[Code of Federal Regulations]
[Title 7, Volume 11, Parts 1600 to 1899]
[Revised as of January 1, 1999]
From the U.S. Government Printing Office via GPO Access
[CITE: 7CFR1773]
[Page 928-959]
TITLE 7--AGRICULTURE
AGRICULTURE
PART 1773--POLICY ON AUDITS OF RUS BORROWERS
Subpart A--General Provisions
Sec.
1773.1 General.
1773.2 Definitions.
Subpart B--RUS Audit Requirements
1773.3 Annual audit.
1773.4 Borrower responsibilities.
1773.5 Qualifications of CPA.
1773.6 Audit agreement.
1773.7 Audit standards.
1773.8 Audit date.
1773.9 Disclosure of irregularities and illegal acts.
1773.10 Access to audit-related documents.
1773.11-1773.19 [Reserved]
Subpart C--RUS Requirements for the Submission and Review of the
Auditor's Report, Report on Compliance, Report on Compliance and on
Internal Controls Over Financial Reporting, and Management Letter
1773.20 CPA's submission of the auditor's report, report on compliance,
report on compliance and on internal controls over financial
reporting, and management letter.
1773.21 Borrower's review and submission of the auditor's report,
report on compliance, report on compliance and on internal
controls over financial reporting, and management letter.
1773.22-1773.29 [Reserved]
Subpart D--RUS Reporting Requirements
1773.30 General.
1773.31 Auditor's report.
1773.32 Report on compliance and on internal control over financial
reporting.
1773.33 Management letter.
1773.34-1773.37 [Reserved]
Subpart E--RUS Required Audit Procedures and Documentation
1773.38 Scope of engagement.
1773.39 Utility plant and accumulated depreciation.
1773.40 Regulatory assets.
1773.41 Extraordinary retirement losses.
1773.42 Clearing accounts.
1773.43 Capital and equity accounts.
1773.44 Long-term debt.
1773.45 Regulatory liabilities.
1773.46-1773.49 [Reserved]
Appendix A to Part 1773--Sample Auditor's Report for an Electric
Cooperative
Appendix B to Part 1773--Sample Auditor's Report for a Class A or B
Commercial Telephone Company
Appendix C to Part 1773--Illustrative Independent Auditor's Management
Letter for Electric Borrowers
Appendix D to Part 1773--Illustrative Independent Auditor's Management
Letter for Telecommunications Borrowers
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.).
Source: 56 FR 63360, Dec. 3, 1991, unless otherwise noted.
Editorial Note: Nomenclature changes to part 1773 appear at 63 FR
38722, July 17, 1998.
Subpart A--General Provisions
Sec. 1773.1 General.
(a) This part implements those standard provisions of the security
instrument utilized by the Rural Utilities Service (RUS) for both
electric and telephone borrowers and by the Rural Telephone Bank (RTB)
for its telephone borrowers. The provisions require 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 certified public accountant (CPA), satisfactory to
RUS, and accompanied by a
[[Page 929]]
report of such audit, in form and substance satisfactory to RUS.
(b) This part 1773 applies to both RUS and RTB borrowers. For the
purposes of RTB borrowers, as used in this part 1773, RUS means RTB and
Administrator means Governor unless the text indicates otherwise.
(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.
(d) An auditor's report, report on compliance, report on compliance
and on internal controls over financial reporting, and management letter
are required to meet the reporting provisions of the RUS security
instrument.
(1) The auditor's report must state that the audit was conducted in
accordance with generally accepted government auditing standards
(GAGAS).
(2) The management letter must state that the audit was conducted in
accordance with this part.
(3) A report of the audit, in form and substance satisfactory to
RUS, cannot be issued unless and until an audit has been performed in
accordance with GAGAS and this part.
(4) A borrower is in violation of provisions of its security
instrument with RUS if the borrower fails to provide an audit performed
in compliance with GAGAS and this part. RUS security instruments
normally provide for notice and an opportunity to cure such violations
before RUS can exercise certain remedies.
(5) A report prepared in connection with a review or compilation of
financial statements, as defined in Statement of Standards for
Accounting and Review Services No. 1, Compilation and Review of
Financial Statements, does not satisfy the requirements of the RUS
security instrument.
(6) A report, as described in Statement on Auditing Standards (SAS)
No. 62, entitled ``Special Reports'', or in SAS No. 35, entitled
``Special Reports--Applying Agreed-upon Procedures to Specified
Elements, Accounts, or Items of a Financial Statement'', does not
satisfy the RUS loan security instrument requirements.
(7) An annual report containing audited financial statements does
not satisfy the RUS security instrument requirements.
(e) This part further implements those provisions of the standard
RUS security instrument by setting forth the criteria for CPAs to be
deemed satisfactory to RUS and the audit procedures and documentation
standards that must be performed before a report of the audit
satisfactory to RUS can be prepared and issued.
[56 FR 63360, Dec. 3, 1991, as amended at 61 FR 107, Jan. 3, 1996]
Sec. 1773.2 Definitions.
As used in this part:
Administrator means the Administrator of RUS and, as provided in
Sec. 1773.2 (b), Governor.
AICPA means the American Institute of Certified Public Accountants.
Audit means an examination of financial statements by an independent
CPA for the purpose of expressing an opinion on the fairness with which
those statements present financial position, results of operations, and
changes in cash flows in conformity with generally accepted accounting
principles (GAAP) and for determining whether the borrower has complied
with applicable laws, regulations, and contracts for those transactions
and events reflected in the financial statements.
BAD means the Borrower Accounting Division of RUS.
Borrower means an entity that has an outstanding RUS, RTB, or FFB
loan or loan guarantee, or that has received a grant for electric,
telecommunications, distance learning, or telemedicine purposes under
the act.
CPA means certified public accountant. The terms CPA and CPA firm
are used interchangeably.
FFB means the Federal Financing Bank, an instrumentality and wholly
owned corporation of the United States.
GAAP means generally accepted accounting principles.
GAGAS means generally accepted government auditing standards as set
forth in Government Auditing Standards, Standards for Audit of
Governmental Organizations, Programs, Activities, and Functions, issued
by the Comptroller General of the United States.
[[Page 930]]
GAO means the General Accounting Office.
Governor means the Governor of the RTB.
Illegal act has the meaning prescribed in SAS No. 54, entitled
``Illegal Acts by Clients''.
Irregularity has the meaning prescribed in SAS No. 53, entitled
``The Auditor's Responsibility to Detect and Report Errors and
Irregularities''.
OIG means the Office of Inspector General, United States Department
of Agriculture.
OMB means the Office of Management and Budget.
PCPS means the Private Companies Practice Section of the AICPA.
REA means the Rural Electrification Administration formerly an
agency of the United States Department of Agriculture and predecessor
agency to RUS with respect to administering certain electric and
telephone loan programs.
Regulatory asset means an asset resulting from an action of a
regulator as prescribed in Statement of Financial Accounting Standards
(SFAS) No. 71, entitled ``Accounting for the Effects of Certain Types of
Regulation''.
Regulatory liability means a liability imposed on a regulated
enterprise by an action of a regulator as prescribed in SFAS No. 71,
entitled ``Accounting for the Effects of Certain Types of Regulation''.
Related party has the meaning prescribed in SFAS No. 57, entitled
``Related Party Disclosures''.
Related party transaction has the meaning prescribed in SFAS No. 57,
entitled ``Related Party Disclosures''.
Reportable condition has the meaning prescribed in SAS No. 60,
entitled ``Communication of Internal Control Structure Related Matters
Noted in an Audit''.
RTB means the Rural Telephone Bank.
RUS means the Rural Utilities Service, an agency of the United
States Department of Agriculture established pursuant to Section 232 of
the Federal Crop Insurance Reform and Department of Agriculture
Reorganization Act of 1994 (Pub. L. 103-354, 108 Stat. 3178), successor
to REA with respect to administering certain electric and telephone
programs. See 7 CFR 1700.1.
SAS means Statement on Auditing Standards as prescribed by the
AICPA.
SEC Practice Section means the Securities and Exchange Commission
Practice Section of the AICPA.
SFAS means Statements of Financial Accounting Standards as
prescribed by the Financial Accounting Standards Board.
State means any state or territory of the United States, or the
District of Columbia.
Uniform System of Accounts means, for telephone borrowers, the
Uniform System of Accounts for Telecommunications Companies, prescribed
by the Federal Communications Commission and set forth at 47 CFR part
32, as supplemented by RUS pursuant to 7 CFR part 1770, Accounting
Requirements for RUS Telephone Borrowers, subpart B, Uniform System of
Accounts, and, for electric borrowers, the Uniform System of Accounts
Prescribed for Electric Borrowers of the RUS.
[56 FR 63360, Dec. 3, 1991, as amended at 59 FR 66440, Dec. 27, 1994; 60
FR 2874, Jan. 12, 1995; 63 FR 38722, July 17, 1998]
Subpart B--RUS Audit Requirements
Sec. 1773.3 Annual audit.
(a) Each borrower must have its financial statements audited
annually by a CPA selected by the borrower and approved by RUS as set
forth in Sec. 1773.4.
(b) Each borrower must establish an annual as of audit date within
twelve months of the date of receipt of the first advance of RUS or FFB
loan funds and must prepare financial statements as of the date
established.
(c) Until all loans made or guaranteed by RUS have been repaid, the
borrower must furnish three copies of the auditor's report, report on
compliance, report on compliance and on internal controls over financial
reporting, and management letter to RUS within 120 days of the as of
audit date.
(d) A borrower that qualifies as a unit of state or local government
or Indian tribe as such terms are defined in the Single Audit Act of
1984 (31 U.S.C. 7501 et seq.), the Single Audit Act Amendments of 1996
(31 U.S.C. 7505 et seq.) and OMB Circular A-133, Audits of States, Local
Governments, and Non-
[[Page 931]]
Profit Organizations (copy available from the Executive Office of the
President, Publication Services, 725 17th St., NW., Suite 2200,
Washington, DC 20502; 202-395-7332), must comply with this part as
follows:
(1) A borrower that expends $300,000 or more in a year in Federal
awards must have an audit performed and submit an auditor's report
meeting the requirements of the Single Audit Act of 1984 and the Single
Audit Act Amendments of 1996.
