auditors guide

AuditorsGuide

Commonwealth of PennsylvaniaTom Ridge, Governor

Department of Community and Economic DevelopmentSam McCullough, Secretary

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Audi torsGuide

Ninth Edi tion

Har ris burg, Oc to ber 1998

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Ad di tional cop ies, com ments or in quir ies on the sub ject mat ter of this pub li ca tion should be ad dressed to:

The Gov er nor’s Cen ter for Lo cal Gov ern ment Serv ices325 Fo rum Build ingHar ris burg, Penn syl va nia 171201- 888- 2CENTER (223- 6837)

Prepa ra tion and print ing of this edi tion of the Audi tors Guide was funded from ap pro pria tions of the Gen eralAs sem bly of the Com mon wealth of Penn syl va nia.

Copy right © 1998, Penn syl va nia De part ment of Com mu nity and Eco nomic De vel op ment, all rights re served.

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Ta ble of Con tents

I. In tro duc tion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. Pow ers and Du ties of Of fice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51. Elected Audi tors of Bor oughs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52. Elected Con trol lers Of Bor oughs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83. In de pendent Audi tor For Bor oughs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104. Elected Audi tors of First Class Town ships. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105. Elected Con trol lers of First Class Town ships. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136. In de pendent Audi tor for First Class Town ships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147. Elected Audi tors of Sec ond Class Town ships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158. In de pendent Audi tor for Sec ond Class Town ships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209. Audit ing Mu nici pal Authori ties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

10. Audit ing Earned In come Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2211. Ad vi sory Role of Elected Audi tors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

12. Sin gle Audit Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

III. Audit Pro grams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251. Plan ning the Audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252. Evalua tion of Ex ist ing In ter nal Con trol Pro ce dures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283. Gen eral Fund: Reve nues, Re ceiv ables, Re ceipts, As sets. . . . . . . . . . . . . . . . . . . . . . . . . . 324. The Gen eral Fund: Ex pen di tures and Re lated Li abili ties . . . . . . . . . . . . . . . . . . . . . . . . . 425. Spe cial Reve nue Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456. Util ity Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467. Spe cial As sess ment Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 488. Debt and Debt Serv ice Ac counts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499. Sink ing Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

10. Capi tal Pro jects Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5211. Other Bor ough and Town ship Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5312. State High way Aid Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5413. Agency and Trust Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5614. Ac counts of Tax Col lec tors, Town ship Treas ur ers and Dis trict Jus tices . . . . . . . . . . . . . . 5715. In terim Audit Check List for Elected Audi tors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

IV. An nual Fi nan cial Re ports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 611. Fi nan cial State ments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 612. Re ports Re quired by the De part ment of Com mu nity and Eco nomic De vel op ment . . . . . . 623. Pub lished Fi nan cial State ments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

V. Ap pen dix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651. Glos sary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 652. In ter nal Con trol Ques tion naire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

3. Stan dard Bank Con fir ma tion Inquiry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

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I. In tro duc tion

Pur pose of Guide

Bor oughs and town ships are re quired by their codes to have an an nual audit made by ei ther: (1) three elected audi tors, or (2) an elected con trol ler, or (3) un der cer tain cir cum stances, cer ti fied pub lic ac count ants or pub licac count ants who may be ap pointed to make the audit in stead of or in ad di tion to the elected audi tors. Theelected audi tor sys tem is used al most ex clu sively in smaller town ships and bor oughs. This guide out lines whatwork audi tors are ex pected and re quired to do. The De part ment set sev eral goals in pre par ing the Guide:

First, to give di rec tion and pur pose to the elected audi tors as they be gin their audit task.

Sec ond, to ac quaint elected audi tors with their du ties and re spon si bili ties un der the bor ough and town shipcodes.

Third, to out line the scope of an audit of a bor ough or town ship; to sug gest pro grams for the audit of thevari ous funds, and of the ac counts of cer tain of fi cials such as: tax col lec tor, dis trict jus tice and treas urer.

Fourth, to of fer in struc tion in the prepa ra tion of the uni form fi nan cial re ports re quired to be filed with theDe part ment of Com mu nity and Eco nomic De vel op ment.

The Pri mary Pur pose of Audit ing

The audi tor ex am ines the ac count ing rec ords and ac count ing prac tices of the or gani za tion or agency un derre view to en able him to ex press an in formed opin ion as to whether or not the bal ance sheet and the state ment of reve nues and ex pen di tures pre pared from the books and rec ords pres ent fairly the fi nan cial po si tion and the re -sults of op era tions of the mu nici pal ity, and whether the mu nici pal ity com plied with ap pli ca ble laws and regu la -tions. The in de pend ent re view by the audi tor in cludes judg ments as to facts, sup port ing evi dence, andad her ence to gen er ally ac cepted ac count ing prin ci ples ap plied con sis tently from year to year.

In ad di tion to these broad as sign ments, the audi tor should be alert to pos si ble ir regu lari ties and fraud, as well as weak nesses in in ter nal con trol. It is im por tant for the audi tor to in form the re spon si ble of fi cials about suchweak nesses when they are dis cov ered.

Audit ing Tech niques

In ful fill ing this pri mary pur pose, the audi tor gen er ally ob tains evi den tial ma te rial to form and sup port his con clu -sion on the fi nan cial state ments. The audi tor ob tains the evi dence in sev eral ways:

1. Analy sis and Re view. A care ful analy sis and criti cal re view of data pre sented by the mu nici pal ity with a view to de ter min ing its rea son able ness and re li abil ity.

2. Ob ser va tion. The audi tor is pres ent to ob serve how vari ous pro ce dures are be ing per formed by theem ploy ees.

3. In spec tion. The in spec tion of physi cal as sets, such as se cu ri ties, cash, in ven to ries, as well as docu ments and other evi dence sup port ing the fig ures in the ac count ing rec ords.

4. Con fir ma tion. Ver ify the cor rect ness of the books un der audit by di rect ad vice from an in di vid ual,agency or com pany in a po si tion to ver ify such items. The most com mon ex am ple of this tech niqueis con fir ma tion of bank bal ances di rectly with the bank or banks where the mon eys are kept.

5. In quiry. Se cure in for ma tion by dis cuss ing vari ous trans ac tions and other fi nan cial mat ters with of fi cers

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and em ploy ees of the agency or or gani za tion un der audit. The alert audi tor will gain a bet terun der stand ing of points not set forth clearly in the rec ords or per haps not dis closed in the books ofac count.

The Na ture of Gov ern men tal Ac count ing

It is the pur pose of gov ern men tal ac count ing to pro vide fac tual in for ma tion con cern ing the fi nan cial op era -tions of the gov ern men tal unit un der con sid era tion. This in for ma tion con sti tutes an im por tant tool in mak ingplans, con trol ling, ad min is ter ing and re port ing to in ter ested par ties. Some of those in ter ested in the ac count ingre sults are:

The ad min is tra tive or man ag ing staff

The leg is la tive body (bor ough coun cil, board of com mis sion ers or board of su per vi sors)

In ves tors (those who pur chase bonds is sued by the mu nici pal ity)

The pub lic and in di vid ual tax pay ers

State su per vi sory agen cies

Stu dents of gov ern ment and pub lic fi nance

It should be em pha sized that ac count ing is not a sub sti tute for ef fec tive and ef fi cient ac tion on the part of the ad min is tra tive staff and leg is la tive body. Ac count ing is a means of fa cili tat ing such ac tion.

Ac count ing — both com mer cial and gov ern men tal — is a sys tem atic method whereby fi nan cial trans ac tionsare ana lyzed, clas si fied, re corded in books of origi nal en try and posted to gen eral and sub sidi ary ledg ers, trialbal ance sum ma ries are com piled, and, fi nally, fi nan cial state ments are pre pared. Fi nan cial or busi ness trans ac -tions are ex changes of val ues meas ured in terms of money, that is, the re ceipt of money for taxes lev ied or thein cur ring and pay ing of an ob li ga tion for wages earned in cash. Trans ac tions are evi denced by docu ments suchas re ceipts, de posit tick ets, checks, vouch ers, and con tracts. Re cord ing may be done by long hand pen and inkmeth ods, book keep ing ma chines, elec tronic data proc ess ing or by com bi na tions of these meth ods.

For- profit ac count ing is de signed to match reve nues with cor re spond ing ex penses in the proper ac count ingpe riod. The ob jec tive of gov ern men tal ac count ing, how ever, is to con trol and il lus trate the proper authori za tion for ex pen di tures. Be cause of this, gov ern men tal ac count ing has cer tain pe cu liar fea tures:

1. Le gal Re quire ments. Gov ern men tal ac count ing and fi nance for lo cal units, such as bor oughs andtown ships, are gov erned by the pro vi sions of the bor ough and town ship codes, the uni form budgetand fi nan cial re port forms of the De part ment of Com mu nity and Eco nomic De vel op ment and thedebt and taxa tion limi ta tions im posed by the Penn syl va nia Con sti tu tion and the laws of the Gen eralAs sem bly.

2. Le gal Status of Budget. Statu tory re quire ments also pro vide that a budget (which will con trol theex pen di tures for a given fis cal year) must be adopted by the leg is la tive body. The budget mustin clude reve nue es ti mates as well as de tailed clas si fi ca tion of ex pen di tures ar ranged in such formthat it may be com pared with ac tual reve nues and ex pen di tures set forth in the an nual fi nan cialre port.

3. Use of Funds. Gov ern men tal units have a number of pur poses, ac tivi ties, and agen cies to deal with.The use of sepa rate funds en sures that money is ex pended for the pur pose for which the fund ises tab lished. The term fund has been de fined by the Na tional Com mit tee on Gov ern men talAc count ing as “a sum of money or other re sources seg re gated for the pur pose of car ry ing on ofspe cific ac tivi ties and at tain ing cer tain ob jec tives in ac cor dance with spe cial regu la tions, re stric tions, or limi ta tions and con sti tut ing an in de pend ent fis cal and ac count ing en tity.”

This means each fund is a sepa rately main tained, self- balancing set of books which is es tab lished for vari ous

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spe cific rea sons or ac tivi ties. Each fund re quires, in ef fect, a com plete book keep ing sys tem.

There are three ba sic types of funds — gov ern men tal, pro prie tary, and fi du ci ary.

Gov ern men tal funds are used to ac count for the on go ing ac tivi ties of gov ern ments. These ac tivi ties usu allyare fi nanced by gen eral gov ern ment reve nues, such as taxes, li cense fees, grants, and en ti tle ments. Gov ern -men tal funds are gen er ally ac counted for on the modi fied ac crual ba sis of ac count ing.

Pro prie tary funds are simi lar to on go ing busi nesses with op er at ing ex penses be ing met with cur rent reve -nues. These funds are gen er ally fi nanced with user serv ice charges and are ac counted for on the ac crual ba sisof ac count ing un der ideal cir cum stances.

Fi du ci ary funds are used to ac count for situa tions where the gov ern men tal unit is act ing as a trus tee or agentfor in di vidu als or other gov ern ments. These funds may be main tained on the ac crual or modi fied ac crual ba sisof ac count ing. The funds most widely used in Penn syl va nia lo cal gov ern men tal units are:

Gen eral Fund Gov ern men tal Fund

Spe cial Reve nue Funds Gov ern men tal

Capi tal Pro jects Funds Gov ern men tal

Util ity Funds Pro prie tary

Spe cial As sess ment Bond Funds Gov ern men tal

Sink ing Funds Gov ern men tal

Capi tal Re serve Funds Gov ern men tal

High way Aid Fund Gov ern men tal

Agency and Trust Funds Fi du ci ary

These funds are ex plained in the Guide where the audit pro gram is out lined for each.

Com pari son of Com mer cial and Gov ern men tal Ac count ing

The same gen eral prin ci ples and pro ce dures are gen er ally fol lowed in the same man ner as in com mer cial and gov ern men tal ac count ing. In the fol low ing re spects the two types of ac count ing are simi lar:

a. Trans ac tion analy sis, books of origi nal en try and ledg ers are simi lar in prin ci ple.

b. A proper clas si fi ca tion of ac counts is es sen tial to the prepa ra tion of fi nan cial state ments.

c. Uni form ac count ing ter mi nol ogy is very use ful.

How ever, there are cer tain fun da men tal fea tures which are pe cu liar to gov ern men tal ac count ing;

a. The ab sence of the profit and loss mo tive in gov ern ment.

b. The use of budg ets and funds within the ac count ing sys tem.

c. The le gal re quire ments gov ern ing the op era tions of a lo cal gov ern men tal unit.

d. De pre cia tion of fixed as sets, ex cept pos si bly in the case of pro prie tary and fi du ci ary funds, isnot used in gov ern men tal ac count ing.

e. In Penn syl va nia, uni form fi nan cial re port and budget forms are man dated by law and pro vided by the De part ment of Com mu nity and Eco nomic De vel op ment.

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II. Pow ers and Du ties of Of fice

1. Elected Audi tors of Bor oughs

Elec tion

In bor oughs which have not es tab lished the of fice of con trol ler, nor em ployed an in de pend ent audi tor, threeaudi tors are elected for a term of six years. One audi tor is elected at each mu nici pal elec tion, pro vid ing forover lap ping mem ber ship on the board.1

Va can cies in the of fice of audi tor are filled by bor ough coun cil. If the va cancy is for more than two years, anew audi tor is elected at the next mu nici pal elec tion com ing at least sixty days af ter the va cancy oc curs.2

Audi tors may be paid be tween fif teen and thirty dol lars per day, as coun cil de ter mines. Each day is to con -sist of not less than five hours em ployed in the dis charge of their du ties.3

Or gani za tion

The audi tors meet an nu ally on the first Tues day of Janu ary. They or gan ize by elect ing a chair and a sec re -tary.4 Two audi tors con sti tute a quo rum and may take of fi cial ac tion as the board of audi tors.5 How ever, a sin -gle audi tor act ing alone has no le gal author ity.6

The audi tors may em ploy an at tor ney when deemed ad vis able by a ma jor ity of the board. The at tor ney’scom pen sa tion is fixed by the audi tors, but can not ex ceed the sum pay able to one audi tor for mak ing the an nualaudit, un less a greater com pen sa tion is al lowed by coun cil or the court in con nec tion with any pro ceed ing be -fore it.7

Audit ing, Ad just ing and Set tling Ac counts

The audi tors must audit, ad just and set tle the ac counts of the tax col lec tor, dis trict jus tice and all of fi cers ofthe bor ough. They may also audit the ac counts of any per son, or gani za tion or agency re ceiv ing or spend ingbor ough funds.8

In ad di tion to the an nual audits af ter the end of the fis cal year, the audi tors are also re quired to audit and re port tothe bor ough coun cil on the ac counts of every of fi cer upon their death, res ig na tion or re moval from of fice.9

Wit nesses; Docu ments

Audi tors may com pel the at ten dance of wit nesses, ad min is ter oaths, pe ti tion the court to is sue sub poe nas toper sons re fus ing to tes tify, author ize the pay ment of wit nesses and set tle ac counts where wit nesses do not ap -pear.10 Audi tors have the right to com pel bor oughs of fi cials to ap pear at meet ings with books, vouch ers and pa -pers for audit.11 In a case where cer tain mem bers of bor ough coun cil re fused to an swer ques tions on thegrounds that such an swers might in crimi nate, and other parts of their tes ti mony were con fus ing and eva sive,the court held they must be sur charged. Whether other coun cil mem bers were guilty of such neg li gence as tobe sur charged had to be de ter mined by elimi na tion, keep ing in mind that they could not be ab solved by ig no -rance nor re lieved from the ef fects of mere care less ness or er ror.12

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Audit Re port

Each year, audi tors must pre pare a re port con tain ing an audit of the ac counts of the last fis cal year. It mustshow a com plete state ment of the fi nan cial con di tion of the bor ough, in clud ing de tails of in debt ed ness, value of tax able prop erty and a list ing of the as sets of the bor ough.

The re port is to be pre pared within ninety days af ter the close of the fis cal year. Uni form forms for the re -port as man dated by law, are pro vided by the De part ment of Com mu nity and Eco nomic De vel op ment. Cop iesof the re port must be filed with the bor ough sec re tary, clerk of the court of com mon pleas and the De part mentof Com mu nity and Eco nomic De vel op ment.

