THE HOUSING AUTHORITY OF THE CITY OF FREDONIA, KANSAS

Criteria: The consolidated loan resolution, dated November 2002, states that the Authority will transfer a minimum of $13,294.78 per year into a reserve account until the minimum balance of$132,947.80 is reached. The balance requirement is reduced by any approved withdrawals. Per United States Department of Agriculture?s Rural Development Office, the required balance as of December 31, 2020 was $93,081.29. Condition: The actual balance in the reserve checking account and certificate of deposit as of December 31, 2020 is $50,311.44, which is a deficit of $42,769.84. Context: The actual reserve balance was compared to the required reserve balance as of December 31, 2020. Effect: The condition created non-compliance of $42,769.84. This also creates the need for even larger transfers to the reserve account in future years which restricts cash that may be needed for other purpose.Cause: The Authority has not designed nor implemented an adequate system of control regarding the transfers to the reserve account, nor do they have an appropriate system to track the required balance of the account. Recommendation: Controls should be in place to ensure all annual required transfers to the reserve account are being made. Additionally, catch-up transfers will need to be made based off Rural Development?s recommendations. Views of responsible officials and planned corrective action: See the Corrective Action Plan on pages 25-26 of the current year audit.

Criteria: AU-C section 315 defines internal control as a process effected by those charge with governance, management, and other personnel that is designed to provide reasonable assurance about the achievement of the entity?s objectives with regards to the reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. To obtain an acceptable internal control environment that reduces the risk of material misstatement of the financial statement or the required supplementary information, control activities and monitoring functions must be properly implemented and effectively designed. AU-C section 265 further explains that deficiencies in the design of a control function that can result in material misstatements should be considered, at minimum, to be a significant deficiency. Statement of Condition: The Authority currently lacks a system of internal control for the assurance of completeness and accuracy for the Schedule of Expenditures of Federal Awards. Context: The Schedule of Expenditures of Federal Awards (SEFA) prepared by the Authority was not prepared prior to the start of auditor?s field work. Observation and inquiry demonstrated the Authority?s inaccuracy in calculating the federal expenditures of all Federal awards. Additionally, there was no documented review by management of the SEFA or the supporting documentation used to prepare the schedule. Effect of Condition: The Schedule of Expenditures of Federal Awards serves as the primary basis for the auditor?s major program determination. Misstatements in the schedule could result in the omission of potential major programs from required compliance audit procedures. Failure to audit a program as major, when required, is cause for the future reissuance of the compliance audit report. Also, the SEFA is a required supplementary schedule and the lack of controls over the SEFA could result in a material misstatement of the SEFA in the financial reporting package. Cause of Condition: The Authority has not designed nor implemented an adequate system of control regarding the preparation of the required Schedule of Expenditures of Federal Awards. Repeat Finding: This finding is repeated from prior year Finding 2018-004. Recommendations: Controls should be in place to ensure accuracy and completeness of the Schedule of Expenditures of Federal Awards. Management should be aware of all Federal awards received and expended, their source, and their compliance requirements. During the preparation of the schedule, the Authority should verify with granting agencies all CFDA titles and numbers, and the appropriate pass-through entity to be reported. After the schedule is completed, a reconciliation of the financial statements to the schedule should be performed, and management should review the schedule to verify all known Federal Programs are reported and that expenditures are properly captured on the regulatory basis of accounting. The reconciliation and management?s review should be documented. View of responsible officials and planned corrective actions: Management concurs with the finding. The Authority will develop an appropriate system of control over the preparation of the SEFA. See the Corrective Action Plan developed by the Authority on page 27.

Criteria: The Uniform Guidance provides requirements regarding the auditee?s responsibility related to internal control in 2 CFR 200.303 of Subpart D, ?Post Federal Award Requirements Standards for Financial and Program Management,? of the Uniform Guidance. As noted in that section, the nonfederal entity must establish and maintain effective internal control over federal awards; comply with federal statutes, regulations, and the terms and conditions of the federal awards; evaluate and monitor the entity?s compliance with statues, regulations, and the terms and conditions of federal awards; and take prompt action when instances of noncompliance are identified, including noncompliance identified in the audit findings. Under the Uniform Guidance, the auditor determines that internal controls over a compliance requirement for a major program is likely to be ineffective in preventing or detecting noncompliance, the auditor must report either a significant deficiency or material weakness. Statement of Condition: The Authority does not have a system of control over the Special Tests compliance requirement for the debt reserve account that is considered to have a direct or material effect on the major program. Context: Controls over the special tests requirements were discussed with management. It was determined that there were no reliable controls present over the requirement. Effect of Condition: The condition created a deficit in the reserve accounts of $40,978.72. Additionally, the lack of controls over the reserve account requirements could result in insufficient funds to cover the costs of capital improvements or repairs. Also, see Finding 2019-003. Cause of Condition: The Authority has not designed nor implemented an adequate system of control regarding the transfers to the reserve account, nor do they have an appropriate system to track the required balance of the account. Repeat Finding: This finding is repeated from prior year Finding 2018-005. Recommendations: Controls should be in place to ensure all annual required transfers to the reserve and security deposit accounts are being made. Additionally, catch-up transfers will need to be made based off Rural Development?s recommendations. View of responsible officials and planned corrective actions: Management concurs with the finding and will work to create a system that allows for proper transfer of reserve and security deposit required deposits. Additionally, the Authority will create a spreadsheet to begin tracking the required balance for any point during the year. See corrective action plan on page 27.

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