(2) A borrower that expends less than $300,000 in Federal awards
during the year must have an audit performed in accordance with the
requirements of this part.
(3) A borrower must notify RUS, in writing, within 30 days of the as
of audit date, of the total Federal awards expended during the year and
must state whether it will have an audit performed in accordance with
the Single Audit Act of 1984 and the Single Audit Act Amendments of
1996, or this part.
(i) A borrower that elects to comply with this part must select a
CPA that meets the qualifications set forth in Sec. 1773.5.
(ii) If an audit is performed in accordance with the Single Audit
Act of 1984 and the Single Audit Act Amendments of 1996, an auditor's
report that meets the requirements of the Single Audit Act of 1984, and
the Single Audit Act Amendments of 1996, will be sufficient to satisfy
that borrower's obligations under this part.
(e) OMB Circular A-133, Audits of States, Local Governments, and
Non-Profit Organizations does not apply to audits of RUS electric and
telecommunications cooperatives and commercial telecommunications
borrowers.
[56 FR 63360, Dec. 3, 1991, as amended at 59 FR 659, Jan. 6, 1994; 63 FR
38722, July 17, 1998]
Sec. 1773.4 Borrower responsibilities.
(a) Selection of a qualified CPA. The borrower's board of directors
is responsible for the selection of a qualified CPA that meets the
requirements set forth in Sec. 1773.5. When selecting a CPA, the
borrower should consider, among other matters:
(1) The qualifications of CPAs available to do the work;
(2) The CPA's experience in performing audits of utilities; and
(3) The CPA's ability to complete the audit and submit the reports
and management letter within 90 days of the as of audit date.
(b) Board approval of selection. The board's approval of a CPA must
be recorded by a board resolution that states:
(1) The CPA meets RUS's qualifications to perform an audit; and
(2) The borrower and CPA will enter into an audit agreement in
accordance with Sec. 1773.6.
(c) Notification of selection. When the initial selection or
subsequent change of a CPA by a borrower has been made, the borrower
must notify RUS, in writing, at least 90 days prior to the as of audit
date.
(1) RUS will notify the borrower, in writing, within 30 days of the
date of receipt of such notice, if the selection or change in CPA is not
satisfactory.
(2) Notification to RUS that the same CPA has been selected for
succeeding audits of the borrower's financial statements is not
required; however, the procedures outlined in this part must be followed
for each new CPA selected, even though such CPA may previously have been
approved by RUS to audit records of other RUS borrowers. Changes in the
name of a CPA firm are considered to be a change in the CPA.
(d) Audit agreement. The borrower must enter into an audit agreement
with the CPA that complies with Sec. 1773.6.
(e) Debarment certification. The borrower is responsible for the
receipt, from the selected CPA, of a lower tier covered transaction
certification, as required under the provisions of Executive Orders
12549 and 12689, Debarment and Suspension, and any rules or regulations
issued thereunder.
(f) Submission of auditor's report. The borrower must submit to RUS
the required auditor's report, report on compliance, report on
compliance and on internal controls over financial reporting, and
management letter as set forth in Sec. 1773.21.
(1) An annual auditor's report, report on compliance, report on
compliance and on internal controls over financial reporting, and
management letter that
[[Page 932]]
fail to meet the requirements detailed in this part will be returned to
the borrower with a written explanation of noncompliance.
(2) The borrower must, within 60 days of the date of the letter
detailing the noncompliance, submit corrected reports to RUS.
(3) If corrected reports are not received within 60 days of the date
of the letter detailing the noncompliance, RUS may notify the borrower
that a default has occurred under its security instrument or take other
appropriate action. The default notice will set forth the period of time
during which the default will be remedied.
(g) Submission of plan of corrective action. The borrower must
submit written comments to RUS on the findings and recommendations in
the auditor's report, report on compliance, report on compliance and on
internal controls over financial reporting, and management letter. The
borrower must also submit to RUS:
(1) A written plan for corrective action taken or planned; and
(2) Comments on the status of corrective action taken on previously
reported findings and recommendations.
If corrective action is not necessary, a written statement
describing the reason it is not should accompany the auditor's report.
Sec. 1773.5 Qualifications of CPA.
For purposes of the RUS standard security instrument, any CPA that
meets the qualifications criteria of this section and enters into an
audit agreement with the borrower that complies with Sec. 1773.6, will
be considered satisfactory to RUS.
(a) Certification. The accountant that audits the financial
statements of an RUS borrower must be a CPA in good standing of some
state. The CPA does not have to be licensed by the state in which the
borrower is located; however, the CPA must abide by the rules and
regulations of professional conduct promulgated by the accountancy board
of the state in which the borrower is located.
(b) Independence. The CPA must be independent. A CPA will be
considered independent if the CPA:
(1) Meets the standards for independence contained in the AICPA Code
of Professional Conduct in effect at the time the CPA's independence is
under review;
(2) Does not have and has not had any direct financial interest or
any material indirect financial interest in the borrower during the
period covered by the audit; and
(3) Is not and was not, during the period under audit, connected
with the borrower as a promoter, underwriter, trustee, director,
officer, or employee.
(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 36 months of the issuance of the previous peer review 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
[[Page 933]]
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 Assistant Administrator,
Program Accounting and Regulatory Analysis, 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 Assistant
Administrator, Program Accounting and Regulatory Analysis, 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 Assistant
Administrator, Program Accounting and Regulatory Analysis, 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 Assistant
Administrator, Program Accounting and Regulatory Analysis, 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 OIG,
upon request.
(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.
(d) Audit agreement. The CPA must enter into an audit agreement with
the borrower that complies with Sec. 1773.6.
[56 FR 63360, Dec. 3, 1991, as amended at 61 FR 107, Jan. 3, 1996; 63 FR
38722, July 17, 1998]
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
[[Page 934]]
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
compliance and on internal controls over financial reporting, 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 compliance and on internal
controls over financial reporting, 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 (OIG 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.
(b) The audit agreement may include such additional terms and
conditions as the CPA and borrower deem appropriate, including, but not
limited to:
(1) The CPA will report all audit findings to the board of directors
as required in Sec. 1773.20(b); and
(2) The auditor's report, report on compliance, report on compliance
and on internal controls over financial reporting, and management letter
with copies for transmittal to RUS, and supplemental lenders, if
applicable, will be submitted to the borrower's board of directors
within 90 days of the as of audit date;
(c) A copy of the audit agreement must be available at the
borrower's office for inspection by RUS personnel. One copy of the
current audit agreement must be maintained in the CPA's workpapers or
permanent file.
[56 FR 63360, Dec. 3, 1991, as amended at 61 FR 108, Jan 3, 1996; 63 FR
38722, July 17, 1998]
Sec. 1773.7 Audit standards.
(a) The audit must be performed in accordance with GAGAS and this
part. The audit must be performed in accordance with GAGAS in effect at
the audit date unless the borrower is directed otherwise, in writing, by
RUS.
(b) The audit must include such tests of the accounting records and
such other auditing procedures that are sufficient to enable the CPA to
express an opinion on the financial statements and to issue the required
reports on compliance and internal controls and the management letter.
(c) Audit scope limitation. (1) The borrower will not limit the
scope of the audit to the extent that the CPA is unable to meet RUS's
audit requirements or to provide an unqualified opinion that the
financial statements are presented fairly in conformity with GAAP.
(2) The security instrument provision requiring the submission of a
report of the audit is not satisfied if the CPA must qualify the opinion
in the auditor's report due to limitations placed on the scope of the
audit by the borrower.
(3) If the CPA determines during the audit that an unqualified
opinion cannot be issued due to a scope limitation imposed by the
borrower, the CPA
[[Page 935]]
should use professional judgment to determine what levels of the
borrower's management should be informed.
(4) After informing the borrower's management, if the scope
limitation is not adequately resolved, the CPA should immediately
contact the Assistant Administrator, Program Accounting and Regulatory
Analysis, RUS, U.S. Department of Agriculture, Washington, DC 20250-
1500. The Assistant Administrator, Program Accounting and Regulatory
Analysis, will endeavor to resolve the matter with the borrower.
Sec. 1773.8 Audit date.
(a) The annual audit must be performed as of the end of the same
calendar month each year unless prior approval to change the as of audit
date is obtained, in writing, from RUS.
(1) A borrower may request a change in the as of audit date by
writing to the appropriate RUS regional office at least 60 days prior to
the newly requested as of audit date.
(2) The time period between the prior as of audit date and the newly
requested as of audit date must be no longer than twenty-four months.
For example, a borrower that wishes to change its as of audit date from
December 31, 19X1, to June 30, must make the change effective no later
than June 30, 19X3.
(b) Comparative financial statements must be prepared and audited
for the twelve months ending as of the new audit date and for the twelve
months immediately preceding that period.
(c) A borrower that changes its as of audit date from December 31,
19X1, to June 30, 19X3, must have the CPA report on statements in the
following manner:
------------------------------------------------------------------------
Statements prepared as of
Previously issued statements new audit date
------------------------------------------------------------------------
12/31/X1; 12/31/X0 (Statements need not be 6/30/X3; 6/30/X2
reissued).
------------------------------------------------------------------------
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.
(c) Pursuant to the terms of its audit agreement with the borrower,
the CPA must immediately report, in writing, all irregularities and all
indications or instances of illegal acts, whether material or not, to:
(1) The president of the borrower's board of directors;
(2) The Assistant Administrator, Program Accounting and Regulatory
Analysis; and
(3) OIG, as follows:
(i) For the States of Delaware, District of Columbia, Maryland,
Pennsylvania, Virginia, West Virginia, Connecticut, Maine,
Massachusetts, New Hampshire, New Jersey, New York, Puerto Rico, Rhode
Island, Vermont and the Virgin Islands, report to USDA-OIG-Audit,
Northeast Region, Regional Inspector General, 6505 Belcrest Road, room
428-A, Hyattsville, Maryland 20782;
(ii) For the States of Alabama, Florida, Georgia, Kentucky,
Mississippi, North Carolina, South Carolina, and Tennessee, report to
USDA-OIG-Audit, Southeast Region, Regional Inspector General, 401 W.