Re ports filed with the De part ment should be sent to:

Gov er nor’s Cen ter for Lo cal Gov ern ment Serv icesDe part ment of Com mu nity and Eco nomic De vel op mentRoom 325, Fo rum Build ingHar ris burg, PA 17120

Fail ure to file the re port, on con vic tion in a sum mary pro ceed ing, means a fine of five dol lars for each day’sde lay in fil ing up to a to tal of two hun dred dol lars for each audi tor.13

The audit is to cover only the fis cal year im me di ately pre ceed ing. No ac tion taken on prior years’ ac countshas any va lid ity.14

The de ci sion of the audi tors in prior years’ re ports is con clu sive if it has not been chal lenged dur ing the ap -peal pe riod.

An audi tors’ re port is fi nal and con clu sive when it is filed. It can not be opened for cor rec tion of er rors or ad -di tional in quiry into by audi tors.15 An audi tors’ re port can not be re opened be cause the audi tors had been un fa -mil iar with cer tain tech ni cal and le gal re quire ments and had dis cov ered new facts.16

Sur charges

The amount of any bal ance or short age, or any ex pen di ture made in a man ner pro hib ited or not author ized by law, which causes a fi nan cial loss to the bor ough, must be sur charged against any of fi cer re spon si ble for thebal ance or short age, or who by vote, act or ne glect, has per mit ted or ap proved the ex pen di ture. No elected orap pointed of fi cer is to be sur charged in ex cess of the ac tual fi nan cial loss sus tained by the bor ough, based onthe dif fer ing re sults pro duced by the act, er ror or omis sion and those pro duced had the pro ce dure been strictlyac cord ing to law.

The lim its on the amount of sur charge do not ap ply to cases in volv ing fraud or col lu sion on the part of of fi -cers nor to any pen alty pay able to the Com mon wealth.17 Any of fi cial know ingly and will fully act ing con trary to law in any mat ter in volv ing any fi nan cial trans ac tion can be found guilty of a mis de meanor, sub ject to a finenot ex ceed ing one hun dred dol lars and his of fice be ing de clared va cant.18

In mak ing a sur charge, the audi tors must name an in di vid ual. An at tempted sur charge against bor ough coun -cil as a body was dis al low by the court.19 Sur charge can be made where of fi cials per mit ted or ap proved un au -thor ized ex pen di tures from the bor ough treas ury, caus ing a fi nan cial loss to the bor ough.20 This in cludes coun cil mem bers who, by their vote, had author ized an il le gal ex pen di ture or, know ing it was il le gal, ne glected to in -form coun cil as a whole.21 This does not ap ply to coun cil mem bers who com mit hon est er rors of judg ment indis charge of their du ties.

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Pro ce dures to Com plete Audit

All or ders, vouch ers and cer tifi cates of in debt ed ness which have been marked paid must be can celed by theaudi tors by writ ing or stamp ing the word “audited” on their face.22

Within ten days af ter the audit is com pleted, the audi tors must pub lish a con cise fi nan cial state ment in atleast one news pa per of gen eral cir cu la tion in the bor ough. The state ment is to in clude:

– the bal ance in the treas ury at the be gin ning of the year

– all reve nues re ceived by ma jor clas si fi ca tions

– all ex pen di tures by ma jor func tions

– the cur rent re sources and li abili ties of the bor ough at the end of the fis cal year

– the gross li abil ity and net debt of the bor ough

– the as sessed valua tion of the bor ough

– the as sets of the bor ough and their de scrip tion

– the date of the last ma tur ity of each form of funded debt and the as sets in each sink ing fund23

Ap peals from Audit

The re port of the audi tors may be ap pealed by the bor ough, by any tax payer of the bor ough, or by any of fi -cer whose ac count has been set tled. Ap peals must be taken to the court of com mon pleas within forty days ofthe date of fil ing of the re port with the clerk.24 The rem edy pro vided in the Bor ough Code for ju di cial re view of the re port of bor ough audi tors by ap peal to the court of com mon pleas is the ex clu sive rem edy un der law.25 Un -der the Bor ough Code, if a tax payer be lieves that mem bers of coun cil have vio lated the Bor ough Code inauthor iz ing the pur chase of goods and serv ices, the sole rem edy is for the tax payer to ap peal the re port of bor -ough audi tors within the forty- day pe riod af ter fil ing.26

Ap peals by tax pay ers or of fi cers re quire a $1,000 bond and se cu rity to prose cute and pay all costs if a morefa vor able de ci sion is not achieved.27 When coun cil mem bers ap pealed an audi tor’s sur charge and lost, theywere re quired to pay all costs.28 In any pro ceed ing on ap peal, the ac counts of any sur charged of fi cer or or gani -za tion may be ex am ined again, but the bur den is upon the sur charged party to es tab lish cred its claimed againstthe amount due. The op pos ing party may use find ings in the audi tors’ re port as prima fa cie evi dence againstthe sur charged of fi cer or or gani za tion.29 In an ap peal from a re port of the bor ough audi tors, the bur den is placed on the pub lic of fi cers to es tab lish the pro pri ety of all ex pen di tures made by them.30 Sev eral ap peals may becom bined into a sin gle pro ceed ing.

Af ter a hear ing, the court files its find ings of fact and law and en ters judg ment. Ex cep tions to the court’s de -ci sion may be ap pealed to the ap pel late court. Bal ances due to the bor ough in the ac count of any of fi cer con sti -tute a sur charge, and the amount is en tered as a judg ment by the pro thono tary, if there is no ap peal.31

Pen al ties Im posed on Audi tors

In a case of ne glect or re fusal of any audi tor to com ply with the Bor ough Code re quire ments, the audi tor isli able to a fine of not more than one hun dred dol lars or, in de fault of the fine and costs, to be im pris oned fornot more than ten days.32 Audi tors can not be sued to re cover em bez zled funds lost due to in ade quate auditsover sev eral years. They are pro tected by gov ern men tal im mu nity. The ap pro pri ate rem edy for neg li gent per -form ance by audi tors are the pen al ties pro vided in Sec tion 1054 of the Bor ough Code.33

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Ref er ences

1. 53 P.S. 45831; Bor ough Code, Sec tion 831.2. 53 P.S. 45901; Bor ough Code, Sec tion 901.3. 53 P.S. 46053; Bor ough Code, Sec tion 1053.4. 53 P.S. 46041(a); Bor ough Code, Sec tion 1041(a).5. 1 PA C.S.A. 1905; In re Bor ough of Rankin, 31 A.2d 543, 347 Pa.40, 1943.6. Hof facker v. Hano ver Bor ough, 25 Dist. 960, (1916).7. 53 P.S. 40652; Bor ough Code, Sec tion 1052.8. 53 P.S. 46041(b); Bor ough Code, Sec tion 1041(b).9. 53 P.S. 40641(g)’ Bor ough Code, Sec tion 1041(g).

10. 53 P.S. 46055 to 46059; Bor ough Code, Sec tion 1055 to 1059.11. Pe ti tion of Audi tors of Bor ough of Nu an gola, 34 Luz. L. Reg. Rep. 321, 1941.12. Ap peal from Audi tors’ Re port, Du pont Bor ough, 38 Luz. L. Reg. Rep. 281, 1946.13. 53 P.S. 46041(d); Bor ough Code, Sec tion 1041(d).14. Audi tor’s Re port, 20 Lack., 295, 11 Mun. 129, 1919.15. Steel ton Bor ough v. Detweiler, 26 Dauph. 270, 1923.16. Bond v. Fer nan dez, 66 D.&C.2d. 494, 33 Bea ver 199, 1974.17. 53 P.S. 46041(c); Bor ough Code, Sec tion 1041(c).18. 53 P.S. 46041(e); Bor ough Code, Sec tion 1041(e).19. Ap peal of Baden Audi tors’ Re port, 20 Bea ver 141, 50 Mun. 190, 1959.20. In re Bor ough of Rankin, 31 A, 2d 543, 347 Pa. 40, 1943.21. Ap peal of Wil liam, 29 Mun. 177, 86 P.L.J. 241, 1938.22. 53 P.S. 46042; Bor ough Code, Sec tion 1042.23. 53 P.S. 46043; Bor ough Code, Sec tion 1043.24. 53 P.S. 46044; Bor ough Code, Sec tion 1044.25. In re An nual Audit of Bor ough of Tur tle Creek , 163 A. 2d 876, 401 Pa. 201, 1960.26. Grib ble v. Miller, 284 A 2d. 825, 3 Pa. Cmwlth. 520, 1971.27. 53 P.S. 46045; Bor ough Code, Sec tion 1045.28. In re Baden Audi tors Re port, 21 Bea ver 128, 1960.29. 53 P.S. 46047; Bor ough Code, Sec tion 1047.30. Ap peal from State ment of Audit of Fi nances of Bor ough of Mon aca, 35 Mun. 111, 1944.31. 53 P.S. 46049,46050,46051; Bor ough Code, Sec tions 1049, 1050 and 1051.32. 53 P.S. 46054; Bor ough Code, Sec tion 1054.33. Bor ough of West Fair view v. Hess, 568 A. 2d 709, 150 Pa. Cmwlth. 385, 1989.

2. Elected Controllers Of Boroughs

Es tab lish ing Of fice

Bor ough coun cil may es tab lish the of fice of con trol ler by en act ing an or di nance. Upon pe ti tion, the court ofcom mon pleas ap points a con trol ler to hold of fice un til the first Mon day of Janu ary af ter the next mu nici palelec tion, when a con trol ler is elected.1 The ap pointed or elected con trol ler takes of fice. The con trol ler iselected to a four- year term.

Quali fi ca tions

The Bor ough Code re quires the con trol ler to be a com pe tent ac count ant.2 The court has ruled that this re -quire ment is “di rec tory” and not “man da tory” and a mat ter for the vot ers them selves to de cide.3 The con trol lermust be a reg is tered voter of the bor ough for at least four years prior to his elec tion. The court has held that this re quire ment is man da tory and the con trol ler must have re sided in the bor ough for at least four years im me di -ately prior to the elec tion.4

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The con trol ler must take an oath to per form the du ties of of fice with fi del ity and a loy alty oath. The con trol -ler must give bond to the bor ough with a surety com pany ap proved by coun cil. The amount of the bond is setby or di nance and must be suf fi cient to pro tect the bor ough from any il le gal or un faith ful ac tion by the con trol -ler. The pre mium is paid by the bor ough.5 In a court case the re port of a con trol ler who had been elected to of -fice, but whose bond had not been ap proved by bor ough coun cil, was voided by the court.6

Sal ary

Bor ough coun cil must fix the an nual sal ary of the con trol ler, but may not in crease or de crease this sal arymore of ten than once in two years.7

Audit ing and Set tling of Ac counts

The con trol ler has all the power and per forms all the du ties vested in the elected audi tors. The an nual auditmust be filed and pub lished in the same man ner as re quired of audi tors. The ac counts of all bor ough of fi cersand de part ments author ized to re ceive and dis burse pub lic mon eys must be audited.8

In the mak ing of any audit or set tle ment, the con trol ler has the same power to re quire the at ten dance of wit -nesses and the pro duc tion of books and pa pers as given to audi tors.9 A bor ough con trol ler whose term hasended has full power to com pel at ten dance of wit nesses and pro duc tion of books and docu ments in mak ing thefi nal audit of bor ough ac counts for the year pre ced ing the ex pi ra tion of his term.10

Ap peals may be made from the con trol ler’s set tle ments and audits as shown in the re port to the court ofcom mon pleas, sub ject to the same pro ce dures as ap ply to elected audi tors of the bor ough.11

Su per vis ing Bor ough Fi nances

In ad di tion to the audit ing func tion, the bor ough con trol ler re views the daily fi nan cial trans ac tions of thebor ough. The con trol ler coun ter signs each war rant drawn upon the bor ough treas urer, but only af ter de ter min -ing it is prop erly due, made out to the right per son, the goods or serv ices pur chased have been re ceived andthere are suf fi cient funds to pay for it in the ap pro pria tion.12

The con trol ler may at any time re quire a state ment from any bor ough of fi cer of bor ough money or prop ertyin their con trol or pos ses sion. The con trol ler has the power to ver ify bank ac counts. 13 Any ir regu lari ties dis -cov ered must be im me di ately re ported to coun cil.

The con trol ler must keep a regu lar set of books show ing all ap pro pria tions, all re ceipts and ex pen di tures ofbor ough of fi cers, de part ments and agen cies, and all trust ac counts of the bor ough.14

The con trol ler has the power to sug gest plans to coun cil for the man age ment and im prove ment of bor oughfi nances, as deemed ex pe di ent or at the di rec tion of coun cil.15

Ref er ences

1. 53 P.S. 4607l; Bor ough Code, Sec tion 1071.2. 53 P.S. 45841; Bor ough Code, Sec tion 841.3. Com. ex rel. Ad ams v. Ste phens, 28 A. 2d 924, 345 Pa 436, 1942.4. Ibid. 5. 53 P.S. 46061; Bor ough Code, Sec tion 1061.6. Con trol ler’s Re port, 83 Pitts. 245, 1934.7. 53 P.S. 46062; Bor ough Code, Sec tion 1062.8. 53 P.S. 46063; Bor ough Code, Sec tion 1063.

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9. 53 P.S. 46064; Bor ough Code, Sec tion 1064.10. Com. ex rel. Ea gen v. Pe trusef ski, 12 A. 2d 3, 338 Pa. 278, 1940.11. 53 P.S. 46070; Bor ough Code, Sec tion 1070.12. 53 P.S. 46065,46066,46067; Bor ough Code, Sec tion 1065,1066 and 1067.13. 53 P.S. 46063; Bor ough Code, Sec tion 1063.14. 53 P.S. 46069; Bor ough Code, Sec tion 1069.15. 53 P.S. 46068; Bor ough Code, Sec tion 1068.

3. Independent Auditor For Boroughs

Ap point ment

By an or di nance passed by a two- thirds vote of the en tire number of coun cil mem bers elected, coun cil maycre ate the of fice of in de pend ent audi tor. Coun cil an nu ally ap points an in de pend ent audi tor by reso lu tion be fore the close of the fis cal year. The in de pend ent audi tor must be a cer ti fied pub lic ac count ant, a firm of cer ti fiedpub lic ac count ants, a com pe tent pub lic ac count ant or a com pe tent firm of pub lic ac count ants. When the of ficeof in de pend ent audi tor has been es tab lished, the of fice of elected audi tors or con trol ler is abol ished. Thoseelected audi tors or con trol lers still in of fice com plete their terms, but do not make the an nual audit.1

Pow ers

The pow ers of the in de pend ent audi tor are simi lar to those of the elected bor ough audi tors.2 This in cludesthe re spon si bil ity to levy a sur charge against any of fi cer re spon si ble for any short age or il le gal ex pen di ture un -cov ered in the audit.

Ref er ences

1. 53 P.S. 46005(7); Bor ough Code, Sec tion 1005(7).2. 53 P.S. 46196,46197,46198,46199; Bor ough Code, Sec tions 1196, 1197, 1198 and 1199.

