account. Management Response: The Project contracted with Keli Management, Inc. as of July 1, 2020 to provide property management services. In addition, to the two missed deposits during the year ended June 30, 2019, the new management company discovered that replacement reserve deposits were not made for all of fiscal year ended June 30, 2020. In fiscal year 2021, Keli Management, Inc. was added as a signer/user to the existing bank accounts. The Project began using the replacement reserve bank account. Fourteen months of replacement reserve deposits totaling $23,699 were deposited into this account on October 5, 2020. The residual receipt account will be activated when needed.