Peachtree Street, NW., room 2328, Atlanta, Georgia 30365-3520;
(iii) For the States of Illinois, Indiana, Michigan, Minnesota,
Ohio, and Wisconsin, report to USDA-OIG-Audit, Midwest Region, Regional
Inspector General, 111 N. Canal Street, Suite 1130, Chicago, Illinois
60606;
(iv) For the States of Arkansas, Louisiana, New Mexico, Oklahoma,
and Texas, report to USDA-OIG-Audit,
[[Page 936]]
Southwest Region, Regional Inspector General, 101 South Main, room 324,
Temple, Texas 76501;
(v) For the States of Colorado, Iowa, Kansas, Missouri, Montana,
Nebraska, North Dakota, South Dakota, Wyoming, and Utah, report to USDA-
OIG-Audit, Great Plains Region, Regional Inspector General, P.O. Box
293, Kansas City, Missouri 64141; and
(vi) For the States of Alaska, Arizona, California, Hawaii, Idaho,
Nevada, Oregon, Territory of Guam, Trust Territories of Pacific, and
Washington, report to USDA-OIG-Audit, Western Region, Regional Inspector
General, 555 Battery Street, room 511, San Francisco, California 94111.
[56 FR 63360, Dec. 3, 1991, as amended at 61 FR 108, Jan. 3, 1996]
Sec. 1773.10 Access to audit-related documents.
Pursuant to the terms of the audit agreement, the CPA must make all
audit-related documents, including auditors' reports, workpapers, and
management letters available to RUS, or its designated representative,
upon request and must permit RUS, or its designated representative, to
photocopy all audit-related documents.
Secs. 1773.11-1773.19 [Reserved]
Subpart C--RUS Requirements for the Submission and Review of the
Auditor's Report, Report on Compliance, Report on Compliance and on
Internal Controls Over Financial Reporting, and Management Letter
Sec. 1773.20 CPA's submission of the auditor's report, report on
compliance, report on compliance and on internal controls over
financial reporting, and management letter.
(a) Time limit. As soon as possible after completion of the audit,
but within 90 days of the as of audit date, the CPA should deliver the
auditor's report, report on compliance, report on compliance and on
internal controls over financial reporting, and management letter to the
president of the borrower's board of directors. As a minimum, copies
should be provided for each member of the board of directors and the
manager. Further, three copies must be provided to the borrower for
transmittal to RUS.
(b) Communication with the board of directors. In addition to
providing sufficient copies of the auditor's report, report on
compliance, report on compliance and on internal controls over financial
reporting, and management letter for each member of the borrower's board
of directors, RUS requires that the CPA report all audit findings to the
borrower's board of directors. RUS recommends that audit findings be
communicated orally; however, the communication may be oral or written,
at the borrower's discretion. If the information is communicated orally,
the CPA must document the communication by appropriate memoranda or
notations in the workpapers. If the CPA communicates in writing, a copy
of the written communication must be included in the CPA's audit
workpapers or permanent file.
(c) Matters to be communicated. Matters communicated to the board of
directors must include, but are not limited to the matters to be
communicated to the audit committee as prescribed in SAS No. 61,
entitled ``Communication with Audit Committee'',:
(1) The initial selection of and changes in significant accounting
policies;
(2) The methods used to account for significant or unusual
transactions and the effects of significant accounting policies in
controversial or emerging areas;
(3) The process utilized by management to formulate significant
accounting estimates and the basis for the CPA's conclusions regarding
the reasonableness of these estimates;
(4) Audit findings and recommendations, including audit adjustments
that either individually or in the aggregate have a significant effect
on the borrower's financial statements;
(5) The CPA's responsibility for other information presented with
the audited financial statements, any audit procedures performed, and
the results thereof;
[[Page 937]]
(6) Any disagreements with management, whether or not satisfactorily
resolved, concerning matters that individually or in the aggregate may
be significant to the borrower's financial statements or the auditor's
report, report on compliance, report on compliance and on internal
controls over financial reporting, or management letter;
(7) Significant matters that were the subject of consultations with
other accountants;
(8) Significant issues discussed with management with regard to the
initial or recurring retention of the CPA; and
(9) Any serious difficulties encountered in dealing with management
during the performance of the audit.
[56 FR 63360, Dec. 3, 1991, as amended at 59 FR 659, Jan. 6, 1994]
Sec. 1773.21 Borrower's review and submission of the auditor's report,
report on compliance, report on compliance and on internal
controls over financial reporting, and management letter.
(a) The borrower's board of directors should note and record receipt
of the auditor's report, report on compliance, report on compliance and
on internal controls over financial reporting, and management letter and
any action taken in response to the reports or management letter in the
minutes of the board meeting at which such reports and management letter
are presented.
(b) The borrower must furnish RUS with three copies of the auditor's
report, report on compliance, report on compliance and on internal
controls over financial reporting, and management letter within 120 days
of the as of audit date. Any provision in RUS's security instrument that
requires such documents to be furnished to RUS in a shorter period of
time may be disregarded.
(c) The borrower must furnish RUS with three copies of its plan for
corrective action, if any, within 180 days of the as of audit date.
(d) The borrower must furnish RUS, within 120 days of the as of
audit date, with a copy of each special report, summary of
recommendations or similar communications, if any, received from the CPA
as a result of the audit.
[56 FR 63360, Dec. 3, 1991, as amended at 59 FR 659, Jan. 6, 1994]
Secs. 1773.22-1773.29 [Reserved]
Subpart D--RUS Reporting Requirements
Sec. 1773.30 General.
(a) The CPA must prepare the following:
(1) An auditor's report, examples of which are set forth in
appendixes A, exhibit 1 (Electric), and B, exhibit 1 (Telephone) of this
part 1773;
(2) A report on compliance and on internal control over financial
reporting, examples of which are set forth in appendices A, exhibits 2
and 3 (Electric) and B, exhibits 4 and 5 (Telecommunications) of this
part 1773; and
(3) A management letter, an example of which is set forth in
appendix C of this part 1773.
(b) The CPA should deliver the auditor's report, report on
compliance, report on compliance and on internal controls over financial
reporting, and management letter (with copies as required in
Sec. 1773.20) to the borrower as soon as possible after completion of
the audit but not more than 90 days after the as of audit date.
[56 FR 63360, Dec. 3, 1991, as amended at 63 FR 38723, July 17, 1998]
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. This report must be signed by the
CPA, cover all statements presented, and refer to the separate report on
compliance and on internal control
[[Page 938]]
over financial reporting issued in conjunction with the auditor's
report.
[61 FR 108, Jan. 3, 1996, as amended at 63 FR 38723, July 17, 1998]
Sec. 1773.32 Report on compliance and on internal control over
financial reporting.
As required by GAGAS, the CPA must prepare a written report on the
tests performed for compliance with applicable laws, regulations,
contracts, and grants, and on the borrower's internal control structure
and on 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 control risk;
(c) If no reportable instances of noncompliance and no reportable
conditions were found, the CPA must issue a report as illustrated in
appendix A, exhibit 2 (Electric), and appendix B, exhibit 4
(Telecommunications) of this part 1773;
(d) If material instances of noncompliance and reportable conditions
are identified, the CPA must issue a report as illustrated in appendix
A, exhibit 3 (Electric), and appendix B, exhibit 5 (Telecommunications)
of this part 1773;
(e) Other nonmaterial instances of noncompliance should not be
disclosed in the report on compliance and on internal control over
financial reporting, but should be reported in a separate communication
to the board of directors, preferably in writing. All such
communications must be documented in the workpapers and submitted to RUS
in compliance with Sec. 1773.21.
(f) If the CPA has issued a separate letter detailing immaterial
instances of noncompliance, the report on compliance and on internal
control over financial reporting must be modified to include a statement
such as:
We noted certain immaterial instances of noncompliance that we have
reported to the management of (borrower's name) in a separate letter
dated (month, day, year).
(g) If the CPA has issued a separate letter to management to
communicate other matters involving the design and operation of the
internal control over financial reporting, the report on compliance and
on internal control over financial reporting must be modified to include
a statement such as:
However, we noted other matters involving the internal control over
financial reporting that we have reported to the management of
(borrower's name) in a separate letter dated (month, day, year).
(h) The report must contain the status of known but uncorrected
significant or material findings and recommendations from prior audits
that affect the current audit objective.
[63 FR 38723, July 17, 1998]
Sec. 1773.33 Management letter.
The CPA must prepare a management letter that includes, at a
minimum, comments on:
(a) Audit procedures. State whether the audit has been performed in
accordance with this part;
(b) Special reports. State whether any special reports, summaries of
recommendations, or similar communications were furnished to the
borrower's management during the course of the audit or during interim
audit work, and provide a description of the information furnished;
(c) Accounting and records. Comment on the adequacy and
effectiveness of the borrower's accounting procedures, discuss the
general condition of the records, and outline any recommendations for
improvement. Comment on the adequacy and fairness of the methods used in
accumulating and recording labor, material, and overhead costs, and the
distribution of these costs to construction, retirement, and maintenance
or other expense accounts, and where appropriate, include:
(1) Whether subsidiary plant records agree with the controlling
general ledger plant accounts;
(2) Whether construction clearing accounts are cleared promptly of
costs of completed construction to the proper classified plant accounts
and whether
[[Page 939]]
depreciation was accrued on such completed construction from the date
the plant was placed in service;
(3) Whether retirements of plant are currently and systematically
recorded and properly priced;
(4) Whether all costs associated with retirements of plant are
properly accounted for in the accumulated provision for depreciation
accounts and comment on any unusual charges or credits to such accounts;
and
(5) Whether RUS approval was obtained for a sale requiring such
approval, and whether receipts from sales of plant, material or scrap
were not handled in conformance with RUS requirements.
(d) Materials control. Comment on the adequacy of the control over
materials and supplies.
(e) Compliance with RUS loan and security instrument provisions.