4. Elected Auditors of First Class Townships

Elec tion

In town ships of the first class which have not es tab lished the of fice of con trol ler nor em ployed an in de pend -ent audi tor, three audi tors are elected for a term of six years. One audi tor is elected at each mu nici pal elec tion,pro vid ing for over lap ping mem ber ship on the board.1

Audi tors must be reg is tered vot ers of the town ship.2 Audi tors may not hold any other elec tive or ap point iveof fice.3 The of fice of party com mit tee man has been held in com pati ble with that of town ship audi tor.4

Va can cies in the of fice of audi tor are filled by the board of com mis sion ers. If the va cancy is for more thantwo years, a new audi tor is elected at the next mu nici pal elec tion com ing at least sixty days af ter the va cancyoc curs.5

Audi tors are paid twenty dol lars a day. A day con sists of at least five hours em ployed in the du ties of theirof fice. In town ships of less than three thou sand popu la tion, audi tors must com plete their audit in twenty days;in town ships of more than three thou sand, but less than ten thou sand, thirty days; in town ships of ten thou sandand more, forty days.6

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Or gani za tion

The audi tors meet an nu ally on the day fol low ing the or gani za tion meet ing of the town ship com mis sion ers.Two audi tors con sti tute a quo rum and may take of fi cial ac tion as the board of audi tors.7 A sin gle audi tor act -ing alone has no le gal author ity. The audi tors may em ploy an at tor ney in case of a dis agree ment with any of fi -cials or boards they must audit. Be fore an at tor ney is em ployed, a rea son able ef fort to reach agree ment must be made, and no tice must be given to the audited party. Com pen sa tion for the at tor ney is lim ited to thirty dol lars,un less an ap peal is taken to court, in which case the court fixes ad di tional com pen sa tion.8


The audi tors must audit, set tle and ad just the ac counts of the town ship com mis sion ers, town ship treas urer,tax col lec tor, sec re tary and other of fi cers re ceiv ing and dis burs ing or author iz ing the dis burse ment of town shipfunds dur ing the pre ced ing fis cal year. The audi tors audit the ac counts of the dis trict jus tice for the town ship to de ter mine the amount of fines and costs paid or due to the town ship.9

The audi tors must can cel all or ders and vouch ers pre sented to them which they find have been paid by writ -ing the word “audited” on their face.10

The set tle ment of ac counts of the treas urer and tax col lec tor by the audi tors in cludes ac count ing for all mo -nies re ceived and col lected and for any cred its against the funds col lected, such as vouch ers for money paid outas ex penses con nected with col lec tion of town ship mo nies.11


The audi tors may is sue sub poe nas to ob tain the at ten dance of of fi cers and per sons whose ac counts they areaudit ing and any per sons nec es sary to ex am ine as wit nesses. They may also com pel the pro duc tion of allbooks, vouch ers and pa pers rela tive to such ac counts. Audi tors can ad min is ter oaths and af firma tions to all per -sons ap pear ing be fore them.12

All dis trict jus tices must open and make avail able to the audi tors their dock ets, tran scripts, rec ords and allother of fi cial books or pa pers for the pur pose of the audit.13

Sur charges

Any of fi cer whose ac tor ne glect has con trib uted to the fi nan cial loss of the town ship must be sur charged bythe audi tors with the amount of such loss.14 Any bal ance against any of fi cer of the town ship will con sti tute asur charge against the of fi cer as fully as if ex pressly stated in the re port to be a sur charge. Un less ap pealed, theaudi tors must di rect the clerk of the court of com mon pleas to cer tify the amount of every bal ance or sur chargeand the pro thono tary must en ter it as a judg ment against the of fi cer in fa vor of the town ship.15

In any case where the dis trict jus tice charges a fine con trary to or di nances or to any act which makes the fine pay able to the town ship, the audi tors have the power to sur charge the jus tice any amount un der charged.16

Re port; Pub li ca tion

The audi tors must com plete their audit, set tle ment and ad just ment within as short a time as pos si ble. Theyfile cop ies of the re port with the sec re tary of the town ship, the clerk of court or pro thono tary as pro vided by lo -cal rules of court and the De part ment of Com mu nity and Eco nomic De vel op ment not later than ninety days af -ter the close of the fis cal year.17 The court has ruled that this dead line is di rec tory rather than man da tory. Fail ure to file within the pre scribed time will not pre vent re ports from be ing valid.18

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The audit re port is fi nal. Sub stan tive changes can not be made in the re port af ter it is filed. Where a re portwas in sub stan tive com pli ance with the law, the court al lowed add ing the pre scribed oath and proof of pub li ca -tion within the 45- day ap peal pe riod.19

Within ten days af ter com ple tion of their re port, the audi tors must pub lish a con cise fi nan cial state ment in anews pa per of gen eral cir cu la tion in the town ship. The re port must con tain:

– the bal ance in the treas ury at the be gin ning of the fis cal year;

– all reve nues re ceived by ma jor clas si fi ca tions;

– all ex pen di tures made by ma jor func tions;

– the cur rent re sources and li abili ties of the town ship at the end of the year;

– the gross li abil ity and net debt;

– the amount of the as sessed valua tion of the town ship;

– de tails of town ship as sets;

– the date of the last ma tur ity of each form of debt;

– and the as sets of sink ing funds.

The audit re port and fi nan cial state ment must be made on uni form forms man dated by law and pro vided bythe De part ment of Com mu nity and Eco nomic De vel op ment. They must be signed by all the audi tors and there port must be veri fied by the oath of one of the audi tors. Re ports filed with the De part ment of Com mu nity and Eco nomic De vel op ment should be sent to:


Fail ure to file the re port, on con vic tion in a sum mary pro ceed ing, means a fine of five dol lars for each audi -tor for each day’s de lay in fil ing. All fines re ceived are cred ited to the Com mon wealth.20

Ap peals from Audit

The town ship, any reg is tered voter or tax payer, or any of fi cer or per son whose ac count is audited may ap peal from the audit to the court of com mon pleas within forty- five days af ter the set tle ment has been filed.21 The pro -vi sion in the First Class Town ship Code is the ex clu sive statu tory rem edy for any chal lenge to an audit re port.22

Reg is tered vot ers, tax pay ers and of fi cers ap peal ing a re port must post a bond to cover costs, if they fail towin a de ci sion more fa vor able than the re port. When more than one ap peal is taken from a re port, they may becon soli dated and the court can frame an is sue for trial. Af ter a hear ing, the court en ters its judg ment and as -signs costs. Ap peals may be taken to higher courts.23

Pen alty

Any audi tor ne glect ing or re fus ing to com ply with the pro vi sions of the First Class Town ship Code is sub ject to a pen alty of one hun dred dol lars to be re cov ered by suit, in sti tuted in the name of the town ship on the com -plaint of any tax payer. The pen alty is to be paid into the town ship treas ury.24 If any town ship of fi cer re fuses or ne glects to per form his du ties, one hun dred citi zens, own ers of real es tate re sid ing in the town ship, may file acom plaint with the court of com mon pleas. Upon a hear ing of the proof that the facts al leged in the com plaintare true, the court may de clare the of fice va cant and ap point some one else to serve for the un ex pired term.25

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Ref er ences

1. 53 P.S. 55520; First Class Town ship Code, Sec tion 520.2. 53 P.S. 55501; First Class Town ship Code, Sec tion 501.3. 53 P.S. 55520; First Class Town ship Code, Sec tion 520.4. In re Lower Chich es ter Twp. Audi tor, 23 D.&C.2d 176, 1982.5. 53 P.S. 55530; First Class Town ship Code, Sec tion 530.6. 53 P.S. 56001; First Class Town ship Code, Sec tion 1001.7. Ibid.8. 53 P.S. 56006; First Class Town ship Code, Sec tion 1006.9. 53 P.S. 56001; First Class Town ship Code, Sec tion l001.

10. 53 P.S. 56004; First Class Town ship Code, Sec tion 1004.11. Skel ton v. Lower Merion Twp., 178 Atl 387, 318 Pa. 356, 1935.12. 53 P.S. 56002; First Class Town ship Code, Sec tion 1002.13. 53 P.S. 56001; First Class Town ship Code, Sec tion 1001.14. 53 P.S. 56003; First Class Town ship Code, Sec tion 1003.15. 53 P.S. 56007; First Class Town ship Code, Sec tion 1007.16. 53 P.S. 56001; First Class Town ship Code, Sec tion 1001.17. 53 P.S. 56003; First Class Town ship Code, Sec tion 1003.18. In re Audi tors’ Re port for Nev ille Twp, Al le gheny County, 70 A. 2d 379, 166 Pa. Su per. 122, 1950. 19. Ibid20. 53 P.S. 56003; First Class Town ship Code, Sec tion 1003.21. 53 P.S. 56009: First Class Town ship Code, Sec tion 1009.22. Nev ille Twp., su pra. 23. 53 P.S. 56010 through 56018; First Class Town ship Code, Sec tion 1010 through 1018. 24. 53 P.S. 56005; First Class Town ship Code, Sec tion 1005.25. 53 P.S. 55604; First Class Town ship Code, Sec tion 604.

5. Elected Controllers of First Class Townships

Es tab lish ing Of fice

The board of town ship com mis sion ers may, by or di nance, es tab lish the of fice of con trol ler. When the of ficeof con trol ler is es tab lished, the of fice of town ship audi tor is abol ished. The court of com mon pleas, on pe ti tionof the com mis sion ers, ap points a con trol ler to hold of fice un til the first Mon day of Janu ary af ter the next mu -nici pal elec tion, at which a con trol ler is elected.1 The con trol ler is elected for a four- year term.

Quali fi ca tions

The con trol ler must be a reg is tered voter of the town ship and a com pe tent ac count ant.2 The First ClassTown ship Code does not fur ther de fine com pe tency. How ever, a court held that a milk wagon driver- salesmanwhose sole ex pe ri ence in ac count ing was keep ing his cus tom ers’ ac counts in a route book was not a com pe tentac count ant within the mean ing of the Code.3

The con trol ler must take the oath re quired of town ship of fi cers. The con trol ler must give bond to the town -ship in the amount of twenty thou sand dol lars with a surety com pany ap proved by the board of com mis sion ers.4

Sal ary

The sal ary of the con trol ler is to be fixed by or di nance passed at least thirty days be fore the date of the elec -tion. The sal ary is not to ex ceed five thou sand dol lars.5

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Audit ing and Set tling of Ac counts

The con trol ler has all the pow ers and per forms all the du ties vested in the elected audi tors of a first classtown ship. The an nual re port of the audit must be made and filed in the same man ner re quired of audi tors. Allac counts in which the town ship is con cerned must be ex am ined, audited and set tled by the con trol ler. The con -trol ler must also audit and re port on the ac count of any town ship of fi cer upon their death, res ig na tion, re movalor the ex pi ra tion of their term. The con trol ler has the same power as audi tors to re quire the at ten dance of wit -nesses and the pro duc tion of books and pa pers.6 Ap peals may be taken from the con trol ler’s audit re port in the same man ner as ap peals from audi tors’ re ports.7

Su per vis ing Town ship Fi nances

In ad di tion to the audit ing func tion, the town ship con trol ler moni tors the daily fi nan cial trans ac tions of thetown ship. The con trol ler coun ter signs each war rant drawn upon the town ship treas urer, but only af ter de ter -min ing it is prop erly due, made out to the right per son, the goods or serv ices pur chased have been re ceived andthere are suf fi cient funds to pay for it in the ap pro pria tion.8

The con trol ler may at any time re quire a state ment from any town ship of fi cer of town ship money or prop erty in their con trol or pos ses sion. The con trol ler has the power to ver ify bank ac counts. Any ir regu lari ties dis cov -ered must be im me di ately re ported to the board of com mis sion ers.9

The con trol ler must keep a regu lar set of books show ing all ap pro pria tions, all re ceipts and ex pen di tures oftown ship of fi cers, de part ments and agen cies, and all trust ac counts of the town ship.10

The con trol ler has the power to sug gest plans to the board of com mis sion ers for the man age ment and im -prove ment of town ship fi nances, as deemed ex pe di ent or at the di rec tion of the board.11

Ref er ences

1. 53 P.S. 55526; First Class Town ship Code, Sec tion 526.2. 53 P.S. 55525; First Class Town ship Code, Sec tion 525.3. Pe ti tion of Hor ton, 11 D.&C.2d 706, 1959.4. 53 P.S. 56101; First Class Town ship Code, Sec tion 1101.5. 53 P.S. 56102; First Class Town ship Code, Sec tion 1102.6. 53 P.S. 56103; First Class Town ship Code, Sec tion 1103.7. 53 P.S. 56109; First Class Town ship Code, Sec tion 1109.8. 53 P.S. 56104; First Class Town ship Code, Sec tion 1104.9. 53 P.S. 56103; First Class Town ship Code, Sec tion 1103.

10. 53 P.S. 56108; First Class Town ship Code, Sec tion 1108.11. 53 P.S. 56107; First Class Town ship Code, Sec tion 1107.

6. Independent Auditor for First Class Townships

Ap point ment

In stead of elect ing three audi tors or a con trol ler, a town ship may pro vide for the audit of its ac counts by anin de pend ent audi tor by or di nance. The audi tor must be a cer ti fied pub lic ac count ant, a firm of cer ti fied pub licac count ants, a com pe tent pub lic ac count ant or a com pe tent firm of pub lic ac count ants. The in de pend ent audi -tor is ap pointed an nu ally by reso lu tion at least thirty days be fore the close of the fis cal year. When an in de -pend ent audi tor is ap pointed, the of fice of elected audi tor is abol ished. Com pen sa tion of the in de pend entaudi tor is set by the board of com mis sion ers.1

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Pow ers

The in de pend ent audi tor has all the pow ers and must per form all the du ties out lined in the First Class Town -ship Code for elected audi tors.2

Ref er ences

1. 53 P.S. 55520; First Class Town ship Code, Sec tion 520.2. Ibid.

7. Elected Auditors of Second Class Townships

Elec tion

Each town ship of the sec ond class elects three audi tors.1 At each mu nici pal elec tion, one audi tor is elected toserve for a term of six years.2 Audi tors must be reg is tered vot ers of the town ship.3 They may not be em ployedby the town ship or hold any other elec tive or ap point ive of fice in the town ship. Audi tors must have re sidedcon tinu ously in the town ship for at least one year im me di ately prior to their elec tion.4

Va can cies in the of fice of audi tor are filled by the board of su per vi sors. The ap pointed suc ces sor serves un tila new audi tor is elected at the next mu nici pal elec tion com ing at least sixty days af ter the va cancy oc curs.5

Audi tors are paid at the rate of $7 for each hour nec es sar ily em ployed in dis charg ing their du ties of of fice.An item ized list ing of the dates, times, places, and hours worked to per form the audit must be sub mit ted to thetown ship su per vi sors. In town ships of less than 10,000 popu la tion, no audi tor may re ceive more than $700 forcom plet ing the audit. In town ships of more than 10,000 popu la tion, the maxi mum amount that may be paid toany audi tor is lim ited to $1,400. In ad di tion to amounts re ceived for com plet ing the an nual audit, each audi tormay re ceive com pen sa tion at the rate of $7 per hour for audit ing the ac counts of any pub lic of fi cial who han -dles pub lic funds when a va cancy in of fice oc curs. No more than fifty hours may be spent by each audi tor incom plet ing audits re quired be cause of va can cies in of fice. Each audi tor is also re im bursed for nec es sary travelcosts at rates as set by the town ship su per vi sors in ac cor dance with the Uni form Mile age Fee Law. Other ex -penses in clud ing post age, no tary fees, and pub li ca tion costs re lated to the audit are also re im burs able.6

Or gani za tion

The audi tors meet an nu ally, at the place of meet ing of the su per vi sors, on the day fol low ing the day fixedfor the or gani za tion of town ship su per vi sors. They or gan ize by elect ing a chair and a sec re tary. Two audi torscon sti tute a quo rum.7

The audi tors may pe ti tion the court of com mon pleas to em ploy an at tor ney to rep re sent them in cases of dis -agree ment with any of fi cials or boards they must audit. Be fore an at tor ney is em ployed, a rea son able ef fort toreach agree ment must be made and no tice must be given to the audited party. Com pen sa tion for the at tor ney isde ter mined by agree ment be tween the audi tors and su per vi sors and is paid from the town ship gen eral fund. Ifthe dis pute re sults in liti ga tion, or if the audi tors and su per vi sors can not agree on the amount to be paid to theat tor ney, the at tor ney’s com pen sa tion is de ter mined by the court.8


The audi tors must audit, ad just and set tle the ac counts of all elected or ap pointed town ship of fi cials, boards,or agen cies that re ceived, dis bursed, or were oth er wise en trusted with town ship funds dur ing the pre ced ingyear. They also may audit the ac counts of the dis trict jus tice for the town ship to de ter mine the amount of fines

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and costs paid or due to the town ship. Un less oth er wise agreed to by the audi tors and the of fi cer be ing audited, the audit shall be con ducted at the place where the rec ords of the of fi cer are nor mally kept.9

When any of the above of fices be comes va cant through death or res ig na tion, the audi tors meet on the call ofthe chair man and audit the ac counts of the former in cum bent.10


The audi tors may is sue sub poe nas to ob tain the at ten dance of of fi cers and per sons whose ac counts they areaudit ing and any per sons nec es sary to ex am ine as wit nesses. They may also com pel the pro duc tion of all books, vouch ers and pa pers rela tive to such ac counts. Audi tors can ad min is ter oaths and af firma tions to all per sons ap -pear ing be fore them.11

