Audits and Annual Financial Statements

Introduction

Money received by a local government is public money. Each local government has a responsibility to manage its money in a manner that ensures the best interests of the public are being served. To help ensure public funds are properly accounted for, Alaska law requires all municipalities to submit an annual audit, except for second class cities, which may submit an audit or a statement of annual income and expenditures.

Municipalities and unincorporated communities must provide a copy of their audit, or of their annual statement certified by resolution of the local governing body, to the Department of Community and Regional Affairs each year in order to receive available community revenue sharing funds.

Any entity, including second class cities, that expends a cumulative total of $500,000 or more in state or federal financial assistance during a fiscal year is required to submit a state or federal single audit for that fiscal year.

In addition to meeting legal requirements, an audit or annual statement provides organizations a tool for determining how effective they have been in meeting their financial goals.

Narrative

An annual audit is an independent examination of an organization’s financial transactions and accounts for an entire fiscal year. State law requires that the audit be completed by a public accountant who has no personal interest in the fiscal affairs of the municipality. The audit report should state what has been audited and whether the organization's financial information is presented fairly, in accordance with generally accepted accounting principles. A report of the auditor's comments and recommendations might also be provided.

A state or federal single audit is similar to an annual audit, but includes reports which examine the entity’s system of internal controls and whether the organization has complied with the rules and regulations associated with the major state or federal funding program(s) from which it received financial assistance.

A statement of annual income and expenditures is a summary of annual income received and money spent during the fiscal year. The statement can be prepared by local staff, rather than by a public accountant.

A certified financial statement (CFS) is a report of revenues and expenditures for a fiscal year, accompanied by a resolution of the governing body verifying that the information in the statement is true and correct. For state revenue sharing purposes, second class cities in Alaska may submit a certified financial statement instead of an audit. Every year, the Department of Community and Economic Development sends a Certified Financial Statement Manual to second class cities. The manual contains forms and instructions for completing an annual certified financial statement.

Frequently Asked Questions

Is an annual audit required by law?

Yes. Alaska law requires all municipalities to provide an annual audit, or in the case of second class cities, an audit or statement of annual income and expenditures.

State and federal law require that an entity provide a state or federal single audit if it spends $500,000 or more in federal or state financial assistance during a fiscal year. Information about the state and federal single audit requirements is included in the financial assistance agreements. If a community gets an audit that complies with state or federal single audit requirements, it is not required to then have a second audit or certified financial statement prepared under state statute. The single audit standards satisfy the state audit requirements for municipalities.

Local ordinances may have additional audit requirements and procedures.

Are federal and state funds awarded to an entity, but managed and administered by a state agency or other third party on behalf of the entity, included in the $500,000 threshold for state and federal single audits?

State or federal pass-through funds or “on behalf” payments generally count toward the federal or state threshold – but there are some exceptions. For answers to specific questions, it is best to contact the granting agencies and the State of Alaska single audit coordinator (phone: 907-456-4666; Email: single.audit@alaska.gov)

If federal funds are passed through a state agency, are they still considered federal funds for audit purposes?

Yes, federal funds remain federal even if they are passed through a state agency.

Can municipalities hire any accountant to perform an audit?

No. State law requires that an audit be performed by a public accountant who has no personal interest either directly or indirectly in the financial affairs of the municipality. Government Auditing Standards referenced in the Alaska Administrative Code require that state or federal single audits be performed by a certified public accountant with specific training in governmental accounting and auditing standards.

What is the difference between a single audit and a program audit?

A single audit is an audit of the whole organization and all its state and federal financial assistance. A program audit is an audit of a particular grant or program for which funds are received, and is only necessary if required as a condition of that particular grant or program. Program audits alone do not satisfy the annual audit requirements for municipalities.

How much does an annual audit cost?

The cost of an audit will depend on the type of audit, the level of detail, the complexity of the entity’s financial records, how well organized the financial records and documents are, and the time it takes to complete the audit. Contact at least three auditing firms to get a cost estimate. Generally, audit costs range from $5,000 to $15,000, but if your financial records are not organized or properly maintained, it will be difficult to complete an audit, and your cost will be much higher.

Your governing body should budget for the cost of the audit. Failure to budget for the cost of an audit is not a valid excuse for failing to have an audit performed.

Can state or federal grant funds be used to pay the cost of an audit?

Audit costs can be legitimate costs of administering state or federal financial assistance, depending on the award agreement and on the policies established by the granting agency/agencies. The portion of the audit cost applied to the grant(s) must be approved by the funding agency/agencies, and all audit costs should be fully documented.

How do we prepare for an audit?

An auditor and the entity being audited each have responsibilities that should be spelled out in a written agreement signed by both parties before any work begins. When hiring an auditor, specify what type of audit your organization needs. The auditor should provide a list of what information is required to prepare for the audit (e.g. ledgers, grant agreements, invoices and receipts, bank statements, policies, etc.). Collect all the necessary files and documents and have them ready for the auditor. Providing well organized files and ledgers with clear, accurate, and up-to-date records and background documentation will greatly reduce your audit cost: the less time the auditor must spend searching for documents, the lower your cost will be.

Who should receive copies of the audit or certified financial statement?

In order to receive available community revenue sharing funds from the state, eligible entities must provide a copy of their annual audit or certified financial statement to the Alaska Division of Community and Regional Affairs.

For state single audits, the entity must provide the Alaska Department of Administration sufficient copies for each state agency from which financial assistance was received. Federal single audits should be submitted to the Federal Audit Clearinghouse.

All records of a public entity that are not expressly confidential are open to the public. Audits and annual financial statements are no exceptions. Alaska law stipulates that copies of an audit shall be available to the public upon request. The municipality may charge for copies given to the public, but it may only charge what it costs to produce the copy.

When is an audit or certified financial statement due?

It depends on the type of audit, and the purpose of the audit.
To receive available community revenue sharing funds, eligible entities must submit an application no later than June 1 of the computation year. They must also submit an audit or annual statement of income and expenditures for the fiscal year preceding January 1 of the computation year. The audit or statement may be submitted later than the application, but funding will not be released until the audit or statement is submitted. Funding will lapse after two years from the beginning of the application year.
State and federal single audits are due the earlier of 30 days after the entity receives its audit report, or nine months after the end of the audit period.


Additional Resources

Publications:

Applicable Laws

Alaska Statutes and Regulations

  • AS 29.35.120 Annual audit
  • AS 29.60.850 – 29.60.879 Community Revenue Sharing Program Statutes

Alaska Administrative Code

  • 2 AAC 45.010 Audit Requirements
  • 2 AAC 45.070 Applicability
  • 2 AAC 45.080 Exemptions from Financial Assistance
  • 2 AAC 45.085 Waiver of Audit Requirements
  • 2 AAC 45.090 Definitions
  • 3 AAC 180.010 – 900 Community Revenue Sharing Program Regulations