State whether the following provisions of RUS's loan and security
instruments have been complied with:
(1) For electric borrowers, provisions relating to:
(i) The requirement for funds to be deposited in banks or other
depositories designated in the loan documents or approved by RUS. For
purposes of this part, funds shall be defined as cash proceeds from
loans made or guaranteed by RUS in accordance with 7 CFR 1717.612.
(ii) The requirement for a borrower to obtain written approval of
mortgagees to enter into any contract for the management, operation, or
maintenance of the borrower's system if the contract covers all or
substantially all (90 percent) of the electric system. For purposes of
this part, the following contracts shall be deemed as requiring RUS
approval:
(A) Management contracts in which the borrower has contracted to
have another borrower or other entity manage its affairs;
(B) Management contracts in which the borrower has contracted to
manage another borrower or other utility system;
(C) Operations and maintenance contracts in which the borrower has
contracted to have another borrower or other entity operate and/or
maintain all or substantially all (90 percent) of the physical plant
facilities of the borrower.
(D) Operations and maintenance contracts in which the borrower has
contracted to operate and maintain the physical plant facilities of
another borrower or other utility system; and
(iii) The requirement for a borrower to prepare and furnish
mortgagees annual financial and statistical reports on the borrower's
financial condition and operations. For borrowers with a December 31
year end, 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. For borrowers with a year end other than December 31, the CPA
must state whether the information appears reasonable based upon the
audit procedures performed. If the borrower represents that an amended
report has been filed as of December 31, the comments must relate to the
amended report.
(2) For telephone borrowers, provisions relating to:
(i) The requirement for a borrower to obtain written approval of the
mortgagees to enter into any contract for the operation or maintenance
of property and for the use of mortgaged property by others, or for
services pertaining to toll traffic, operator assistance, or switching.
For purposes of this part 1773, the following contracts shall be deemed
as requiring RUS approval:
(A) Any contract, agreement or lease between the borrower and an
affiliate other than as allowed under 7 CFR part 1744, subpart E;
(B) Any lease of a building or land; and
(C) Any other contract as defined in Sec. 1773.34 (e)(2)(i) except:
(1) Industry standard traffic settlement agreements involving
interexchange and long distance carriers which, in form and substance,
conform with contracts in general use in the telecommunications
industry;
(2) Billing and collecting agreements;
(3) Toll pooling arrangements involving National Exchange Carrier
Association and state associations;
(4) Directory services agreements; and
[[Page 940]]
(5) Joint use agreements;
(ii) The requirement for funds to be deposited in banks or other
depositories designated in the loan documents or approved by RUS. For
purposes of this part 1773, funds shall be defined as cash on deposit in
demand and time accounts, and certificates of deposit; and
(iii) The requirement for a borrower to prepare and furnish
mortgagees annual financial and statistical reports on the borrower's
financial condition and operations. For borrowers with a December 31
year end, 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. For
borrowers with a year end other than December 31, the CPA must state
whether the information appears reasonable based upon the audit
procedures performed. If the borrower represents that an amended report
has been filed as of December 31, the comments must relate to the
amended report.
(iv) The requirement that a borrower maintain either a net plant to
secured debt ratio or a funded reserve.
(A) For loans approved after June 10, 1991, and before October 7,
1997, if a borrower selected a loan maturity period in excess of the
expected economic life of the facilities financed, the borrower must
maintain a secured debt ratio of at least 1.2 or a funded reserve. If,
during the audit period, the borrower has been issued refunding notes
that match the remaining composite economic life of the facilities thus
eliminating the requirement, the auditor should so state.
(1) If the net plant to secured debt ratio option was selected, this
ratio must be achieved one year following the first advance of funds.
(2) If the funded reserve option was selected, the reserve must be
of such amount that the balance of the reserve plus the value of the
facilities less depreciation be at least equal to the remaining
principal payments on the loan. Funding of the reserve must begin within
one year of approval of release of funds and must continue regularly
over the composite economic life of the facilities financed.
(B) For loans approved after October 7, 1997, if a borrower selected
a loan maturity period in excess of the expected economic life of the
facilities financed, the borrower must maintain a funded reserve in such
amount that the balance of the reserve plus the value of the facilities
less depreciation be at least equal to the remaining principal payments
on the loan. Funding of the reserve must begin within one year of
approval of release of funds and must continue regularly over the
composite economic life of the facilities financed. If, during the audit
period, the borrower has been issued refunding notes that match the
remaining composite economic life of the facilities thus eliminating the
requirement for maintaining the funded reserve requirement, the auditor
should so state.
(f) Related party transactions. State whether all material related
party transactions have been disclosed in the notes to the financial
statements in accordance with SFAS No. 57, entitled ``Related Party
Disclosures''. If the audit did not disclose any related party
transactions considered to be material, either individually or in the
aggregate, so state;
(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
(h) Deferred debits and deferred credits. For electric borrowers,
provide a detailed analysis of the totals reported as deferred debits
and deferred credits, including, but not limited to, margin
stabilization plans, revenue deferral plans, and expense deferrals. The
CPA must state whether RUS has approved, in
[[Page 941]]
writing, each regulatory asset and liability.
[56 FR 63360, Dec. 3, 1991, as amended at 59 FR 659, Jan. 6, 1994; 61 FR
108, Jan. 3, 1996. Redesignated and amended at 63 FR 38723, July 17,
1998; 63 FR 40169, July 28, 1998]
Secs. 1773.34-1773.37 [Reserved]
Subpart E--RUS Required Audit Procedures and Documentation
Sec. 1773.38 Scope of engagement.
(a) RUS requires that the audit procedures set forth in
Secs. 1773.39 through 1773.45 be performed annually by the CPA during
the audit of the RUS borrowers' financial statements, which audit
procedures may be in addition to the conduct of a GAGAS audit.
(b) The CPA must exercise professional judgment in determining
whether any auditing procedures in addition to those mandated by GAGAS
or this part should be performed in order to afford a reasonable basis
for rendering the auditor's report, report on compliance, report on
compliance and on internal controls over financial reporting, and
management letter.
Sec. 1773.39 Utility plant and accumulated depreciation.
(a) General. The audit of these accounts must include tests of
additions, replacements, retirements, and changes. Based upon the CPA's
determination of materiality, an appropriate sample of transactions must
be selected for testing. The CPA's workpapers must document that he/she:
(1) Examined direct labor and material transactions to determine
whether the borrower's accounting records reflect a complete
accumulation of costs;
(2) Examined indirect costs and overhead charges to determine if
they conform to the Uniform System of Accounts;
(3) Reviewed the costs of completed construction and retirement
projects to determine if they were cleared promptly from the work in
progress accounts to the classified plant in service accounts and the
related depreciation reserves;
(4) Examined direct purchases of special equipment and general
plant;
(5) Determined the degree of accuracy and control of costing
retirements, including tests of salvage and removal costs;
(6) Reviewed the borrower's work order procedures; and
(7) Reviewed depreciation rates for adequate support, compared them
to RUS guidelines, and determined if they are in compliance.
(b) Construction work in progress. (1) The workpapers must include a
summary of open work orders reconciled to the general ledger. The CPA
must note on the summary any unusual or nontypical projects.
(2) Based upon the CPA's determination of materiality, an
appropriate sample of work orders must be selected for testing. The
CPA's workpapers must document that he/she:
(i) Reviewed equipment purchases charged to work orders, including
payments and receiving reports;
(ii) Reviewed contracts showing the scope of the work, the nature of
the contract, the contract amount, and scheduled payments and reviewed
supporting documents to determine that all services contracted for were
in fact rendered;
(iii) Reviewed time cards and pay rates for several employees who
allocate their time to work orders;
(iv) Reviewed the nature of material and supplies issued to the
project, traced amounts and quantities to supporting documents, and
reviewed the reasonableness of clearing rates for assignment of stores
expense to the work order;
(v) Reviewed the accuracy of the computation of overheads applied to
the work order; and
(vi) Reviewed other costs charged to the work order for support and
propriety.
(3) Based upon the CPA's determination of materiality, an
appropriate sample of completed contracts must be selected for testing.
The CPA's workpapers must document that he/she:
(i) Scheduled payments to contractors and traced to verify payments
and supporting invoices;
(ii) Traced contract costs to final closeout documents, to the
general
[[Page 942]]
ledger, and to the continuing property records; and
(iii) Verified the costs of owner furnished materials, if
applicable.
(4) The CPA must review the borrower's procedures for unitization
and classification of work order and contract costs. Based upon the
CPA's determination of materiality, an appropriate sample of
transactions must be selected for testing. The CPA's workpapers must
document that he/she:
(i) Reviewed the tabulation of record units for construction from
the work order staking sheets to the tabulation of record units, to the
unitization sheets, and to the continuing property records;
(ii) Reviewed the procedures for unitizing and distributing costs of
completed construction to the plant accounts;
(iii) Verified that standard costs were being used;
(iv) Evaluated the basis for development of standard costs; and
(v) Determined that costs of completed construction were cleared
promptly from work in progress accounts.
(c) Continuing property records. Based upon the CPA's determination
of materiality, an appropriate sample of transactions must be selected
for testing. The CPA's workpapers must document that he/she:
(1) Determined whether the subsidiary plant records agree with the
controlling general ledger plant accounts;
(2) Noted differences in the workpapers; and
(3) Commented, in the management letter, on any discrepancies.
(d) Retirement work-in-progress. Based upon the CPA's determination
of materiality, an appropriate sample of transactions must be selected
for testing. The CPA's workpapers must document that he/she:
(1) Determined that plant retirements are currently and
systematically recorded and priced on the basis of the continuing
property records, and determined that costs of removal have been
properly accounted for;
(2) Explained the method used in computing the cost of units of
plant retired if continuing property records have not been established
and determined whether costs appeared reasonable; and
(3) Determined the manner in which net losses due to retirements
were accounted for and traced clearing entries to the depreciation
reserve, the plant accounts, and the continuing property records.