The dock ets and rec ords of dis trict jus tices are to be open to in spec tion by the audi tors.12

Sur charges

Any elected or ap pointed of fi cer whose act or omis sion, in vio la tion of law or be yond the scope of the of fi -cer’s author ity, had con trib uted to the fi nan cial loss of the town ship must be sur charged by the audi tors with the amount of such loss. Where the of fi cer’s act or omis sion re sults in an un in ten tional vio la tion of law or abuse of author ity, the audi tors must limit the amount of the sur charge to the dif fer ence be tween the amount of loss ac tu -ally in curred by the town ship and the amount of costs which would have been in curred hat the act been per -formed in strict ac cor dance with law or author ized pro ce dures. Such limi ta tion on the amount of the sur chargedoes not ap ply to cases in volv ing fraud or col lu sion on the part of the of fi cers.13

Any bal ance against any of fi cer of the town ship will con sti tute a sur charge against the of fi cer as fully as ifex pressly stated in the re port to be a sur charge. Un less ap pealed, the audi tors must di rect the clerk of the courtof com mon pleas to cer tify the amount of every bal ance or sur charge and the pro thono tary must en ter it as ajudg ment against the of fi cer in fa vor of the town ship.14

In a case where su per vi sors con tracted for high way work in ex cess of budg eted and ap pro pri ated amounts,the court held the acts oc ca sioned town ship “fi nan cial loss” even though the town ship suf fered no ac tual pe cu -ni ary loss and no fraud or dis hon esty on the part of the su per vi sors was shown.15 In cal cu lat ing the sur charge,audi tors must take into ac count re sults of the ques tioned ac tions as com pared to the re sults had pro ce dures been fol lowed strictly ac cord ing to law.16

In an other case, town ship su per vi sors re placed a full- time town ship man ager with a part- time man ager andpaid them selves to un der take part of the du ties of the town ship man ager. The court held the su per vi sors must be sur charged be cause the pay ments were il le gal.The fact that the il le gal pay ments were made in good faith andwith out fraudu lent in tent did not re lieve them of li abil ity to sur charge.17

How ever, in an other case where the su per vi sors had acted im prop erly, but their ac tions did not re sult in a fi nan cialloss to the town ship, the sur charges were not sus tained by the Com mon wealth Court on ap peal.18 An other court heldthat fail ure to use sound dis cre tion sub jected the su per vi sors to sur charge for the amount of any loss to the town ship.They had a duty to use sound dis cre tion in mak ing pur chases whether they were re quired by law to ad ver tise ornot.19An an nual audit showed an ex cess pay ment of $88.00 to the su per vi sors, but there was no evi dence to show who had re ceived any ex cess. The court ap proved sur charg ing each su per vi sor the to tal amount. Sat is fac tion of the sur -charge against any su per vi sor dis charged the sur charges en tered against the oth ers.20

Re port; Pub li ca tion

The audi tors must com plete their audit, set tle ment, and ad just ment prior to March first of each year. Theyfile cop ies of their re port with the sec re tary of the town ship, the clerk of court or pro thono tary as pro vided by

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lo cal rules of court, the De part ment of Com mu nity and Eco nomic De vel op ment and the De part ment of Trans -por ta tion. Re ports filed with the De part ment of Com mu nity and Eco nomic De vel op ment should be sent to:


Each copy of the re port must be signed by at least a ma jor ity of the audi tors and veri fied by oath of the sec re -tary of the audi tors. The audi tors’ re port must be made on forms man dated by law and pro vided by the De part -ment of Com mu nity and Eco nomic De vel op ment. On or be fore March 10 of each year, the audi tors mustpub lish a con cise fi nan cial state ment in a news pa per of gen eral cir cu la tion in the town ship. In town ships withpopu la tions of less than two hun dred, the audi tors may post five cop ies of the fi nan cial state ment in pub licplaces in the town ship in stead of pub lish ing it in a news pa per.

Any town ship sec re tary of audi tors re fus ing or wil fully ne glect ing to file or pub lish the re port com mits asum mary of fense.21 The re port of the town ship audi tors is con clu sive and can be chal lenged only by the statu -tory pro vi sion for ap peal.22 In the ab sence of fraud or col lu sion, the audi tors can not re open their re port af ter fil -ing.23 The audi tors may only set tle the ac counts for the pre ced ing year. When an ac count has been regu larlyset tled, an at tempted re set tle ment in a sub se quent year is of no va lid ity.24

Where an audi tors’ re port con sisted of a tabu la tion on a printed form and sup ple men tal ma te rial on type writ -ten sheets ap par ently in tended as a state ment of sur charge, the court up held the re port.25 Al though the sup ple -ment was ir regu lar in form and to some ex tent in con sis tent with the first part, both parts were filed to gether and in tended as a sin gle docu ment.

Ap peals from Audit

The board of su per vi sors, any reg is tered elec tor or tax payer, or any of fi cer whose ac count is audited may ap -peal from the audit to the court of com mon pleas within forty- five days af ter the set tle ment has been filed.26 The re port of the audi tors may be re viewed by the courts only on ap peal as pro vided by the Code.27 Ap peal of theaudi tors re port is the ex clu sive rem edy for re view of a town ship of fi cer’s ac counts.28

Reg is tered elec tors, tax pay ers and of fi cers ap peal ing a re port must post bond to cover costs, if they fail towin a de ci sion more fa vor able than the re port.29 There is no re quire ment for a bond where the ap peal is by thetown ship and has been duly author ized.30

When more than one ap peal is taken from a re port, they may be con soli dated, and the court can frame an is -sue for trial. Af ter a hear ing, the court en ters its judg ment and as signs costs. Ap peals may be taken to highercourts.31

In hear ing the case, the ac counts of the of fi cer may be in ves ti gated again, as if the ac count had been pre -sented in the first in stance.32 The fig ures of the audi tors are as sumed to be cor rect, and the bur den of proof is on the of fi cer whose ac counts are ques tioned to prove oth er wise.33 Where tax pay ers are ap peal ing the audit andask ing for a sur charge against an of fi cer against whom the audi tors found no bal ance out stand ing, it is the tax -pay ers, and not the of fi cer ques tioned, who must bear the bur den of prov ing the audi tors re port is in cor rect.34

Pen al ties

Any audi tor who fails to com ply with the pro vi sions of the Sec ond Class Town ship Code com mits a sum -mary of fense.35 Any audi tor who is in ter ested, di rectly or in di rectly, in any town ship trans ac tion com mits asum mary of fense and shall for feit his of fice and shall also pay any fi nan cial bene fit de rived from the trans ac -

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tion to the town ship.36 Audi tors who fail to sur charge town ship of fi cers are not sub ject to sur charge them selves on ap peal.37

Audi tors are not em pow ered to sur charge them selves, and the court is with out power to sur charge an audi torfor fail ure to per form the du ties of his of fice.38

Set ting Com pen sa tion of Work ing Su per vi sors

When su per vi sors are em ployed as road mas ters, la bor ers, town ship sec re tar ies, or treas ur ers, their com pen sa -tion is fixed by the board of audi tors. The audi tors also ap prove the mile age al low ance to be paid to the su per -vi sors for use of their ve hi cles on town ship busi ness.39 The term “com pen sa tion” is in ter preted to in clude allpay and paid time off in clud ing re tire ment bene fits, sick leave and va ca tions. The rate set should in clude pro vi -sion for over time rates if work ing over time is ex pected.

Note that in ter pre ta tions of the Fed eral Fair La bor Stan dards Act (FLSA) ex clude town ship su per vi sors andall other elected of fi cials from cov er age by that law. Thus, while pay ment of over time rates may be en tirely ap -pro pri ate in some situa tions, it is a lo cal choice and not re quired by fed eral law.

Sug gested Work sheet

Be fore be gin ning this pro cess, the audi tors should be fa mil iar with sec tions 606, 703, 803, and 901 of theSec ond Class Town ship Code.

The in tent of this work sheet is two fold: to help the audi tors fol low an or gan ized pro cess in set ting pay ratesfor work ing su per vi sors, and to help them docu ment the pro cess in case a ques tion should arise. If more room is needed, use as many ad di tional sheets as nec es sary.

1. List 5-10 ma jor du ties of the job:

2. List em ploy ers you have con tacted about com pen sa tion for simi lar jobs (such as other town ships,con trac -tors, or per haps the Penn DOT County Main te nance Of fice):

Name Tele phone Date Per son Con tacted

3. List the two of three po si tions (by ti tle, not a per son’s name) with du ties most simi lar to the working su -per vi sor. Note dif fer ences in job re spon si bili ties (number of peo ple su per vised), skills (such as mechanic orgrader op era tor), and years of ex pe ri ence. List the pay rate plus pen sion bene fits, and paid time off (such as va -ca tion, holi days, sick leave).

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Pen sion Bene fits

Job Ti tle Pay Rate Paid Paid Time Off

4. Agree on a base pay rate based on the above: If other com pen sa tion is in tended, such as over time or in clu sion in the town ship re tire ment plan, the audi tors must set these as well:

Since com pen sa tion for a work ing su per vi sor must not ex ceed com pen sa tion paid in the lo cal ity for simi larserv ices, the audi tors may wish to check with nearby em ploy ers to com pare wages, bene fits, and the type ofwork be ing per formed. The work sheet above may be use ful in the pro cess, both in ar riv ing at a rea son able fig -ure and in docu ment ing the pro cess used to do so.

Set ting and Fil ing The Treas ur er’s Bond

Un der prior law, the amount of the treas ur er’s bond was set by the town ship audi tors. The Sec ond ClassTown ship Code, as amended in 1995, now re quires that the board of su per vi sors set the amount for the treas ur -er’s bond in an amount equal to the es ti mated maxi mum amount to be held by the treas urer at any one time dur -ing the year, to tal ing all ac counts. The bond is given with a surety com pany and is filed with the board ofaudi tors.40

Ref er ences

1. 53 P.S. 65402; Sec ond Class Town ship Code, Sec tion 402.2. 53 P.S. 65404; Sec ond Class Town ship Code, Sec tion 404.3. 53 P.S. 65401; Sec ond Class Town ship Code, Sec tion 401.4. 53 P.S. 65404; Sec ond Class Town ship Code, Sec tion 404.5. 53 P.S. 65407; Sec ond Class Town ship Code, Sec tion 407.6. 53 P.S. 65902; Sec ond Class Town ship Code, Sec tion 902.

7. 53 P.S. 65901; Sec ond Class Town ship Code, Sec tion 901. 8. 53 P.S. 65906; Sec ond Class Town ship Code, Sec tion 906; 9. 53 P.S. 65901; Sec ond Class Town ship Code, Sec tion 901.10. Ibid.11. 53 P.S. 65903; Sec ond Class Town ship Code, Sec tion 903.12. 53 P.S. 65901; Sec ond Class Town ship Code, Sec tion 901.13. 53 P.S. 65907, Sec ond Class Town ship Code, Sec tion 90714. Ibid.15. In re Lilly, 19 A.2d 92, 341 Pa. 171, 1941.

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16. In re Ben sa lem Twp. Audi tors’ Re port, 7 Bucks 237, 1958.17. Cot lar v. Warmin ster Twp., 302 A. 2d 859, 8 Pa. Cmwlth. 163, 1973.18. In re Re port of Audit of South Un ion Town ship for 1975, 407 A.2d 906, 47 Pa. Cmwlth. 1, 1979.19. Ap peal from Hazle Twp. Audit, 51 Luz. L. Reg. 207, 1962.20. Ap peal from Audit of An nual Twp. Re port of Su per vi sors of High land Twp., 8 Chest. 345, 1959.21. 53 P.S. 65904; Sec ond Class Town ship Code, Sec tion 904.22. Brown v. White Deer Town ship, 27 Pa. 109, 1856; Baugh man v. Hemp field Twp., West mo re land Co., 48 A. 2d 41,159 Pa. Su per.

178, 1946; Brady Twp. v. Ash ley, 331 A. 2d 585, 17 Pa. Cmwlth. 226, 1975.23. Audi tor’s Re port, Lake Twp., 21 Luz. 387, 1921; Ap peal of Muh len berg Twp. Su per vi sors, 45 Berks 241, 1954.24. Mid dle town Twp. v. Miles, 61 Pa. 290, 1897; Com. v. Scan lon, 51 Atl. 986, 202 Pa. 250, 1902.25. Ben sa lem Twp., su pra.26. 53 P.S. 65909; Sec ond Class Town ship Code, Sec tion 909.27. Com. v. Joyce, 3 Pa. Su per. 609, 1897.28. Festa v. Derry Town ship, 411 A. 2d 904, 49 Pa. Cmwlth. 297,1980.29. 53 P.S. 65910; Sec ond Class Town ship Code, Sec tion 910.30. South Un ion Twp., su pra.31. 53 P.S. 65911,65913,65914, Sec ond Class Town ship Code, Sec tions 911, 913, and 914.32. 53 P.S. 65912; Sec ond Class Town ship Code, Sec tion 912; In re Can ton Twp., Wash ing ton County, 192 A. 2d 727, 412 Pa. 26,

1963.33. 53 P.S. 65912; Sec ond Class Town ship Code, Sec tion 912; Ap peal from Hazle Twp. Audit, 50 Luz. L. Reg. 69, 1960.34. In re 1980 Audi tors Re port for New Cas tle Town ship, 482 A. 2d 287, 84 Pa. Cmwlth. 339, 1984.35. 53 P.S. 65905; Sec ond Class Town ship Code, Sec tion 905.36. 53 P.S. 65916; Sec ond Class Town ship Code, Sec tion 916.37. Can ton Twp., su pra.38. Ap peal of Warmin ster Twp., 29 D.&C.2d 197, 1964.39. 53 P.S. 65606,65703; 65803 Sec ond Class Town ship Code, Sec tions 606, 703, and 803.40. 53 P.S. 65702, Sec ond Class Town ship Code, Sec tion 702.

8. Independent Auditor for Second Class Townships

Ap point ment

The town ship board of su per vi sors may em ploy an in de pend ent audi tor to be ap pointed by the court of com -mon pleas if a pe ti tion has been pre sented to the su per vi sors by at least twenty- five tax pay ers of the town shipask ing for such ap point ment.1 Af ter re ceiv ing the pe ti tion, the court must ap point an audi tor, but re tains thechoice of who is ap pointed.2 The audi tor must be a cer ti fied pub lic ac count ant, a firm of cer ti fied pub lic ac -count ants, a com pe tent pub lic ac count ant or a com pe tent firm of pub lic ac count ants. The audi tor must be ap -pointed at least thirty days prior to the close of the fis cal year. The amount of com pen sa tion shall not ex ceedthe maxi mum al lowed to be paid to the board of town ship audi tors for the year, un less an ad di tional amount isap proved by the court.

The town ship su per vi sors may also ap point an in de pend ent audi tor, with out a tax pay ers' pe ti tion or court ap -proval, by adopt ing a reso lu tion to re place the elected audi tors at their an nual or gani za tion meet ing or any timethere af ter. The su per vi sors must ad ver tise their in ten tion to re place the elected audi tors in a news pa per of gen -eral cir cu la tion at least thirty days prior to the or gani za tion meet ing or any later vote to ap point the in de pend ent ac count ant. When ap pointed by reso lu tion, the town ship su per vi sors de ter mine the in de pend ent audi tor's com -pen sa tion.3

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Pow ers

When an in de pend ent audi tor is ap pointed, the town ship audi tors do not audit and set tle town ship ac counts,but they still set the com pen sa tion of the su per vi sors.

The in de pend ent audi tors have the pow ers given the elected audi tors un der the Code, ex cept for the power to fixthe com pen sa tion of su per vi sors. They are sub ject to the same pen al ties out lined in the Code for elected audi tors andmust con duct their audit in ac cor dance with gen er ally ac cepted audit ing stan dards. The in de pend ent audi tor's re portmay be ap pealed in the same man ner as the re port of the elected audi tors.

For pur poses of meet ing Fed eral or State audit re quire ments ap pli ca ble to pro grams, grants, and con tracts fundedby those sources, the su per vi sors may em ploy an in de pend ent audi tor to per form an audit sepa rate from that con -ducted by the elected audi tors.

Ref er ences

1. 53 P.S. 65917; Sec ond Class Town ship Code, Sec tion 917.2. Falls Town ship Board of Su per vi sors v. Bozzo, 314 A 2d 559, 11 Pa. Cmwlth, 599, 1974.3. 53 P.S. 65917; Sec ond Class Town ship Code, Sec tion 917.

9. Auditing Municipal Authorities

Status of Authori ties

Elected bor ough and town ship audi tors do not audit the books of mu nici pal authori ties. Al though cre ated by lo calgov ern ment units and per form ing cer tain gov ern men tal func tions, authori ties are in de pend ent pub lic en ti ties cre atedto do spe cific jobs. Ex am ples of authori ties are: wa ter authori ties, sew age authori ties, park ing authori ties, schoolbuild ing authori ties and trans por ta tion authori ties. Many are joint authori ties in clud ing two or more mu nici pali ties.

Audits

Every mu nici pal author ity must have its books, ac counts and rec ords audited an nu ally by a cer ti fied pub lic ac -count ant. If the author ity fails to have an an nual audit made, then the con trol ler, audi tors or ac count ant des ig nated bythe mu nici pal ity or mu nici pali ties may ex am ine the ac counts and books of the author ity, in clud ing its re ceipts, dis -burse ments, con tracts, leases, sink ing funds, in vest ments and any other mat ters re lat ing to its fi nances, op era tion andaf fairs. Such ex ami na tion is to be at the ex pense of the author ity. The At tor ney Gen eral has the power to ex am ine the books, ac counts and rec ords of any author ity.1

Simi lar pro vi sions for audit ing park ing authori ties are found in the Park ing Author ity Law.2

Fil ing; Pub li ca tion

Mu nici pal authori ties and park ing authori ties must file an an nual re port of their fis cal af fairs, in clud ing acopy of the audit re port, with the De part ment of Com mu nity and Eco nomic De vel op ment and with the mu nici -pal ity or mu nici pali ties cre at ing the author ity. The re port must be on forms dis trib uted by the De part ment ofCom mu nity and Eco nomic De vel op ment.

Those authori ties whose fis cal year ends De cem ber 31 must file by July 1. Authori ties whose fis cal yearends on other than De cem ber 31 must file within ninety days af ter the end of their fis cal year.

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Re ports filed with the De part ment of Com mu nity and Eco nomic De vel op ment should be sent to:

Gov er nor's Cen ter for Lo cal Gov ern ment Serv icesDe part ment of Com mu nity and Eco nomic De vel op mentRoom 325, Fo rum Build ingHar ris burg, PA 17120

A con cise fi nan cial state ment must be pub lished an nu ally at least once in a news pa per of gen eral cir cu la tionin the mu nici pal ity where the prin ci pal of fice of the author ity is lo cated.3

Ref er ences

1. 53 P.S. 310; Mu nici pal ity Authori ties Act, Sec tion 8.2. 53 P.S. 350; Park ing Author ity Law, Sec tion 10.3. 53 P.S. 310, 53 P.S. 350; Mu nici pal ity Authori ties Act, Sec tion 8, Park ing Author ity Law, Sec tion 10.

10. Auditing Earned Income Taxes

Audits

Mu nici pali ties which levy earned in come taxes must pro vide for an an nual ex ami na tion of the books, ac -counts and rec ords of the in come tax col lec tor by a cer ti fied pub lic ac count ant, a firm of cer ti fied pub lic ac -counts, a com pe tent in de pend ent pub lic ac count ant or a firm of in de pend ent pub lic ac count ants ap pointed bythe mu nici pal gov ern ing body. Re ports of the audit are sent to the gov ern ing body. No fur ther audit is to beper formed by elected or ap pointed audi tors.1

Joint Col lec tion Agen cies

When a sin gle per son or agency has been se lected to col lect earned in come taxes for more than one po liti calsub di vi sion, the books, ac counts and rec ords of the joint col lec tor are to be audited by a sin gle ac count ant. The ac count ant is to be se lected by joint agree ment of the po liti cal sub di vi sions in volved or, in the lack of agree -ment, on the ba sis of vot ing ac cord ing to the pro por tion of the popu la tion each sub di vi sion bears to the en tirepopu la tion of the com bined col lec tion dis trict. A ma jor ity of votes de ter mines the ap point ment.2

Other Act 511 Taxes

Col lec tion of all other taxes lev ied un der the author ity of the Lo cal Tax Ena bling Act, ex cept for the earnedin come tax, is to be audited by the mu nici pal audi tors, con trol ler or ap pointed audi tor.3

Ref er ences

1. 53 P.S. 6911; Lo cal Tax Ena bling Act, Sec tion 11.2. 53 P.S. 6911,6910; Lo cal Tax Ena bling Act, Sec tion 11 and 10.3. 53 P.S. 6912; Lo cal Tax Ena bling Act, Sec tion 12.

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11. Advisory Role of Elected Auditors

There are dif fer ences be tween pro fes sional audit ing and the du ties of elected audi tors. By na ture, pro fes -sional audit ing re quires the audi tor be a per son trained in audit ing and ac count ing.

An elected mu nici pal audi tor is not re quired to have any train ing in audit ing and ac count ing. By way of du -ties, the pro fes sional audi tor not only ex am ines the fi nan cial trans ac tions of the unit, but also has a re spon si bil -ity to rec om mend im prove ments in ac count ing pro ce dures, in ter nal con trol de vices and re lated fis cal mat ters.The elected mu nici pal audi tor has no re spon si bil ity for the fi nan cial wel fare of the mu nici pal ity be yond the set -tle ment of the ac counts.

Elected audi tors are un able to com pel in stal la tion of ade quate ac count ing meth ods where they are lack ing.They are not re quired to pre pare sup port ing fi nan cial state ments nor to ad here to any gen er ally ac cepted ac -count ing prin ci ples.

Ob vi ously, this does not im ply audi tors are pow er less in en forc ing their find ings where cor rec tions are found nec es sary. The vari ous codes pro vide that audi tors may em ploy an at tor ney to as sist in set tling dis agree ments.Fur ther more, the audi tors have the power to sur charge in di vid ual of fi cers of the mu nici pal ity for any bal ancesfound due. Audi tors also have a power of sub poena to com pel the at ten dance of wit nesses and the pro duc tionof nec es sary evi dence.

These pow ers, prop erly used, con sti tute an ef fec tive of fice for in sur ing the fi nan cial af fairs of a mu nici pal ityare car ried out in a le gal man ner. The pow ers avail able be come less clear, how ever, with re gard to mak ingman age ment rec om men da tions to im prove an oth er wise le giti mate method of op era tion.

We sug gest that the elected audi tor take an ad vi sory role in the im prove ment of mu nici pal fi nan cial pro ce -dures as deemed ap pro pri ate. The elected audi tors should, how ever, be rea sona bly cer tain that their po si tion isvalid since they can at times be per son ally re spon si ble for the re sults of their work and rec om men da tions. Anyrec om men da tions for op er at ing im prove ments should there fore be prop erly de vel oped and checked with knowl -edge able mu nici pal per son nel prior to mak ing them pub lic.

Rec om men da tions and re lated find ings should in clude:

1. An ex pla na tion of the prob lem that ex ists.

2. The rea son that the ex ist ing con di tion has a nega tive ef fect on the op era tion of the mu nici pal ity.

3. The rea son for the con di tion ex ist ing. This may in clude ex pla na tions pro vided by the mu nici pal ity.

4. A dis cus sion of the so lu tions - good busi ness prac tice, laws, regu la tions.

5. Rec om men da tion for op er at ing im prove ments. It is sug gested that any find ings and rec om men da tionsbe sub mit ted in a sepa rate man age ment let ter ac com pa ny ing the An nual Audit and Fi nan cial Re port.This let ter should be ad dressed to the same par ties as the re port, should in di cate its pur pose, andshould ref er ence the An nual Audit and Fi nan cial Re port.

12. Single Audit Act

On July 5, 1996, the fed eral gov ern ment passed the Sin gle Audit Act Amend ments of 1996. The pur pose ofthe Sin gle Audit is to de ter mine and re port whether:

1. The gov ern ment’s en tity wide fi nan cial state ments fairly pres ent its fi nan cial po si tion and re sults ofop era tions in ac cor dance with gen er ally ac cepted ac count ing prin ci ples (GAAP), in clud ing in ter nalcon trols over fi nan cial re port ing and com pli ance with laws and regu la tions that may have a ma te rialef fect on those fi nan cial state ments.

2. The gov ern ment has es tab lished in ter nal con trol sys tems to pro vide rea son able as sur ance that each ma jor

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fed eral award pro gram is man aged in com pli ance with ap pli ca ble laws and regu la tions.

3. The gov ern ment has com plied with the laws and regu la tions that may have a ma te rial ef fect on eachma jor fed eral award pro gram.

Ap pli ca bil ity

Every state and lo cal gov ern ment en tity that ex pends $300,000 or more in fed eral awards in any fis cal yearmust have a sin gle audit or, when per mit ted, a program- specific audit. Gov ern ments which ex pend less than$300,000 in fed eral awards in any fis cal year are ex empt from the sin gle audit, as well as other fed eral audit re -quire ments for that year. These ex empt gov ern men tal en ti ties, how ever are still re quired to main tain rec ordscon cern ing their fed eral awards and to per mit fed eral agen cies, pass- through gran tors, and the Comp trol lerGen eral ac cess to those rec ords.

Quali fied Audi tors

Fed eral Of fice of Man age ment and Budget Cir cu lar A- 133 de fines audi tors quali fied to per form sin gle orprogram- specific audits to gen er ally in clude Cer ti fied Pub lic Ac count ants and other gov ern men tal audi torsmeet ing the in de pend ence and pro fes sional stan dards of the US Gen eral Ac count ing Of fice as is sued by theComp trol ler Gen eral of the United States in a pub li ca tion en ti tled GAO Gov ern ment Audit ing Stan dards (com -monly known as “the Yel low Book”).

The elected audi tor will gen er ally not par tici pate in a Sin gle Audit. But, since the Sin gle Audit in cludes thetra di tional audit of a gov ern men tal en tity, the sin gle audit could be fea si bly per formed by an in de pend ent auditor gani za tion work ing in con junc tion with and pos si bly in clud ing the ap pointed mu nici pal audi tor. In any event,the elected or ap pointed audi tor should be aware of situa tions where a Sin gle Audit should have been per -formed and should take nec es sary steps to de ter mine the out come of that ex ami na tion.

Ad di tional in for ma tion on the Sin gle Audit re quire ments and program- specific audits from a the Com mon -wealth’s per spec tive can be ob tained from:

Com mon wealth of Penn syl va nia, Of fice of the BudgetComp trol ler Op era tionsBu reau of AuditsBell Tower - 6th Floor303 Wal nut StreetHar ris burg, PA 17101- 1830(717) 783- 0114

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III. Audit Programs

1. Plan ning the Audit

Im por tance of Plan ning

To per form a rea sona bly com plete audit, the elected audi tors should be come fa mil iar with the or gani za tionof the mu nici pal ity to be audited, the of fi cials and em ploy ees who keep the rec ords, and the ac count ing sys temin use. Then a plan of ac tion should be worked out so that the audit may pro ceed ef fi ciently. The fol low ing sug -ges tions may help.

Of fi cials Who Keep the Re cords

Audi tors must know both elected and ap pointed of fi cers and em ploy ees in volved with mu nici pal fi nance.Some of the elected and ap pointed of fi cials of bor oughs and town ships who may have ac counts or rec ords to be audited are:

I. Elected Of fi cials

Bor oughs Townships- 1st Class Townships- 2nd Class

Coun cil Mem bers Com mis sion ers Su per vi sors

Tax Col lec tors Treas urer Tax Col lec tors

Dis trict Jus tices Dis trict Jus tices Dis trict Jus tices

II. Se lected Ap pointed Of fi cials

Bor oughs Townships- 1st Class Townships- 2nd- Class

Sec re tary Sec re tary Secretary- Treasurer

So lici tor So lici tor So lici tor

Treas urer Appt. Tax Col lec tor Appt. Tax Col lec tor

Appt. Tax Col lec tor Po lice Po lice

Po lice Man ager* Man ager*

Man ager* Road mas ter(s)

(dis trict) or

Su per in ten dent

(en tire town ship)

*(if the of fice is cre ated by coun cil, com mis sion ers or su per vi sors) The audi tors will be pri mar ily con cerned with thework of the sec re tary, treas urer, tax col lec tor and dis trict jus tices. Since ad min is tra tive prac tices vary con sid era bly frommu nici pal ity to mu nici pal ity, the audi tors must de ter mine which of fi cers and em ploy ees have rec ords to be audited.

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Funds in Use

The audi tors must de ter mine what funds are in use by a par ticu lar bor ough or town ship. Since bor oughs andtown ships vary in size and com plex ity of pro grams, there are dif fer ences in the funds used. (See page two). To de ter mine the number and na ture of funds to be audited, the audi tors should check with ap pro pri ate mu nici palof fi cials or em ploy ees, in spect prior audit re ports, in clud ing prior An nual Audit and Fi nan cial Re ports, and ap -proved budg ets for the pe riod un der ex ami na tion.

Re cords To Be Made Avail able to Audi tors

While vari ous mu nici pali ties may use a va ri ety of rec ords, meth ods of book keep ing, and ac count ing meth -ods. The fol low ing rec ords are needed for any ac count ing sys tem and should be made avail able to the audi torsfor each fund for the fis cal year un der audit.

1. The fi nan cial state ment(s) of the mu nici pal ity, if avail able

2. The gen eral and sub sidi ary ledg ers

3. All rec ords per tain ing to cash re ceipts, such as, docu men ta tion and jour nals.

4. All rec ords per tain ing to cash dis burse ments.

5. Any sepa rate rec ords main tained by the treas urer.

6. All bank state ments, can celled checks, voided checks, du pli cate de posit tick ets, pass books and bankcharge slips; a list of de posi to ries, their ad dresses, ac count num bers, ac count names and author izedsig na tures.

7. A sched ule of in vest ment trans ac tions for the year.

8. All vouch ers to gether with in voices or bills.

9. The budget for the year un der audit as of fi cially adopted and sub mit ted to the De part ment of Com -mu nity and Eco nomic De vel op ment, to gether with the munici pali ty’s work ing budget and all amend -ments and changes.

10. Pe ri odic fi nan cial re ports pre pared by the treas urer and sub mit ted to meet ings of coun cil, com mis -sion ers or su per vi sors.

11. Or di nances and reso lu tions and of fi cial en tries in the min utes author iz ing trans fer be tween funds,amend ments to the budget and simi lar ac tions.

12. An or gani za tion chart in clud ing names of per sons in each po si tion.

13. A copy of the munici pali ty’s chart of ac counts, ac count ing poli cies, and docu ment flow chart.

14. All can celled bonds and in ter est cou pons or, al ter na tively, cre ma tion or other de struc tion cer tifi cates.

15. A sched ule of all in ter fund loans or ad vances.

16. A sum mary of all liti ga tion in volv ing the lo cal gov ern ment.

17. Min utes of coun cil, com mis sion ers’ or su per vi sors’ meet ings for the year un der audit.

18. In sur ance poli cies cov er ing fire, other casu al ties, of fi cial surety bonds.

19. Re cords show ing in ven to ries of real prop erty, plant and equip ment.

20. Cop ies of ap praisal re ports by pro fes sional ap prais ers, if any.

21. Re cords of all out stand ing in debt ed ness such as bank loans and bonded debt.

22. Cop ies of leases or con tracts, if any.

23. Cop ies of docu ments in sup port of ad ver tis ing and bid ding pro ce dures.

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Tax Col lec tors’ Re ports That Should be Avail able:

1. Origi nal as sessed valua tions as cer ti fied by the county show ing sepa rately the amount of as sessedvalua tions for real es tate tax, oc cu pa tion tax and the number of tax ables for per cap ita tax.