(e) Provision for accumulated depreciation. The CPA's workpapers
must include an analysis of transactions. Based upon the CPA's
determination of materiality, an appropriate sample of transactions must
be selected for testing. The CPA's workpapers must document that he/she:
(1) Verified the depreciation accruals for the period, including the
depreciation base;
(2) Reviewed the basis of the depreciation rates, any change in
rates and the reason therefor, and, if appropriate, determined whether
the rates are in compliance with RUS requirements or with the
requirements of the state regulatory body having jurisdiction over the
borrower's depreciation rates;
(3) Reviewed salvage and removal costs; and
(4) Searched for unrecorded retirements.
(f) Other reserves. The CPA's workpapers must include an account
analysis for all other material plant reserves, such as the reserve for
the amortization of plant acquisition adjustments. Based upon the CPA's
determination of materiality, an appropriate sample of transactions must
be selected for testing. The CPA's workpapers must document that
appropriate tests of transactions were performed.
(g) Narrative. The CPA must prepare and include in the workpapers a
comprehensive narrative on the scope of work performed, observations
made, and conclusions reached. Specific matters covered in this
narrative must include:
(1) The nature of construction and other additions;
(2) The control over, and the accuracy of pricing retirements;
(3) The accuracy of distributing costs to classified utility plant
accounts;
(4) An evaluation of the method of:
[[Page 943]]
(i) Capitalizing the direct loadings on labor and material costs;
(ii) Distributing transportation costs and other expense clearing
accounts; and
(iii) Capitalizing overhead costs;
(5) The tests of depreciation;
(6) A review of agreements such as those relating to acquisitions,
property sales, and leases which affect the plant accounts; and
(7) Notations, if applicable, of RUS approval of property sales and
the propriety of the disposition of the proceeds.
Sec. 1773.40 Regulatory assets.
The CPA's workpapers must document whether all regulatory assets
comply with the requirements of SFAS No. 71. For electric borrowers
only, the CPA's workpapers must document whether all regulatory assets
have received RUS approval.
[59 FR 660, Jan. 6, 1994]
Sec. 1773.41 Extraordinary retirement losses.
The CPA's workpapers must contain an analysis of retirement losses,
including any required approval by a regulatory commission with
jurisdiction in the matter, or RUS, in the absence of commission
jurisdiction.
Sec. 1773.42 Clearing accounts.
The CPA's workpapers must contain an analysis of all clearing
accounts. Based upon the CPA's determination of materiality, an
appropriate sample of transactions should be selected for testing. The
CPA's workpapers must document that transactions were reviewed for
proper allocation between expense and capital accounts.
Sec. 1773.43 Capital and equity accounts.
(a) Capital stock. For privately owned companies, the workpapers
must include analyses of all stock transactions during the audit period.
Based upon the CPA's determination of materiality, an appropriate sample
of transactions must be selected for testing. The CPA's workpapers must
document that he/she:
(1) Reviewed the subsidiary records and reconciled them to the
general ledger control account;
(2) Reviewed authorizations and issuances or redemptions of capital
stock for proper approvals by the board of directors, stockholders, and
regulatory commissions;
(3) Determined that transactions were made in accordance with the
appropriate provisions of the articles of incorporation, bylaws, and RUS
loan documents; and
(4) Determined that transactions were recorded in accordance with
the Uniform System of Accounts.
(b) Memberships. For cooperative organizations, the workpapers must
include an analysis of the membership transactions during the audit
period. Based upon the CPA's determination of materiality, an
appropriate sample of transactions must be selected for testing. The
CPA's workpapers must document that he/she:
(1) Reviewed the subsidiary records and reconciled them to the
general ledger control account; and
(2) Determined that transactions were made in accordance with the
appropriate provisions of the articles of incorporation, bylaws, and RUS
loan documents.
(c) Patronage capital, retained earnings, margins, and other
equities. The workpapers must include an analysis of the patronage
capital, retained earnings, margins and other equities, and any related
reserve accounts. Based upon the CPA's determination of materiality, an
appropriate sample of transactions must be selected for testing. The
CPA's workpapers must document that he/she:
(1) Determined that the transactions were made in accordance with
the appropriate provisions of the articles of incorporation, bylaws, RUS
loan documents, Uniform System of Accounts, or orders of regulatory
commissions;
(2) Traced payments to underlying support; and
(3) Determined whether, under the terms of the RUS security
instrument, restrictions of retained earnings or margins are required
and, if so, whether they have been properly recorded.
[[Page 944]]
Sec. 1773.44 Long-term debt.
The CPA's workpapers must document that he/she:
(a) Confirmed RUS, FFB, and RTB debt to the appropriate confirmation
schedule (RUS Form 690, Confirmation Schedule Obligation to the FFB as
of: or Form 691, Confirmation Schedule--Long-term Obligation to RUS as
of; or RTB Form 12, Confirmation Schedule);
(b) Confirmed other long-term debt directly with the lender;
(c) Examined notes executed or canceled during the audit period; and
(d) Tested accrued interest computations.
Sec. 1773.45 Regulatory liabilities.
The CPA's workpapers must document whether all regulatory
liabilities comply with the requirements of SFAS No. 71. For electric
borrowers only, the CPA's workpapers must document whether all
regulatory liabilities have received RUS approval.
[59 FR 660, Jan. 6, 1994]
Secs. 1773.46-1773.49 [Reserved]
Appendix A to Part 1773--Sample Auditor's Report for an Electric
Cooperative
Appendix A includes an example of an auditor's report, report on
compliance, report on compliance and on internal controls over financial
reporting, financial statements and accompanying notes for an electric
distribution cooperative. The sample auditor's report is intended as a
guide only and, while it is recommended that the format be followed,
each auditor's report should be prepared to adequately cover the
circumstances. To the extent possible, it should be used as a guide in
preparing auditors' reports for other types of electric borrowers. For
power supply borrowers and for distribution borrowers with production or
transmission plant, the same general format should be followed. However,
the Statement of Revenue and Patronage Capital must be expanded to show
separate totals for operations expenses and maintenance expenses for
each class of production plant and for transmission plant.
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, 1998 and 1997, 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 the standards applicable to financial audits
contained in Government Auditing Standards, issued by the Comptroller
General of the United States. Those standards required 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 audit provides 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, 1998 and 1997, 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, 1999, on our consideration of Center
County Electric Cooperative's internal control over financial reporting
and our tests of its compliance with certain provisions of laws,
regulations, contracts, and grants.
Certified Public Accountants
March 2, 1999
Exhibit 2--Sample Report on Compliance and on Internal Control over
Financial Reporting, the CPA found No Reportable Instances of
Noncompliance and No Material Weaknesses (No Reportable Conditions
Identified).
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, 1998 and 1997,
and have issued our report thereon dated March 2, 1999. We conducted our
audit in accordance with generally accepted auditing standards and the
standards applicable to financial audits contained in Government
Auditing Standards, issued by the Comptroller General of the United
States.
[[Page 945]]
Compliance
As part of obtaining reasonable assurance about whether Center
County Electric Cooperative's financial statements are free of material
misstatement, we performed tests of its compliance with certain
provisions of laws, regulations, contracts, and grants, noncompliance
with which could have a direct and material effect on the determination
of financial statement amounts. However, providing an opinion on
compliance with those provisions was not an objective of our audit, and
accordingly, we do not express such an opinion. The results of our tests
disclosed no instances of noncompliance that are required to be reported
under Government Auditing Standards. [If the CPA has issued a separate
letter to the management detailing immaterial instances of
noncompliance, modify this paragraph to include a statement such as the
following: However, we noted certain immaterial instances of
noncompliance which we have reported to the management of Center County
Electric Cooperative in a separate letter dated March 2, 1999.]
Internal Control Over Financial Reporting
In planning and performing our audit, we considered Center County
Electric Cooperative's internal control over financial reporting in
order to determine our auditing procedures for the purpose of expressing
our opinion on the financial statements and not to provide assurance on
the internal control over financial reporting. Our consideration of the
internal control over financial reporting would not necessarily disclose
all matters in the internal control over financial reporting that might
be material weaknesses. A material weakness is a condition in which the
design or operation of one or more of the internal control components
does not reduce to a relatively low level the risk that misstatements 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 over financial
reporting and its operation that we consider to be material weaknesses.
[If the CPA has issued a separate letter to management to communicate
other matters involving the design and operation of the internal control
over financial reporting, modify this paragraph to include a statement
such as the following: However, we noted other matters involving the
internal control over financial reporting which we have reported to the
management of Center County Electric Cooperative in a separate letter
dated March 2, 1999.]
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, 1999
Exhibit 3--Sample Report on Compliance and on Internal Control over
Financial Reporting, the CPA found Reportable Instances of noncompliance
and Reportable Conditions Identified.
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, 1998 and 1997,
and have issued our report thereon dated March 2, 1999. We conducted our
audit in accordance with generally accepted auditing standards and the
standards applicable to financial audits contained in Government
Auditing Standards, issued by the Comptroller General of the United
States.
Compliance
As part of obtaining reasonable assurance about whether Center
County Electric Cooperative's financial statements are free of material
misstatement, we performed tests of its compliance with certain
provisions of laws, regulations, contracts, and grants, noncompliance
with which could have a direct and material effect on the determination
of financial statement amounts. However, providing an opinion on
compliance with those provisions was not an objective of our audit, and
accordingly, we do not express such an opinion. The results of our tests
disclosed instances of noncompliance that are required to be reported
under Government Auditing Standards. [A description of the findings
should be included in the report.][If the CPA has issued a separate
letter to the management detailing immaterial instances of
noncompliance, modify this paragraph to include a statement such as the
following: We also noted certain immaterial instances of noncompliance
which we have reported to the management of Center County Electric
Cooperative in a separate letter dated March 2, 1999.]
Internal Control Over Financial Reporting
In planning and performing our audit, we considered Center County
Electric Cooperative's internal control over financial reporting in
order to determine our auditing procedures for the purpose of expressing
our opinion on the financial statements and not to provide assurance on
the internal control over financial reporting. However, we noted
[[Page 946]]
certain matters involving the internal control over financial reporting
and its operation that we consider to be reportable conditions.
Reportable conditions involve matters coming to our attention relating
to significant deficiencies in the design or operation of the internal
control over financial reporting that, in our judgment, could adversely
affect Center County Electric Cooperative's ability to record, process,
summarize, and report financial data consistent with the assertions of
management in the financial statements. [A description of the reportable
conditions should be included in the report.]
A material weakness is a condition in which the design or operation
of one or more of the internal control components does not reduce to a
relatively low level the risk that misstatements 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 over financial reporting would not necessarily
disclose all matters in the internal control that might be reportable
conditions and, accordingly, would not necessarily disclose all
reportable conditions that are also considered to be material
weaknesses. However, we believe none of the reportable conditions
described above is a material weakness. [If conditions believed to be
material weaknesses are disclosed, the last sentence should be deleted
and instead the report should identify which of the reportable
conditions described above are considered to be material weaknesses.][If
the CPA has issued a separate letter to management to communicate other
matters involving the design and operation of the internal control over
financial reporting, modify this paragraph to include a statement such
as the following: We also noted other matters involving the internal
control over financial reporting which we have reported to the
management of Center County Electric Cooperative in a separate letter
dated March 2, 1999.]
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, 1999
EXHIBIT 4--SAMPLE FINANCIAL STATEMENTS
Center County Electric Cooperative Balance Sheets--December 31, 19X9 and
19X8 Assets (Notes 1 and 2)
------------------------------------------------------------------------
19X9 19X8
------------------------------------------------------------------------
ELECTRIC PLANT: (Note 3)
In Service--at cost................. $9,524,646 $9,365,264
Construction Work in Progress....... 407,943 317,166
-------------------------------
9,932,589 9,682,430
Less: Accumulated Provisions for 3,117,629 2,917,295
Depreciation.......................
-------------------------------
6,814,960 6,765,135
===============================
OTHER ASSETS AND INVESTMENTS:
Nonutility Property................. 20,227 20,227
Investments in Associated 391,258 292,798
Organizations (Note 4).............
-------------------------------
411,485 313,025
===============================
CURRENT ASSETS:
Cash--General Funds................. 37,350 51,544
Cash--Construction Funds............ 10,034 20,193
Accounts Receivable (Less 36,527 35,255
accumulated provision for
uncollectible accounts of $2,207 in
19X9 and $1,933 in 19X8)...........
Materials and Supplies (at average 83,652 80,882
cost)..............................
Other Current and Accrued Assets.... 8,613 8,692
-------------------------------
176,176 196,566
===============================
DEFERRED CHARGES (Note 5):.............. 5,666 1,762
-------------------------------
$7,408,287 $7,276,488
------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
[[Page 947]]
Center County Electric Cooperative Balance Sheets--December 31, 19X9 and
19X8 Equities and Liabilities (Note 1)
------------------------------------------------------------------------
19X9 19X8
------------------------------------------------------------------------
EQUITIES:
Memberships......................... $60,145 $59,440
Patronage Capital (Note 6).......... 1,761,798 1,526,833
Other Equities (Note 7)............. 53,647 35,900
-------------------------------
1,875,590 1,622,173
===============================
LONG-TERM DEBT:
RUS Mortgage Notes less current 5,249,115 5,396,385
maturities (Note 8)................
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt 145,000 140,000
Accounts Payable--Purchased Power... 48,916 52,117
Accounts Payable--Other............. 21,859 6,556
Consumer Deposits................... 32,660 33,085
Accrued Taxes....................... 10,958 9,146
Other Current and Accrued 12,285 6,461
Liabilities........................
-------------------------------
271,678 247,365
-------------------------------
DEFERRED CREDITS (Note 10).............. 11,904 10,565
-------------------------------
$7,408,287 $7,276,488
------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
Center County Electric Cooperative Statements of Revenue and Patronage
Capital for the Years Ended December 31, 19X9 and 19X8
------------------------------------------------------------------------
19X9 19X8
------------------------------------------------------------------------
OPERATING REVENUES...................... $1,719,467 $1,605,690
OPERATING EXPENSES:
Cost of Power....................... 587,729 625,411
Distribution--Operation............. 111,058 121,682
Distribution--Maintenance........... 158,622 182,740
Consumer Accounts................... 76,675 72,927
Sales............................... 38,378 40,755
Administrative and General.......... 94,682 87,058
Depreciation and Amortization....... 288,389 279,776
Taxes............................... 34,920 34,438
-------------------------------
1,390,453 1,444,787
===============================
OPERATING MARGINS BEFORE FIXED CHARGES 329,014 160,903
FIXED CHARGES:
Interest on Long-Term Debt............ 113,713 115,082
===============================
OPERATING MARGINS AFTER FIXED CHARGES... 215,301 45,821
G&T AND OTHER CAPITAL CREDITS........... 14,460 17,500
===============================
NET OPERATING MARGINS................... 229,761 63,321
===============================
NONOPERATING MARGINS:
Interest Income......................... 24,289 18,802
Other Nonoperating Income............... 1,200 1,200
-------------------------------
25,489 20,002
===============================
NET MARGINS............................. 255,250 83,323
PATRONAGE CAPITAL--BEGINNING OF YEAR.... 1,526,833 1,469,125
===============================
1,782,083 1,552,448
RETIREMENT OF CAPITAL CREDITS........... 20,285 25,615
-------------------------------
PATRONAGE CAPITAL--END OF YEAR.......... $1,761,798 $1,526,833
------------------------------------------------------------------------
[[Page 948]]
The accompanying notes are an integral part of these statements.
Center County Electric Cooperative Statements of Cash Flows for the
Years Ended December 31, 19X9 and 19X8
------------------------------------------------------------------------
19 x 9 19 x 8
------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash Received from Consumers...... $1,721,496 $1,609,933
Cash Paid to Suppliers and (1,049,139) (1,126,367)
Employees........................
Interest Received................. 24,289 18,802
Interest Paid..................... (114,131) (115,607)
Taxes Paid........................ (33,108) (32,132)
---------------------------------
Net Cash Provided by Operating 549,407 354,629
Activities.......................
=================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction and Acquisition of (322,234) (216,427)
Plant............................
Plant Removal Costs............... (25,994) (19,268)
Materials Salvaged from 10,014 7,327
Retirements......................
(Increase)/Decrease In:
Materials Inventory........... (2,770) 1,916
Deferred Charges-Preliminary (3,486) (2,617)
Survey & Investigation.......
Investments-CFC Capital Term (82,472) (69,412)
Certificates.................
Inventory Adjustment-Deferred (2,290) (1,057)
Credit Decrease..................
---------------------------------
Net Cash Used in Investing (429,232) (299,538)
Activities.......................
=================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirements of Patronage Capital (20,285) (25,615)
Credits..........................
Retired Capital Credits--Gain..... 1,200 1,200
Donated Capital................... 16,547 6,178
RUS Loan Advances................. 174,976 197,450
Payments on RUS Debt.............. (317,246) (279,575)
Increase/(Decrease) In:
Consumer Deposits............. (425) 575
Memberships Issued............ 705 450
---------------------------------
Net Cash Used in Financing (144,528) (99,337)
Activities.......................
---------------------------------
Net Increase/(Decrease) in Cash... (24,353) (44,246)
Cash--Beginning of Year........... 71,737 115,983
---------------------------------
Cash--End of Year................. 47,384 71,737
The accompanying notes are an
integral part of these statements.
RECONCILIATION OF NET MARGINS TO NET
CASH PROVIDED BY OPERATING
ACTIVITIES:
Net Margins........................... $255,250 $83,323
Adjustments to Reconcile Net
Margins to Net Cash Provided by
Operating Activities:
Depreciation and Amortization. 288,389 279,776
G&T and Other Capital Credits (14,460) (17,500)
(Non-Cash)...................
Patronage Capital Credits- (1,528) (1,200)
NRUCFC (Non-Cash)............
Provision for Uncollectible 274 (526)
Accounts Receivable..........
(Increase)/Decrease In:
Customer and Other Accounts (1,546) 2,523
Receivable...................
Current and Accrued Assets- 79 112
Other........................
Increase/(Decrease) In:
Accounts Payable.............. 12,102 5,117
Accrued Taxes................. 1,812 2,306
Deferred Energy Prepayments... 3,629 2,246
Current and Accrued 5,824 (1,023)
Liabilities-Other............
Deferred Interest Expense......... (418) (525)
---------------------------------
Total Adjustments............... 294,157 271,306
=================================
Net Cash Provided by Operating 549,407 354,629
Activities...........................
------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
[[Page 949]]
Center County Electric Cooperative Notes to Financial Statements
December 31, 19X9 and December 31, 19X8
------------------------------------------------------------------------
19X9 19X8
------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Include a brief description of the reporting entity's significant
accounting policies in accordance with Accounting Principles Board
Opinion No. 22, Disclosure of Accounting Policies.
Disclosure of accounting policies should identify and describe the
accounting principles followed by the borrower and the methods of
applying those principles that materially affect the determination
of financial position, cash flow, and results of operations.
Disclosures of accounting policies do not have to be duplicated in
this section if presented elsewhere as an integral part of the
financial statements.
2. ASSETS PLEDGED:
Substantially all assets are pledged as security for long-term debt
to RUS.
3. ELECTRIC PLANT AND DEPRECIATION RATES AND PROCEDURES:
Listed below are the major classes of the electric plant as of
December 31, 19X9, and 19X8:
Intangible Plant...................... $2,194 $2,194
Distribution Plant.................... 9,011,036 8,873,957
General Plant......................... 511,416 489,113
---------------------------------
Electric Plant in Service............. 9,524,646 9,365,264
=================================
Construction Work in Progress......... 407,943 317,166
=================================
9,932,589 9,682,430
Provision has been made for depreciation of distribution plant at a
straight-line composite rate of 2.86 percent per annum.
General Plant depreciation rates have been applied on a straight-line
basis as follows:
Structures and Improvement........ 2.5%
Office Furniture.................. 6.0%
Transportation Equipment.......... 14.0%
Power Operated Equipment.......... 12.0%
Other General Plant............... 4.0%
Communications Equipment.......... 6.0%
4. INVESTMENTS IN ASSOCIATED ORGANIZATIONS:
Investments in associated organizations consisted of the following
at December 31, 19X9 and 19X8:
Capital Term Certificates of $385,193 $288,261
the National Rural Utilities
Cooperative Finance
Corporation (NRUCFC).........