2. Pe ri odic re ports sub mit ted by the tax col lec tor to the coun cil, com mis sion ers and su per vi sors, show -ing for cur rent pe riod:

a. Names of tax pay ers mak ing pay ment

b. Amount of taxes col lected

c. Dis counts granted

d. Pen al ties ap plied

3. Pe ri odic re ports per tain ing to col lec tions on prior year du pli cates.

4. Sepa rate re ports per tain ing to any Act 511 taxes for which the elected col lec tor is re spon si ble, or forwhich any ap pointed col lec tor is re spon si ble, such as the fol low ing:

a. Real Prop erty Trans fer Tax

b. Amuse ment Tax

c. Per Cap ita Tax

d. Earned In come (Wage) Tax

e. Mer can tile/Busi ness Privi lege Tax

f. Me chani cal De vices Tax

g. Other Act 511 Taxes

5. Sepa rate re ports of any spe cially ap pointed col lec tors of any de lin quent or Act 511 taxes.

Tax Col lec tion Re ports from County Tax Claim Bu reau

Pe ri odic re ports from the county show ing de lin quent real es tate taxes col lected plus in ter est and pen al tiesand mi nus com mis sions should ex ist. Each de lin quent year should be shown sepa rately.

Gen eral Audit Pro ce dures

The audi tors should fol low these gen eral pro ce dures. Fol low ing chap ters in clude more de tailed audit ing pro -ce dures.

1. Un der stand the pri mary ob jec tives of the audit, which is to de ter mine whether the An nual Audit andFi nan cial Re port, Com mon wealth of Penn syl va nia De part ment of Com mu nity and Eco nomic De vel -op ment Form DCED- CLGS- 30(1-98), is fairly stated, and to de ter mine whether the mu nici pal ity has com plied with ap pli ca ble laws and regu la tions.

2. Un der stand the ba sic op era tions of the mu nici pal ity such as, serv ices pro vided, number and type ofem ploy ees, the ac count ing sys tem, the number and type of funds, and the form of gov ern ment, andmake an as sess ment of the man age ment’s ca pa bili ties.

3. Con sider the need for and ade quacy of in ter nal con trols and the pos si ble ef fect of them on the con -duct of the audit.

4. Re view prior years’ fi nan cial state ments, re port and work ing pa pers; re view min utes, ma jor con -tracts; dis cuss audit pro ce dures and their tim ing with ap pro pri ate mu nici pal per son nel.

5. Per form a de tailed re view, test, and evalua tion of in ter nal con trol if the audi tor in tends to rely uponin ter nal con trol.

6. Per form sub stan tive tests of ac count ing rec ords. The audi tor may per form sub stan tive test ing one

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fund at a time, or may audit by ac count type (for in stance, cash ac counts for all funds or ac counts re -ceiv able for all funds).

7. If the gov ern men tal unit has not pre pared the An nual Audit and Fi nan cial Re port, com plete it basedupon the in for ma tion ob tained in the ex ami na tion.

The fol low ing chap ters de scribe a rea sona bly de tailed audit pro gram for each fund com monly in use by bor -oughs and town ships. The depth to which audi tors ac tu ally check rec ords may vary de pend ing upon the amount of rec ords in volved and the com plex ity of the fi nan cial sys tem.

2. Evalua tion of Ex ist ing In ter nal Con trol Pro ce dures

Al though elected Penn syl va nia mu nici pal audi tors have no le gal re spon si bil ity for guar an tee ing the ade quacy of in ter nal con trol pro ce dures or for rec om mend ing im prove ments where ade quate con trols do not ex ist, a dis -cus sion of the evalua tion of in ter nal con trol pro ce dures is pre sented for the bene fit of those who wish to domore than merely ex am ine and set tle the ac counts of the mu nici pal ity.

What Is In ter nal Con trol?

Gen er ally, in ter nal con trols in volve the way the peo ple and their work are or gan ized, and the meth ods andpro ce dures they use to safe guard as sets and other re sources and to en sure that those as sets and re sources areused as ef fec tively as pos si ble as di rected by the gov ern ing body and man age ment.

Sev eral broad ob jec tives for in ter nal con trol are in cluded in the defi ni tion, in clud ing the ac tivi ties nec es saryto as sure that:

– As sets and re sources of the mu nici pal ity are used in ac cor dance with authori za tions which may stem from ap pli ca ble laws, regu la tions, or ac tions of the gov ern ing body;

– Trans ac tions are exe cuted In ac cor dance with authori za tions by the gov ern ing body and with man age -ment di rec tives, and are exe cuted as ef fi ciently and ef fec tively as pos si ble;

– All trans ac tions are prop erly re corded to per mit prepa ra tion of re li able re ports, and to main tain account abil ity over as sets;

– Timely and ac cu rate re ports of the munici pali ty’s ac tivi ties are pro vided to its gov ern ing body, tax payers and other agen cies which re quire them.

The pur pose of the in de pend ent audi tor’s evalua tion of in ter nal ac count ing con trols is to de ter mine their re li -abil ity and ex tent to which audit ing pro ce dures are to be re stricted. The in de pend ent audi tor is not ob li gated byGAAS to re view, test, and evalu ate in ter nal ac count ing con trols if the audi tor does not in tend to rely uponthem. Note that the stan dards for audit of the U.S. Gen eral Ac count ing Of fice do re quire that in ter nal con trol be ex am ined, but that the ex ami na tions dis cussed here need not be made in ac cor dance with ei ther U.S. GAO, norby elected audi tors in ac cor dance with GAAS.

Char ac ter is tics of a Sat is fac tory Sys tem of In ter nal Con trol

– Seg re ga tion of Func tions: The con trol sys tem should mini mize in com pati ble func tions. In com pati blefunc tions are those that place any per son in a po si tion to both per pe trate and con ceal er rors or ir regu -lari ties in the nor mal course of his du ties.

– Per son nel: Should be ade quately trained and su per vised.

– Exe cu tion of Trans ac tions: the sys tem should pro vide rea son able as sur ance that trans ac tions are exe -

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cuted as author ized; this re quires in de pend ent evi dence that trans ac tions are exe cuted as author ized,and that authori za tions are is sued by per sons act ing within the scope of their author ity.

– Re cord ing of Trans ac tions: re quires that trans ac tions be re corded at the amounts and in the ac count ing pe ri ods in which they were exe cuted and clas si fied in the ap pro pri ate ac counts.

– Ac cess to As sets: should be lim ited to author ized per son nel.

– Con fir ma tion of Re corded Bal ances: Pe ri odi cally re corded bal ances of as sets should be con firmed bysome one other than the per son re spon si ble for re cord ing and re port ing of the bal ances.

– Man age ment Re spon si bil ity: Man age ment should be aware that the es tab lish ment of a sys tem of in -ter nal con trol is an im por tant re spon si bil ity of man age ment.

– Rea son able As sur ance: In ter nal ac count ing con trol pro vides rea son able, but not ab so lute, as sur -ance that its ob jec tives will be ac com plished. In her ent in the con cept is that the cost of in ter nal con -trol will not ex ceed the bene fits de rived.

Fol low ing are com mon and im por tant in ter nal con trol tech niques in clud ing ap pli ca tion of con trol pro ce dures to cash re ceipts, cash dis burse ments, se cu ri ties, ma te ri als and sup plies, plant and equip ment. An in ter nal con -trol ques tion naire is in cluded in Ap pen dix 2.

In ter nal Con trol of Cash

Cus tody

1. Bank ac counts should be prop erly author ized.

2. Sepa rate bank ac counts should be main tained for each fund or, if not, there should be ade quate fundcon trol over pooled cash.

3. There should be fi del ity in sur ance cov er ing those in volved with cash.

4. Gen eral ledger con trol should ex ist over all bank ac counts.

5. Re spon si bil ity for pre par ing and ap prov ing bank ac count rec on cilia tions should be seg re gated fromother cash re ceipt and dis burse ment func tions.

Cash Re ceipts

1. Re spon si bili ties for the col lec tion and de posit prepa ra tion func tions should be sepa rated from the re -cord ing of cash re ceipts.

2. Re spon si bili ties for cash re ceipts func tions should be sepa rated from cash dis burse ments.

3. Re ceipts should be de pos ited on a timely ba sis (pref era bly daily).

4. Re ceipts should be de pos ited in tact. Re ceipts should not be used to make change or for petty cash.

5. In com ing mail should be opened by some one, other than the book keeper, who lists checks re ceived.

6. Re stric tive en dorse ments should be placed on each in com ing check upon re ceipt.

7. Re ceipts in per son should be con trolled by cash reg is ter, pre num bered re ceipts or simi lar means.

8. Daily re ported re ceipts should be com pared to bank state ments on a test ba sis to ver ify time li ness ofde pos its.

Cash Dis burse ments

1. To the ex tent pos si ble, the re spon si bili ties for dis burse ment prepa ra tion, ap proval, re cord ing and pur -chas ing func tions should be sepa rated.

2. Pre num bered checks should be used.

3. Un used checks should be ade quately con trolled.

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4. Check sign ing ma chines and sig na ture plates should be con trolled with lim its on amounts which canbe paid us ing fac sim ile sig na tures, two sig na tures re quired on checks over cer tain amount, sig na tureplates un der cus tody of signer when not in use.

5. Voided and spoiled checks should be re tained for ex ami na tion.

6. Checks should not be made to cash or bearer.

7. In voices and sup port ing docu ments should be fur nished to check sign ers prior to sign ing. Theyshould also be can celled to pre vent re use.

Petty Cash Dis burse ments

1. Use the so- called im prest sys tem. The fund is set up for a defi nite fixed amount, for ex am ple,$50.00. By draw ing checks pe ri odi cally on the regu lar bank ac count in the amount of funds ex -pended, the fund re mains at $50 un less it is de sired to in crease or de crease the size of the fund.

2. Place the fund in the hands of a sin gle cus to dian who is not in volved in han dling cash re ceipts or inkeep ing the books of ac count.

3. Ex pen di tures from the fund must be sup ported by vouch ers or re ceipts writ ten in ink. Each vouchershould be la beled with the ex pen di ture ac count for which the ex pen di ture was made. For ex am ple, apost age re ceipt might be la beled “400.325 Gen eral gov’t post age.”

4. The vouch ers should be ap proved by a re spon si ble em ploye.

5. When the fund needs to be re im bursed, a check is drawn to the or der of the cus to dian for an amountto bring the fund up to the es tab lished amount of $50.00. For ex am ple, sup pose the vouch ers cov er -ing ex pen di tures made from the fund to tal $42.85: The check is drawn for $42.85 which, added to$7.15 re main ing un spent, will bring the fund up to $50.00. The check is charged to the ex pen di tureac counts shown on the vouch ers, in the re spec tive amounts.

6. The vouch ers sup port ing the re im burse ment check should be can celled in or der to pre vent their use a sec ond time.

7. It is con sid ered a bad prac tice to cash a check from this fund for the ac com mo da tion of an em ployeor of fi cial. It is also un de sir able to make ad vances to an em ploye or of fi cial on his I.O.U.

8. Sur prise counts by man age ment of the petty cash, and audits of petty cash vouch ers are rec om -mended.

In ter nal Con trol of Se cu ri ties

1. Good in ter nal ac count ing con trols over in vest ments in clude to the ex tent pos si ble the seg re ga tion of:

a. Pur chas ing and evalu at ing se cu ri ties from the de tailed ac count ing;

b. Cus to dial du ties over se cu rity docu ments from ac count ing de tail;

c. Moni tor ing mar ket val ues and per form ance from in vest ment ac qui si tion de ci sions.

2. The lo cal gov ern ment unit should have poli cies and pro ce dures de signed to en sure in vest ments arethe type re quired by law; the in vest ment port fo lio is checked pe ri odi cally by per sons not in volved inin vest ment port fo lio man age ment ac tivi ties; and there are for mally es tab lished lev els of ap proval re -quired for pur chas ing or sell ing in vest ments.

3. Lo cal gov ern ment units fre quently own U.S. gov ern ment or state gov ern ment bonds held as part of asink ing fund, as a tem po rary in vest ment of con struc tion funds, or as col lat eral se cu rity for bank de -pos its. These se cu ri ties are usu ally ne go tia ble and should be kept in a safety de posit box or held forsafe keep ing by a cor po rate trus tee.

4. If the se cu ri ties are kept in a safety de posit box, bor ough coun cil, the board of com mis sion ers orboard of su per vi sors should re quire at least two per sons be pres ent when the box is opened. The gov -ern ing body should ap point two or more per sons who have author ity to open the box for clip ping in -ter est cou pons and re mov ing or add ing to the se cu ri ties.

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5. A sepa rate rec ord should be kept show ing a de scrip tion of the se cu rity, the de nomi na tion, the in ter est rate and the se rial number. For ex am ple, U.S. Treas ury Bond, 5 1/2%, 1992/98, $1,000 face value,No. 171533.

6. Pur chases and sales should be author ized by the gov ern ing body.

In ter nal Con trol of Ma te ri als and Sup plies

If a bor ough or town ship keeps a sub stan tial sup ply of ma te ri als on hand to be used in con nec tion with thepo lice, fire, street, health and sani ta tion or other de part ments, the fol low ing pro ce dures are use ful in ex er cis ingcon trol over such ma te ri als:

1. The ma te ri als should be kept in a suit able build ing, such as a ware house or ga rage, with a store -keeper in charge.

2. All pur chases should be de liv ered to the store keeper who is re quired to keep per pet ual in ven torycards show ing quan tity, unit price and to tal cost of each item re ceived.

3. All with draw als for use on bor ough or town ship proj ects should be author ized by writ ten or ders orreq ui si tions signed by some re spon si ble of fi cial des ig nated to author ize such is sues from stock. Thereq ui si tions should show quan tity, unit price and to tal cost which must be posted on the per pet ual in -ven tory cards.

4. The ma te ri als in ven tory should be in sured for an ade quate amount.

5. Pe ri odic physi cal in ven to ries should be taken and com pared with the per pet ual in ven tory cards. Ifdif fer ences arise, the per pet ual in ven tory cards must be ad justed.

In ter nal Con trol of Prop erty, Plant and Equip ment

A bor ough or town ship of ten owns prop erty and equip ment such as of fice equip ment, po lice cars, ra dio sys -tem, fire fight ing equip ment and trucks, road roll ers, scrap ers, bull doz ers, street clean ing trucks and snow plows. To con trol such prop erty the mu nici pal ity should:

1. Main tain a sys tem of plant ledger sheets or other rec ords for each item or class of prop erty to in clude (a) full de scrip tion of item show ing manu fac tur er’s se rial number, (b) date ac quired, (c) cost and (d)where kept.

2. Main tain a rec ord of all in sur ance poli cies cov er ing prop er ties and equip ment, and re view it pe ri odi -cally to as sure ade quate in sur ance cov er age.

3. Re quire pe ri odic ap prais als by a dis in ter ested ap praisal com pany to de ter mine if there is ade quate in -sur ance cov er age.

4. Cor rect plant ledger sheets when ever as sets are dis posed of by trade- in, sold as used equip ment, orsold as junk or scrap.

5. En sure pro ceeds from the sale of scrap or junk are re corded as cash re ceipts.

6. Es tab lish a sys tem to safe guard small tools and re pair parts and ma te ri als.

Other As pects of In ter nal Con trol

Other as pects of in ter nal con trol are con tained in the audit pro grams for vari ous types of reve nues, ex pen di -tures, pay rolls, bond trans ac tions, bank loans and gen eral pro ce dures. May of the de sir able ele ments of an in -ter nal con trol sys tem will be ab sent in a very small of fice. This is of ten not a weak ness that can be cor rected,but one that the audi tor should be aware of dur ing the con duct of the audit.

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3. Gen eral Fund: Reve nues, Re ceiv ables, Re ceipts, As sets

These chap ters on the gen eral fund audit pro gram will es sen tially work for every fund type with cer tainmodi fi ca tions. Sub se quent chap ters will de scribe those fund types and any ad di tional audit ob jec tives and pro -ce dures spe cific to them.

Pur pose of Gen eral Fund

The Gen eral Fund is es tab lished to cover the fol low ing types of trans ac tions:

1. All gen eral sources of reve nue ex cept sources ear marked by law or con trac tual agree ment for otherdes ig nated funds.

2. Non reve nue re ceipts such as tem po rary loans, re funds, sale of in vest ments, trans fers from otherfunds and other re ceipts which do not in crease the net worth of the mu nici pal ity.

3. Gov ern men tal ex pen di tures in curred to carry on such gov ern men tal func tions as gen eral ad mini stra -tion, pro tec tion to per sons and prop erty, health and sani ta tion, and high ways or streets.