NRUCFC Patronage Capital 5,065 3,537
Credits......................
Other......................... 1,000 1,000
---------------------------------
391,258 292,798'<ls-thn
-
5. DEFERRED CHARGES:
=================================
Following is a summary of amounts recorded as deferred charges as of
December 31, 19X9 and 19X8:
=================================
Preliminary Surveys 19X0--X1 Work 5,666 1,762'<ls-thn-e
Plan............................. q
6. PATRONAGE CAPITAL:
At December 31, 19X9 and 19X8, patronage capital consisted of:
Assignable $255,250 $83,323
Assigned to Date.............. 1,952,448 1,869,125
---------------------------------
2,207,698 1,952,448
Less: Retirements to Date..... 445,900 425,615
---------------------------------
1,761,798 1,526,833
=================================
Under the provisions of the Mortgage Agreement, until the equities
and margins equal or exceed forty percent of the total assets of
the cooperative, the return to patrons of contributed capital is
generally limited to twenty-five percent of the patronage capital
or margins received by the cooperative in the prior calendar year.
The equities and margins of the cooperative represent 25.3 percent
of the total assets at balance sheet date. Capital credit
retirements in the amount of $20,285 were paid in 19X9.
7. OTHER EQUITIES:
At December 31, 19X9 and 19X8,
other equities consisted of:
Retired Capital Credits--Gain. $36,190 $34,990
Donated Capital............... 17,457 910
---------------------------------
53,647 35,900'<ls-thn-
e
=================================
8. MORTGAGE NOTES--RUS:
Long-term debt is represented by mortgage notes payable to the
United States of America. Following is a summary of outstanding
long-term debt as of December 31, 19X9 and 19X8:
2% Notes due March 31, 19X5... $1,057,155 $1,098,700
2% Notes due December 31, 19X6 2,485,927 2,502,370
5% Notes due December 31, 19X6 1,851,033 1,935,315
Less: Current Maturities...... (145,000) (140,000)
---------------------------------
[[Page 950]]
5,249,115 5,396,385
=================================
Unadvanced loan funds of $285,600 are available to the cooperative on
loan commitments from RUS.
Principal and interest installments on the above notes are due
quarterly in equal amounts of $99,600. As of December 31, 19X9,
annual maturities of long-term debt outstanding for the next five
years are as follows:
19X0.......................... $145,000
19X1.......................... 150,000
19X2.......................... 151,500
19X3.......................... 154,000
19X4.......................... 155,000
Advance payments of $252,300 may be applied to the installments.
9. PENSION PLAN:
Substantially all of the employees of the Cooperative are covered by
the ABC Retirement and Security Program, a multiemployer plan.
Pension expense for the years ended 19X9 and 19X8 was $22,400.00
and $20,400.00, respectively.
10. DEFERRED CREDITS:
Following is a summary of the amounts recorded as deferred credits
as of December 31, 19X9 and 19X8:
Customer Energy Payments...... $6,694 $3,065
Inventory Adjustment.......... 5,210 7,500
---------------------------------
11,904 10,565
=================================
11. LITIGATION:
The cooperative is a defendant in an action in which the plaintiff
claims damages totaling $200,000 for personal injuries sustained.
The action has been dismissed by the District Court, but is on
appeal before the State Supreme Court. Management is of the opinion
that no liability will be incurred by the cooperative as a result
of this action.
12. COMMITMENTS:
Under its wholesale power agreement, the cooperative is committed to
purchase its electric power and energy requirements from Central
Power Cooperative, Inc., until December 31, 19XX. The rates paid
for such purchases are subject to review annually.
------------------------------------------------------------------------
[56 FR 63360, Dec. 3, 1991, as amended at 61 FR 109, Jan. 3, 1996; 63 FR
38724, July 17, 1998; 63 FR 40169, July 28, 1998]
Appendix B to Part 1773--Sample Auditor's Report for a Class A or B
Commercial Telephone Company
Appendix B includes an example of a short-form auditor's report,
report on compliance, report on compliance and on internal controls over
financial reporting, financial statements and accompanying notes for a
commercial telephone company. The sample auditor's report is intended as
a guide only and, while it is recommended that the format be followed,
each auditor's report should be prepared to adequately cover the
circumstances. To the extent possible, it should be used as a guide in
preparing auditors' reports for other types of telephone borrowers.
Exhibit 1--Same 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, 1998 and 1997, 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 audit in accordance with generally accepted
auditing standards and the standards applicable to financial audits
contained in 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 audit.
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, 1998 and 1997, and the results of
its operations and its cash flows for the years then ended in conformity
with general accepted accounting principles.
[[Page 951]]
In accordance with Government Auditing Standards, we have also
issued our report dated March 2, 1999, on our consideration of Center
Telephone Company's internal control over financial reporting and our
tests of its compliance with certain provisions of laws, regulations,
contracts, and grants.
Certified Public Accountants
March 2, 1999
Exhibit 2--Sample Report on Compliance and on Internal Control over
Financial Reporting, the CPA found No Reportable Instances of
Noncompliance and No Material Weaknesses (No Reportable Conditions
Identified)
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, 1998 and 1997, and have
issued our report thereon dated March 2, 1999. We conducted our audit in
accordance with generally accepted auditing standards and the standards
applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States.
Compliance
As part of obtaining reasonable assurance about whether Center
Telephone Company's financial statements are free of material
misstatement, we performed tests of its compliance with certain
provisions of laws, regulations, contracts, and grants, noncompliance
with which could have a direct and material effect on the determination
of financial statement amounts. However, providing an opinion on
compliance with those provisions was not an objective of our audit, and
accordingly, we do not express such an opinion. The results of our tests
disclosed no instances of noncompliance that are required to be reported
under Government Auditing Standards. [If the CPA has issued a separate
letter to the management detailing immaterial instances of
noncompliance, modify this paragraph to include a statement such as the
following: However, we noted certain immaterial instances of
noncompliance which we have reported to the management of Center
Telephone Company in a separate letter dated March 2, 1999.]
Internal Control Over Financial Reporting
In planning and performing our audit, we considered Center Telephone
Company's internal control over financial reporting in order to
determine our auditing procedures for the purpose of expressing our
opinion on the financial statements and not to provide assurance on the
internal control over financial reporting. Our consideration of the
internal control over financial reporting would not necessarily disclose
all matters in the internal control over financial reporting that might
be material weaknesses. A material weakness is a condition in which the
design or operation of one or more of the internal control components
does not reduce to a relatively low level the risk that misstatements 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 over financial
reporting and its operation that we consider to be material weaknesses.
[If the CPA has issued a separate letter to management to communicate
other matters involving the design and operation of the internal control
over financial reporting, modify this paragraph to include a statement
such as the following: However, we noted other matters involving the
internal control over financial reporting which we have reported to the
management of Center Telephone Company in a separate letter dated March
2, 1999.]
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, 1999
Exhibit 3--Sample Report on Compliance and on Internal Control over
Financial Reporting, the CPA found Reportable Instances of Noncompliance
and Reportable Conditions were Identified
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, 1998 and 1997, and have
issued our report thereon dated March 2, 1999. We conducted our audit in
accordance with generally accepted auditing standards and the standards
applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States.
Compliance
As part of obtaining reasonable assurance about whether Center
County Telephone Company's financial statements are free of material
misstatement, we performed tests of its compliance with certain
provisions of laws, regulations, contracts, and grants,
[[Page 952]]
noncompliance with which could have a direct and material effect on the
determination of financial statement amounts. However, providing an
opinion on compliance with those provisions was not an objective of our
audit, and accordingly, we do not express such an opinion. The results
of our tests disclosed instances of noncompliance that are required to
be reported under Government Auditing Standards. [A description of the
findings should be included in the report.] [If the CPA has issued a
separate letter to the management detailing immaterial instances of
noncompliance, modify this paragraph to include a statement such as the
following: We also noted certain immaterial instances of noncompliance
which we have reported to the management of Center Telephone Company in
a separate letter dated March 2, 1999.]
Internal Control Over Financial Reporting
In planning and performing our audit, we considered Center Telephone
Company's internal control over financial reporting in order to
determine our auditing procedures for the purpose of expressing our
opinion on the financial statements and not to provide assurance on the
internal control over financial reporting. However, we noted certain
matters involving the internal control over financial reporting and its
operation that we consider to be reportable conditions. Reportable
conditions involve matters coming to our attention relating to
significant deficiencies in the design or operation of the internal
control over financial reporting that, in our judgment, could adversely
affect Center Telephone Company's ability to record, process, summarize
and report financial data consistent with the assertions of management
in the financial statements. [A description of the findings pertaining
to reportable conditions should be included in the report.]
A material weakness is a condition in which the design or operation
of one or more of the internal control components does not reduce to a
relatively low level the risk that misstatements 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 over financial reporting would not necessarily
disclose all matters in the internal control that might be reportable
conditions and, accordingly, would not necessarily disclose all
reportable conditions that are also considered to be material
weaknesses. However, we believe none of the reportable conditions
described above is a material weakness. [If conditions believed to be
material weaknesses are disclosed, the last sentence should be deleted
and instead the report should identify which of the reportable
conditions described above are considered to be material weaknesses.][If
the CPA has issued a separate letter to management to communicate other
matters involving the design and operation of the internal control over
financial reporting, modify this paragraph to include a statement such
as the following: We also noted other matters involving the internal
control over financial reporting which we have reported to the
management of Center Telephone Company in a separate letter dated March
2, 1999.]
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, 1999
EXHIBIT 4--SAMPLE FINANCIAL STATEMENTS
Center Telephone Company Balance Sheets--December 31, 19X9 and 19X8
Assets (Notes and 2)
------------------------------------------------------------------------
19X9 19X8
------------------------------------------------------------------------
CURRENT ASSETS:
Cash--Construction Funds............ $21,000 $18,000
Cash--General Funds................. 128,300 140,083
Telecommunications Accounts.........
Receivable (less accumulated 139,642 122,623
provision of $11,597 in 19X9 and
$1,490 in 19X8)....................
Notes Receivable.................... 2,500 3,000
Materials and Supplies.............. 103,713 73,964
Prepayments (Note 3)................ 49,185 62,201
Other Current Assets................ 1,357 10,131
-------------------------------
445,697 430,002
===============================
NONCURRENT ASSETS:
Nonregulated Investments: (Note 4)
Net CATV Plant.................. 413,511 407,086
Net Nonregulated Customer 103,618 0
Premises Equipment.............
Deferred Maintenance and Retirements 40,000 45,000
(Note 5)...........................
-------------------------------
[[Page 953]]
557,129 452,086
===============================
PROPERTY, PLANT, AND EQUIPMENT: (Note 6)
Telecommunications Plant in Service. 7,401,300 6,650,553
Telecommunications Plant Under 67,626 199,092
Construction.......................
Telecommunications Plant Adjustment 176,380 176,380
(Note 7)...........................
-------------------------------
7,645,306 7,026,025
Less: Accumulated Provision for 1,760,587 1,504,255
Depreciation.......................
-------------------------------
5,884,719 5,521,770
-------------------------------
6,887,545 6,403,858
The accompanying notes are an integral
part of these statements.
------------------------------------------------------------------------
Center Telephone Company Balance Sheets--December 31, 19X9 and 19X8
Liabilities and Equities
------------------------------------------------------------------------
19X9 19X8
------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts Payable.................... $123,689 $290,484
Notes Payable....................... 61,600 70,400
Advance Billings and Payments....... 2,137 2,243
Customers Deposits.................. 11,878 4,940
Current Maturities of Long-Term Debt 146,646 145,998
(Note 8)...........................
Accrued Taxes....................... 242,076 224,566
Other Current Liabilities........... 8,500 9,079
-------------------------------
596,526 747,710
===============================
LONG-TERM DEBT:
RUS Mortgage Notes (Note 8)......... 4,592,658 4,128,106
===============================
OTHER LIABILITIES AND DEFERRED CREDITS:
Unamortized Investment Tax Credits 53,078 61,377
(Note 10)..........................
Deferred Income Taxes (Note 11)..... 37,137 35,039
-------------------------------
90,215 96,416
===============================
STOCKHOLDERS' EQUITY:
Capital Stock--Common $2 par value-- 205,200 205,200
300,000 Shares Authorized; 102,600
Shares Outstanding 19X9 and 19X8...
Additional Paid-in Capital.......... 820,800 820,800
Retained Earnings (Note 8).......... 582,146 405,626
-------------------------------
1,608,146 1,431,626
-------------------------------
6,887,545 6,403,858
The accompanying notes are an integral
part of these statements.
------------------------------------------------------------------------
Center Telephone Company Statements of Income and Retained Earnings for
the Years Ended December 31, 19X9 and 19X8
------------------------------------------------------------------------
19X9 19X8
------------------------------------------------------------------------
OPERATING REVENUES:
Basic Local Network Services...... $836,822 $862,205
Network Access Services........... 125,042 -0-
Long Distance Network Services.... 897,300 775,073
Miscellaneous..................... 144,435 147,100
Less: Uncollectible Revenues...... (24,000) (24,500)
---------------------------------
1,979,599 1,759,878
=================================
OPERATING EXPENSES:
Plant Specific Operations......... 564,486 480,509
Plant Nonspecific Operations...... 187,162 393,143
Depreciation and Amortization..... 274,691
[[Page 954]]
Customer Operations............... 94,473 78,772
Corporate Operations.............. 157,453 134,127
---------------------------------
1,278,265 1,086,551
=================================
OPERATING TAXES:
Federal and State Income..........
Taxes--Operating (Notes 10 and 11) 159,845 170,687
Other Operating Taxes............. 225,013 204,230
Provision for Deferred Taxes (Note 31,566 29,468
10)..............................
Investment Credits--Net........... 6,201 1,640
---------------------------------
422,625 406,025
=================================
OPERATING INCOME...................... 278,709 267,302
=================================
FIXED CHARGES:
Interest on Long-Term Debt........ 88,432 85,854
Interest Charged to Construction (2,251) (1,516)
Credit...........................
---------------------------------
86,181 84,338
=================================
NONREGULATED INCOME--NET (Note 4)..... 19,902 10,593
---------------------------------
NET INCOME FOR PERIOD................. 212,430 193,557
Retained Earnings--January 1, 19X9 405,626 235,153
and 19X8.........................
Dividends Declared................ (35,910) (23,084)
---------------------------------
Retained Earnings--December 31, $582,146 $405,626
19X9 and 19X8....................
=================================
Earnings Per Share of Common $2.07 $1.89
Stock--Average...................
The accompanying notes are an integral
part of these statements.
------------------------------------------------------------------------
Center County Telephone Company Statements of Cash Flows for the Years
Ended December 31, 19X9 and 19X8
------------------------------------------------------------------------
19X9 19X8
------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash Received from Consumers...... $1,962,580 $1,733,289
Cash Paid to Suppliers and (1,159,158) (960,459)
Employees........................
Interest Paid..................... (86,181) (84,338)
Taxes Paid........................ (401,316) (376,643)
---------------------------------
Net Cash Provided by Operating 315,925 311,849
Activities.......................
=================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction and Acquisition of (619,281) (507,617)
Plant............................
Investment in CATV Plant.......... (6,425) (18,246)
Investment in Nonregulated CPE.... (103,618)
Plant Removal Costs............... (18,359) (27,216)
(Increase)/Decrease In:
Materials Inventory............... (29,749) (19,478)
Notes Receivable.................. 500 1,000
Deferred Maintenance and 5,000 (45,000)
Retirements......................
Nonregulated Income............... 19,902 10,593
---------------------------------
Net Cash Used in Investing (752,030) (605,964)
Activities.......................
=================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends Paid.................... (35,910) (23,084)
Debt Proceeds..................... 465,200 386,000
Payments on Short-term Debt....... (8,800) (7,500)
Increase/(Decrease) In:
Consumer Deposits and Advance 6,832 4,200
Payments.........................
---------------------------------
Net Cash Provided by Financing 427,322 359,616
Activities.......................
---------------------------------
Net Increase/(Decrease) in Cash... (8,783) 65,501
Cash--Beginning of Year........... 158,083 92,582
---------------------------------
[[Page 955]]
Cash--End of Year................. 149,300 158,083
=================================
The accompanying notes are an
integral part of these statements.
RECONCILIATION OF NET MARGINS TO NET
CASH PROVIDED BY OPERATING
ACTIVITIES:
Net Margins....................... 212,430 193,557
Less: Nonregulated Income......... (19,902) (10,593)
---------------------------------
Net Income from Regulated 192,528 182,964
Operations.......................
Adjustments to Reconcile Net
Margins to Net Cash Provided by
Operating Activities:
Depreciation and Amortization. 274,691 253,509
Provision for Uncollectible 10,107 (3,610)
Accounts Receivable..........
(Increase)/Decrease In:
Customer and Other Accounts (27,126) (22,979)
Receivable...................
Current and Accrued Assets-- 8,774 5,119
Other........................
Prepaid Taxes................. 10,000 (10,000)
Other Prepaid Expenses........ 3,016 (5,426)
Increase/(Decrease) In:
Accounts Payable.............. (166,795) (126,472)
Accrued Taxes................. 17,510 37,742
Other Current Liabilities..... (579) (638)
Deferred Credits.............. (6,201) 1,640
---------------------------------
Total Adjustments............. 123,397 128,885
=================================
Net Cash Provided by Operating 315,925 311,849
Activities...........................
The accompanying notes are an integral
part of these statements.
------------------------------------------------------------------------
[56 FR 63360, Dec. 3, 1991, as amended at 61 FR 111, Jan. 3, 1996; 63 FR
38728, July 17, 1998; 63 FR 40169, July 28, 1998]
Appendix C to Part 1773--Illustrative Independent Auditor's Management
Letter for Electric Borrowers
RUS requires that CPAs auditing RUS borrowers provide a management
letter in accordance with Sec. 1773.33. 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 Auditors' Management Letter for Electric
Borrowers
March 2, 1999
Board of Directors
[Name of Borrower]
[City, State]
We have audited the financial statements of [Name of Borrower] for
the year ended December 31, 1998, and have issued our report thereon
dated March 2, 1999. We conducted our audit in accordance with generally
accepted auditing standards, the standards applicable to financial
audits contained in 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, 1998, we considered
its internal control over financial reporting 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 over financial reporting.
A description of the responsibility of management for establishing
and maintaining the internal control over financial reporting and the
objectives of and inherent limitations in such control is set forth in
our independent auditors' report on compliance and on internal control
over financial reporting dated March 2, 1999, and should be read in
conjunction with this report.
Our consideration of the internal control over financial reporting
would not necessarily disclose all matters in the internal control over
financial reporting that might be material weaknesses. A material
weakness is a condition in which the design or operation of one or more
of the internal control components does not reduce to a relatively low
level the risk that misstatements in amounts that would be material in
relation to the financial statements being audited may occur and not be
[[Page 956]]
detected within a timely period by employees in the normal course of
performing their assigned functions. We noted no matters involving the
internal control over financial reporting that we consider to be
material weaknesses. [If a material weakness was noted, refer the reader
to the independent auditors' report on compliance and on internal
control over financial reportingstructure.]
7 CFR 1773.33 requires comments on specific aspects of the internal
control over financial reporting, 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 over financial reporting, of compliance with
specific RUS loan and security instrument provisions, and of additional
matters. The specific aspects of the internal control over financial
reporting, 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 1773.33 (e)(1), related party transactions, depreciation rates, and
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 over financial reporting, 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 and our
independent auditors' report on compliance and on internal control over
financial reporting, all dated March 2, 1999) or summary of
recommendations related to our audit have been furnished to management.
Our comments on specific aspects of the internal control over
financial reporting, compliance with specific RUS loan and security
instrument provisions, and other additional matters as required by 7 CFR
1773.33 are presented below.
Comments on Certain Specific Aspects of the Internal Control Over
Financial Reporting
We noted no matters regarding [Name of Borrower]'s internal control
over financial reporting 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].
Comme