4. Non gov ern men tal dis burse ments such as re pay ment of in debt ed ness, re funds, pur chase of in vest -ments, or trans fers to other funds and other ex pen di tures which do not de crease the net worth of themu nici pal ity.

The Gen eral Fund is proba bly the fund most used by bor oughs and town ships, and will re flect the ma jor por -tion of re corded ac tivi ties and busi ness trans ac tions. The audit of this fund will re quire a large share of theaudi tor’s time and ef fort. The audit pro gram for the Gen eral Fund will also pro vide a gen eral pat tern whichmay be adapted to the audit of other funds.

Reve nues, Re ceiv ables, Re ceipts De scribed

Fol low ing are sources of reve nues in bor oughs and town ships:

1. Taxes- Current Year

a. Real es tate

b. Oc cu pa tion

c. Per cap ita

d. Re alty trans fer

e. Amuse ment

f. Earned in come

g. Mer can tile/busi ness privi lege

h. Me chani cal de vices

i. Mis cel la ne ous Act 511 Taxes

2. Prior Year De lin quent Taxes Re ceived in Cur rent Year

a. Real es tate taxes (tax collector- Jan. 1 to April or to ear lier date of set tle ment)

b. Real es tate taxes (County Tax Claim Bu reau)

c. Oc cu pa tion (tax collector- delinquent taxes)

d. Per cap ita (tax collector- delinquent taxes)

e. Other de lin quent taxes

3. Li censes and Per mits

a. Bev er age

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b. Build ing

c. Street

d. Busi ness and mer can tile

e. Health and plumb ing

f. Other

4. Fines, For feits and Costs

a. Mo tor ve hi cle code vio la tions

b. Vio la tions of or di nances or stat utes

5. In ter est and Rents

a. In ter est on bank bal ances

b. Rent of build ings, prop erty and equip ment

6. In ter gov ern men tal Reve nues

a. From hous ing authori ties in lieu of taxes

b. From fed eral and state gov ern ments

c. From county as aid for high ways

7. Charges for Serv ices (De part men tal Earn ings)

a. Po lice serv ices

b. Park ing me ters

c. In spec tion serv ices

d. Sewer rents

e. Sewer in stal la tions

f. Street re pairs and open ings

g. Rec rea tional fa cili ties

h. Spe cial serv ices (mar ket, ceme tery, air port)

i. Other de part ments or serv ices

8. Spe cial as sess ments and liens (only where proj ect is fi nanced through the Gen eral Fund)

9. Mis cel la ne ous Reve nue (items not cov ered in above clas si fi ca tion are mis cel la ne ous reve nues).

Not every bor ough or town ship will have all of the reve nue re ceipts. How ever, each bor ough or town shipwill have a large number of the types of reve nue so clas si fied and the audi tors will need to make a care ful re -view of such items.

Taxes

Col lec tions of real es tate taxes, per cap ita taxes and oc cu pa tion taxes usu ally are made by the elected tax col lec torand turned over to the bor ough or sec ond class town ship. In first class town ships the elected treas urer serves as thecol lec tor. A re port is made by the col lec tor to the treas urer show ing in run ning ac count form the status of the du pli -cate af ter each pay ment. The fol low ing in for ma tion is shown for each tax han dled by the tax col lec tor:

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Amount

Date Un col lected bal ance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $Ad di tions to du pli cate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $Pen al ties added . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $To tal to be ac counted for . . . . . . . . . . . . . . . . . . . . . . . . . . . $

De duc tionsDis counts al lowed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $Ex on era tions claimed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $Re turns to county . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $Cash col lec tions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $To tal de duc tions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $Un col lected bal ance (re ceiv able) on (date) . . . . . . $

Sec tion 10 of the Lo cal Tax Col lec tion Law (1945 P.L. 1050) pro vides that tax pay ers who pay the full amount oftheir tax within two months af ter the date of the tax no tice are en ti tled to a dis count of two per cent of the amount ofthe tax. The law also pro vides that all tax pay ers who fail to pay their tax within four months af ter the date of the taxno tice are sub ject to a pen alty of up to 10 per cent. Treat ment of dis counts and pen al ties by the tax col lec tor should becare fully re viewed by the audi tors.

The coun cil, board of com mis sion ers or board of su per vi sors has author ity to ex on er ate a tax col lec tor from col -lect ing such taxes as are un col lecti ble be cause of mis takes, in di gent per sons, deaths or re mov als. The tax col lec tormay ini ti ate the claim for ex on era tions by sub mit ting to the coun cil, board of com mis sion ers or board of su per vi sors a list show ing name, amount of tax and rea son why the tax can not be col lected. The audi tors must ver ify ap proval ofall ex on era tions be fore al low ing the tax col lec tor credit. The tax ing body has no author ity to ini ti ate ex on era tions.

The real es tate trans fer tax ap plies when real prop erty is sold or changes hands. It is col lected by the county Re -corder of Deeds at the time the deed trans fer is re corded. The re corder re mits the mon eys col lected to the bor ough ortown ship treas urer to gether with a list of prop er ties sold. The law author izes the county to with hold two per cent ofthe amount to cover ex penses. The county re ceives no other com pen sa tion for col lect ing the tax.

Other spe cial taxes may be col lected by the regu lar elected tax col lec tor or by a spe cial col lec tor ap pointed for thepur pose. These taxes in clude the tax on ad mis sions to amuse ments, wage or earned in come tax, mer can tile and busi -ness privi lege tax, and me chani cal de vices tax. All de pend upon the vol un tary fil ing of re turns and pay ment of taxwith the re turn. The en force ment de pends upon com pil ing lists of per sons and busi ness or pro fes sional firms whoshould file a re turn and then mak ing sure re turns are filed by all on whom the tax is lev ied, even though no tax is duein some cases.

De lin quent or prior year real es tate taxes are col lected by the regu lar elected col lec tor un til April 30 of the year fol -low ing the year of levy un less set tle ment is made in an ear lier month. Ac cord ingly a sum mary might be set up as fol -lows:

Deli quent Real Es tate Taxes

Bal ance, Janu ary 1,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $Add pen al ties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $To tal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

De duc tions:Ex on era tions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $Re turns to county . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $Col lec tions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $To tal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Bal ance, De cem ber 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

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If a bal ance oc curs at the close of the year fol low ing the year of levy, there is proba bly an er ror or the col lec -tor has not turned over all the money col lected. The pro ce dure for de lin quent per cap ita and oc cu pa tion taxes is es sen tially the same, ex cept they are not turned over to the county for col lec tion.

When the tax col lec tor re turns the list of de lin quent real es tate taxes to the county tax claim bu reau, the bu -reau be comes re spon si ble for col lec tion. Re turns of real es tate taxes are due no later than April 30 of the yearfol low ing the year of levy. From time to time, the tax claim bu reau will send the mu nici pal ity a check alongwith a list of per sons pay ing taxes. The amount paid rep re sents the origi nal face value of the real es tate taxplus pen alty and in ter est. The mu nici pal ity should main tain a file of re turned taxes and check off the names ofpay ees as the money is re ceived from the county.

Li censes and Per mits

These reve nues in clude:

1. Bev er age li censes

2. Build ing per mits

3. Street per mits

4. Busi ness and mer can tile per mits or li censes

5. Plumb ing per mits

6. Other per mits

The State Liq uor Con trol Board pays mu nici pali ties a share of the liq uor and beer li cense fees which havebeen col lected from li cen sees in the mu nici pal ity. Pay ments are made by the state from the Liq uor Li censeFund on the first day of Feb ru ary and August of each year in ac cor dance with the pro vi sions of the Liq uor Code (1951 P.L. 90, Sec tion 801). Of course, if a bor ough or town ship has voted to be a “dry” com mu nity, no money from this source will be re ceived.

Items 2 to 6 are author ized by lo cal or di nances. There should be car bon cop ies or stubs of the re ceipts given to the per sons tak ing out such per mits, which the audi tor should rec on cile with the rec ord of cash re ceipts. Theaudi tors must dis tin guish be tween a busi ness or mer can tile per mit or li cense and an Act 511 busi ness privi legeor mer can tile tax. Act 511 busi ness taxes may eas ily be con fused with per mit and li cense fees. The dis tinc tionwill be found in the author iz ing or di nance or reso lu tion.

Fines and For feits

Fines may be ei ther: (1) mo tor ve hi cle code vio la tions or (2) vio la tions of or di nances or stat utes. Thesefines must be checked with monthly re ports of fines turned over by the dis trict jus tices. The audi tors must alsoex am ine the dock ets of these of fi cials. Car bon cop ies of pre num bered re ceipts is sued to the of fi cials for finesturned over to the treas urer should be avail able for in spec tion by the audi tors.

Un der the pro vi sions of the Ve hi cle Code, fines and pen al ties re sult ing from State Po lice en force ment of theCode are paid by the dis trict mag is trate to the De part ment of Reve nue and cred ited to the Mo tor Li cense Fund.One half of this reve nue is then dis trib uted to mu nici pali ties ac cord ing to the same for mula used to dis trib uteliq uid fu els tax pro ceeds to mu nici pali ties. This for mula is based on the mu nici pali ties’ popu la tion and roadmile age. The dis tri bu tion of funds has no re la tion ship to the State Po lice ar rests which gen er ated the funds.These funds can not be audited as part of the lo cal audi tors’ ex ami na tion of dis trict mag is trates ac counts. Thefunds are, how ever, audited by the De part ment of Reve nue.

One half of all fines and pen al ties re sult ing from lo cal po lice en force ment of the Ve hi cle Code and all finesand pen al ties re sult ing from lo cal po lice en force ment of park ing are paid by the dis trict mag is trate to the mu -nici pal ity un der which the lo cal po lice are or gan ized. These funds can be in cluded as part of the lo cal audit.

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In ter est and Rent

In ter est on bank bal ances can be veri fied from (a) the cred its al lowed by the bank and shown on sav ings ac -count pass books or bank state ments, or (b) cash or check re ceived from the bank on a cer tifi cate of de posit.

The audi tors should keep in mind the Oc to ber 11, 1974, opin ion by the At tor ney Gen eral of Penn syl va niathat funds may be com bined for in vest ment pur poses so long as they meet cer tain pro ce dural re quire ments. The most im por tant of these is that a clear audit trail must be main tained to pre vent money from any par ticu lar ac -count or fund from los ing its iden tity per haps re sult ing in it not ac tu ally be ing spent for the in tended pur poses.

In ter est earn ings should be veri fied by com put ing the share of each fund of the to tal in vest ment and check ing to in sure that the same share of the to tal in ter est earn ing was re turned to the proper fund. The audit pro gram for in ter est in come is in cluded with the in vest ment audit pro gram.

If rent is re ceived for use of space in a bor ough or town ship build ing, the rental agree ment un der which suchspace is rented should be ex am ined by the audi tors. For ex am ple, the wa ter author ity may have of fices in themu nici pal build ing and pay the bor ough or town ship rent for the use of such space.

In ter gov ern men tal Reve nue

The audi tors should ex am ine each of these items care fully to make sure the amount is prop erly re corded andde pos ited in the bank. It is also im por tant to make sure that items in the Gen eral Fund be long there, and not ina spe cial fund. For ex am ple, un der the High way Aid Fund Act, bor oughs and town ships re ceive grants fromthe Mo tor Li cense Fund which must be de pos ited in a spe cial fund known as the “High way Aid Fund.”

Note that un der gen er ally ac cepted ac count ing prin ci ples (GAAP) for gov ern men tal units, grants are to be re -corded as reve nues when they have been earned, that is, ex pen di tures have been made for eli gi ble proj ect pur -poses. Prior to that, grants re ceived should be shown as li abili ties (ad vances) rather than reve nues. Simi larly, if the gov ern men tal unit were to ex pend funds on eli gi ble proj ect pur poses prior to re ceiv ing grants, then theproper en try would be to charge (debit) a re ceiv able and credit the ap pro pri ate grant reve nue ac count. Note also that it is not nec es sary to pre pare the An nual Audit and Fi nan cial Re port in ac cor dance with GAAP.

Charges for Serv ices (De part men tal Earn ings)

Un der this clas si fi ca tion are grouped re ceipts for vari ous serv ices and use of fa cili ties. In the fi nan cial re -ports used by bor oughs and town ships, the fol low ing earn ings are listed:

1. Po lice serv ices

2. Park ing me ters

3. In spec tion serv ices

4. Sewer rents

5. Sewer in stal la tions

6. Street re pairs and open ings

7. Rec rea tional fa cili ties

8. Wa ter charges

For most of these serv ices the audi tors should make sure (a) there is a proper bill ing pro ce dure and a follow- up to see the bills are paid, (b) re ceipts are is sued to all who make pay ments and (c) a du pli cate or stub of suchre ceipts is kept on file for trac ing into the cash re ceipts book and into the bank as de pos its.

Spe cial men tion needs to be made of park ing me ter re ceipts, which usu ally in volve a large amount of smallcoins. The audi tors should criti cally ex am ine how this cash is han dled from the time it is taken from the me ter

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un til it is re corded in the cash re ceipts book and de pos ited in the bank. Re fer also to Chap ter 2, Evalua tion ofEx ist ing In ter nal Con trol Pro ce dure.

Sewer Rents and In stal la tion Fees

The proper audit ing pro ce dure for sewer rents and sewer in stal la tion charges de pends upon which of the fol -low ing situa tions ex ists in the bor ough or town ship un der audit:

1. The op era tion and main te nance of the sani tary sewer sys tem may be fi nanced through the Gen eralFund. Un der these cir cum stances the sewer rents and in stal la tion charges are prop erly clas si fied asGen eral Fund re ceipts.

2. The op era tion and main te nance of the sani tary sewer sys tem may be fi nanced through a spe cial util -ity fund called the Sewer Fund. In this situa tion, the sewer rents and in stal la tion charges are clas si -fied as re ceipts of the Sewer Fund.

3. The op era tion and main te nance of the sani tary sewer sys tem may be fi nanced through a mu nici palauthor ity called The Bor ough or Town ship Sewer Author ity. Un der this ar range ment the sewerrents and in stal la tion charges will be re ceipts of the sewer author ity and need not be audited byelected audi tors.

4. There may be a sewer author ity, but the sewer sys tem could be leased back to the bor ough or town -ship. The mu nici pal ity then makes pe ri odic lease rental pay ments to the author ity which uses thisreve nue to make its debt serv ice pay ments. If the sewer rents are re ceived by the bor ough or town -ship treas urer, those re ceipts and cor re spond ing ex pen di tures must be audited by the bor ough ortown ship audi tors. This audit may be made in ad di tion to an audit made by the author ity audi tor.

Spe cial As sess ments

The term spe cial as sess ment is used where lo cal im prove ments such as pav ing, curb ing or sewer mains, arecon structed on a par ticu lar street by pe ti tion of the own ers liv ing on the street and the cost of im prove ment isas sessed against the abut ting prop erty own ers, usu ally on a front- foot ba sis.

Only spe cial as sess ments and liens col lected on proj ects fi nanced through the Gen eral Fund will be re portedun der the reve nue re ceipts of a bor ough or first class town ship in its Gen eral Fund ac count ing. The com mentsmade with re spect to re ceipt forms and bill ing, in con nec tion with de part men tal earn ings ap ply here as well.The ac count ing for spe cial as sess ments and spe cial as sess ment bonds, is usu ally han dled in a sepa rate Spe cialAs sess ment Fund which will be con sid ered in a later chap ter.

Non reve nue Re ceipts

The sources of non reve nue re ceipts of a bor ough or town ship are listed in the an nual fi nan cial re port as fol -lows:

1. Bor rowed Funds

a. Tem po rary loans

b. Sales of bonds

2. Other Non reve nue Re ceipts

a. Sale of prop erty, sup plies and equip ment

b. Re funds of ex pen di tures

c. Trans fers from other funds

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Much of the pro ce dure de scribed in this chap ter with re spect to the vari ous reve nue re ceipt items ap plies tothese non reve nue items, with the fol low ing ad di tional com ments.

Sale of Bonds

In struc tions in the fi nan cial re port in di cate only pro ceeds of the sale of bonds paid di rectly into the Gen eralFund should be re ported as non reve nue re ceipt of the Gen eral Fund. Bonds are gen er ally is sued for a spe cificpur pose and the pro ceeds usu ally go into a spe cial fund to carry out the spe cial pur pose.

Sale of Prop erty, Sup plies and Equip ment

Where real prop erty, sup plies or equip ment are sold, the audi tors should:

1. De ter mine the sale has been author ized by the bor ough coun cil, board of town ship com mis sion ers or board of su per vi sors;

2. Ex am ine agree ments of sale, in voices or other docu ments con cern ing the sale;

3. As cer tain the agreed price has ac tu ally been re ceived, re corded in the books and de pos ited in thebank.

Re funds

Re ceipts clas si fied as re funds in clude:

1. Re fund of money paid out where some er ror oc curred in the bill ing or some de fect was found inthe pur chased item;

2. Re fund of in sur ance pre mium be cause of can cel la tion of pol icy;

3. Re turn of money tem po rar ily ad vanced to some gov ern men tal agency such as an author ity.

These are gen er ally not con sid ered reve nues but rather re funds of ex pen di ture ex cept that re funds of prioryears ex pen di tures are placed un der Other Fi nanc ing Sources.

Trans fers from Other Funds

Trans fers of money from other funds should be author ized by mo tion or reso lu tion as re quired in the ap pro -pri ate mu nici pal code and may in clude trans fers for the fol low ing pur poses:

1. If the Gen eral Fund wishes to re ceive money from an other fund, a trans fer may be author ized. It isun wise, if not il le gal, to bor row from a Spe cial As sess ment Fund or Sink ing Fund, since thosefunds are defi nitely ear marked to pay in ter est and re tire bonded debt. To bor row from such fundswould de feat the pur pose of the fund and would vio late the trus tee fea tures un der which the fundsop er ate.

2. If there is a sur plus in a util ity or other fund which is needed by the Gen eral Fund, a trans fer may bemade.

In audit ing trans fers, the audi tors should look for sev eral items:

1. Are the funds, in fact, un en cum bered and oth er wise eli gi ble for trans fer?

2. Is the trans fer ap proved prior to the ac tual trans ac tion by ap pro pri ate sup port ing docu ments such asre corded mo tions (in bor oughs) or adopted reso lu tions (in town ships of the sec ond class)?

3. Is the trans fer con sis tent with the ap proved budget or with later changes to the budget?

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Audit Pro gram

Start ing the Audit

1. Ob tain an un der stand ing of the in ter nal con trol sys tem of the gov ern men tal unit.

2. Ob tain an un der stand ing of the gov ern men tal unit’s or gani za tion and key per son nel.

3. Re quest the so lici tor for the bor ough or town ship un der audit to set forth in a let ter any le gal or other situa tions which may af fect the fi nan cial con di tion of the bor ough or town ship. Ex am ples of suchmat ters are: pend ing liti ga tion and con tin gent li abil ity. This let ter is to be sup plied at the close offield work.

4. Se cure a let ter from bor ough coun cil, board of com mis sion ers or board of su per vi sors in di cat ing tothe best of their knowl edge and be lief the fi nan cial rec ords re flect all as sets, li abili ties, re ceipts andex pen di tures for the year un der audit. Such a let ter does not re lieve the audi tors of their re spon si bil -ity to make a care ful ex ami na tion, but it does place a bur den on the re spon si ble of fi cials to see all fi -nan cial mat ters are dis closed in the rec ords and re ports.

5. Read min utes of meet ings of the gov ern ing body.

6. Ex am ine the in sur ance poli cies of the gov ern men tal en tity.

7. Ob tain or pre pare a trial bal ance for each fund.

a. De ter mine whether the trial bal ance ac counts are clas si fied in a man ner which is com pati blewith the Re port Form.

b. If not com pati ble, the audi tor will need to re clas sify trans ac tions dur ing the course of theex ami na tion to in sert fig ures in the An nual Audit and Fi nan cial Re port (DCED- CLGS- 30).

Audit of Cash

The ob jec tives of the audit of cash are to de ter mine that:

1. Re ported cash bal ances are cor rect and be long to the gov ern men tal unit.

2. Cash bal ances pre sented on the bal ance sheet rep re sent all cash items.

3. Cash bal ances are prop erly clas si fied in the fi nan cial re ports.

Audit Pro ce dures

1. Con firm bank bal ances as of the bal ance sheet date for all banks used dur ing the year. A stan dardbank con fir ma tion form is found at the back of the book.

2. Ob tain cop ies of bank rec on cilia tions for the fi nan cial state ment date.

a. Com pare rec on ciled bal ances to the bal ance sheet(s) and ledg ers to ver ify agree ment

b. Com pare rec on ciled bal ances to bank con fir ma tions.

c. Test cleri cal ac cu racy of the rec on cilia tion.

d. Trace de pos its in tran sit and out stand ing checks to the sub se quent bank state ment.

3. Ob tain or pre pare a sched ule of cash in sav ings ac counts or cer tifi cates of de posit.

a. Trace bal ances to the gen eral ledger.

b. Con firm bal ances as of the bal ance sheet date (part of con fir ma tion pro cess).

c. Ex am ine pass books and cer tifi cates of de posit, com pare with con fir ma tions; be alert forun re corded trans ac tions oc cur ring on or be fore the bal ance sheet date, but not re corded in theac count ing rec ords.

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d. Re com pute in ter est earned and trace to re lated in come ac counts (Ac count #341).

4. Pre pare a sched ule of trans fers be tween bank ac counts; in clude the fol low ing in for ma tion:

- Name of dis burs ing and re ceiv ing bank ac counts and num bers.

- Amounts.

- Date dis bursed per books and per bank state ment.

- Date de pos ited per books and per bank state ment.

Re view the sched ule to de ter mine agree ment of dates and amounts on the dis burse ment and de posit sides; in -ves ti gate un com pleted trans ac tions and de ter mine whether time lags ap pear rea son able.

Petty Cash

5. Iden tify all petty cash funds, lo ca tions, cus to di ans and pur pose.

6. Count un de pos ited cash in the pres ence of the cus to dian:

a. List coin and cur rency by de nomi na tion.

b. List other items, stamps, checks, vouch ers; ex am ine date, payee, amount, authori za tion,ac count, docu men ta tion sup port ing vouch ers.

c. Trace the fund bal ance to the bal ance per the gen eral ledger.

d. List un usual items, such as post dated checks or vouch ers pre pared in pen cil to dis cuss withap pro pri ate per son nel.

e. Have the cus to dian sign a re ceipt at the con clu sion of the count cer ti fy ing re turn of the funds.

Audit of In vest ments

The ob jec tives of the audit of in vest ments are to de ter mine that:

1. The mu nici pal ity owns the in vest ments at the bal ance sheet date and has physi cal evi dence of this.

2. Re lated in come is prop erly re corded and re ceived.

3. Re stric tions, pledges or liens on any of the in vest ments are iden ti fied and dis closed.

4. In vest ments and re lated in come are fairly pre sented in the fi nan cial state ments.

Audit Pro ce dures:

1. Ob tain or pre pare an analy sis of in vest ments, show ing.

a. A de scrip tion of se cu ri ties held at the be gin ning of the pe riod in clud ing val ues, ma tur ity dates,in ter est rates.

b. Ad di tions to in vest ments made dur ing the year.

c. Sales and dis po si tions made dur ing the year in clud ing sale price,cost,and gain or loss.

d. In vest ments held at the end of the year.

e. In vest ment in come earned dur ing the year.

2. Trace end ing bal ances to ac count ing rec ords and be gin ning bal ances to prior year audit re port.

3. In spect se cu ri ties on hand (in pres ence of the mu nici pal cus to dian) and ver ify agree ment with ac -count ing rec ords.

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a. Note own er ship by mu nici pal ity.

b. Ob tain a signed re ceipt from the cus to dian that the se cu ri ties were re turned by the audi tor ingood or der.

4. Con firm in vest ments held by in de pend ent cus to di ans and con sider in spect ing them.

5. De ter mine whether ap proval for pur chases and sales are con tained in the min utes of the mu nici pal ity.

6. Trace pur chases and sales to cash books and sup port ing docu men ta tion.

Reve nues, Re ceiv ables, In ter fund Trans fers

The ob jec tives of the audit are to ob tain as sur ances that:

1. Reve nue ac counts in clude all trans ac tions re lated to the pe riod.

2. Any re lated re ceiv ables are valid, fairly stated, and the gov ern men tal unit has the le gal right to col -lect them.

Audit Pro ce dures - Prop erty Taxes:

1. Trace re ports of money re ceived, pre pared by the tax col lec tor for the treas urer, to the cash re ceiptsjour nal.

2. Rec on cile the end ing un col lected bal ance with the be gin ning bal ance, ac count ing for col lec tions, ad -di tions, dis counts or pen al ties of the re port pe riod.

3. Com pare cur rent years’ as sessed value with the prior year, ob tain ex pla na tions of sig nifi cant dif fer -ences.

4. Re view the com pu ta tion of to tal as sessed value for prop erty for mathe mati cal ac cu racy.

5. Re cal cu late the tax levy (as sessed value mul ti plied by tax rate).

6. Re view de lin quent taxes to as cer tain whether the pen alty has been ap plied where ap pli ca ble.

7. Re view dis counts to de ter mine whether jus ti fi able.

8. Ver ify ap proval for ex on era tions from the gov ern ing body of the gov ern men tal agency.

Audit Pro ce dures - Other Taxes and In come

1. Com pare cur rent year reve nues with cur rent budget and prior year ac tual.

2. Re view the rea son able ness of any lev ies and test mathe mati cal ac cu racy.

3. Trace other types of re ceipts (beer and liq uor li cense fees, build ing per mits) from the source docu -ment into the cash re ceipts jour nal and bank de posit.

4. Ac count for the se quen tial num ber ing of pre printed forms used for per mits and li censes.

5. Ex am ine rental agree ments for prop erty rented by the gov ern men tal unit to other en ti ties.

6. Ana lyze end ing ac count ing re ceiv ables and con sider con firm ing.

Audit Pro ce dures - Grants and Simi lar Reve nues From Other Gov ern ments andQuasi- Government En ti ties

1. Ex am ine docu men ta tion trans mit ting grants to ver ify authen tic ity, proper amounts, funds and ac -counts, as well as pos si ble re stric tions on use which could af fect ac count ing.

2. Trace cash grants through the re ceipts jour nal and vali dated bank state ment.

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3. Trace non cash grants into the ac count ing rec ords.

4. Ana lyze end ing ac counts re ceiv able and con sider con firm ing.

4. The Gen eral Fund: Ex pen di tures and Re lated Li abili ties

Audit of Gov ern men tal Ex pen di tures

The ex pen di tures in curred in car ry ing on the ma jor gov ern men tal func tions and ac tivi ties of a bor ough ortown ship are di vided into the fol low ing clas si fi ca tions in the an nual fi nan cial re port.

Gen eral Gov ern ment

1. Ad min istra tion

2. Tax col lec tion

3. Mu nici pal build ings

Pro tec tion to Per sons and Prop erty

1. Po lice pro tec tion

2. Fire pro tec tion

3. Build ing regu la tion, plan ning and zon ing

Health and Sani ta tion

1. Board of health

2. Sani tary sew ers

3. Sew age dis posal

4. Pub lic com fort sta tions

5. Solid waste col lec tion and dis posal

High ways

1. Streets and bridges

2. Street light ing

Culture- Recreation

1. Parks and play grounds

2. Shade trees

3. Li brar ies

4. Sen ior cen ters

Spe cial Serv ices

1. Mar ket

2. Ceme tery

3. Air port

Mis cel la ne ous

1. In sur ance (if not dis trib uted to func tions cited above)

2. Pen sions

3. Other mis cel la ne ous items not clas si fied else where

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Debt Serv ice

1. In ter est on bonds

2. In ter est on tem po rary loans

3. Debt prin ci pal

Com ments on Gov ern men tal Ex pen di tures

Ex pen di tures is the term used in gov ern men tal ac count ing to de scribe trans ac tions which ei ther de crease fi -nan cial re sources or in crease cur rent li abili ties. Ex pen di tures in clude some, but not nec es sar ily all, cash dis -burse ments. Dis burse ments for op er at ing the lo cal gov ern ment, ac quir ing capi tal as sets or for debt serv ice arecon sid ered to be ex pen di tures; how ever, dis burse ments to ac quire se cu ri ties for in vest ment pur poses would notbe con sid ered an ex pen di ture un der most cir cum stances. Also, un der an ac crual or modi fied ac crual ba sis of ac -count ing, ex pen di tures will of ten be re corded in the ac count ing rec ords prior to a cash dis burse ment be ingmade.

The above out line is con densed and at ten tion is called to ad di tional clas si fi ca tions of ex pen di tures that ex istun der each gov ern men tal func tion. The clas si fi ca tions in clude:

1. Clas si fi ca tion by char ac ter and ob ject — ex am ple:

Cur rent Ex pense

a. Sala ries and wages for per sonal serv ices

b. Con trac tual serv ices

c. Ma te ri als and sup plies

d. Other charges

Capi tal Out lay

Fixed as sets (land, struc tures, equip ment)

2. Clas si fi ca tion by ac tiv ity — ex am ple:

High ways

a. Snow re moval

b. Clean ing streets and gut ters

c. Street light ing

d. Street signs and mark ings

The re port form filed by audi tors is the same for bor oughs and town ships. It is de signed to fol low the Chartof Ac counts for Penn syl va nia Mu nici pali ties, which pro vides a uni form num ber ing sys tem. The num ber ing sys -tem in the Chart of Ac counts is adapt able for use with ei ther sin gle or dou ble en try ac count ing and may be ex -panded for those mu nici pali ties with more com plex needs. The Chart of Ac counts is de signed for a pro grambudget sys tem. This is a com bi na tion of the fea tures of line item budg ets and per form ance budg ets. Line itembudg ets spec ify the amounts to be spent for each cate gory of pur chases re gard less of the ul ti mate use of thepur chase (For ex am ple, a to tal amount for gaso line with out speci fy ing the amounts needed for ad min is tra tiveve hi cles, po lice ve hi cles or road main te nance ve hi cles). Per form ance budg ets, on the other hand, budget money ac cord ing to the de sired re sult, such as X number of hours of po lice cov er age at a par ticu lar cost per hour.

The pro gram budget com bines these fea tures by des ig nat ing spe cific line items in each of sev eral pro gramcate go ries. The ac tual use of the Chart of Ac counts and the de sign of the budget may vary some what from onemu nici pal ity to an other. The im por tant fea ture for the audi tors to con sider is the in teg rity of the sys tem within

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the mu nici pal ity and the abil ity to con vert the audited trans ac tions onto the sys tem used in the stan dard izedaudit form.

Fol low ing is a de scrip tion of pro ce dures gov ern ing the ex pen di ture of mu nici pal funds:

1. All ex pen di tures must be ap proved by the gov ern ing body at a pub lic meet ing. The sec re tary may be author ized in ad vance by reso lu tion to pay cer tain re cur ring ob li ga tions (such as pay roll or util itybills) when re ceived.

2. Ref er ence to bills ap proved in min utes of meet ing - The bill list (if used) should in clude: date of bill, amount, name of payee, and brief de scrip tion of what was pur chased, if not self- explanatory. Use ofa bill list can im prove the ef fi ciency of a meet ing.

3. Or der to treas urer signed by two su per vi sors in town ship of sec ond class or presi dent and sec re tary if bor ough or town ship of first class.

4. Treas urer signs check for pay ment of bill only if suf fi cient mo nies are avail able.

Tax Col lec tor’s Bond

The bond ing of tax col lec tors is gov erned by Sec tion 4 of The Lo cal Tax Col lec tion Law. In third class cit -ies and first class town ships, the elected treas urer serves as tax col lec tor, but, in bor oughs and sec ond classtown ships the tax col lec tor is an elected of fi cial. In both cases, the treas urer or tax col lec tor is charged withcol lect ing taxes for all lo cal tax ing units (the mu nici pal ity, the school dis trict, and in most cases the county).One surety bond must be is sued cov er ing all taxes for which the treas urer or tax col lec tor is re spon si ble. Theamount of the bond is fixed by the court of com mon pleas and may not ex ceed the es ti mated amount of the du -pli cates to be de liv ered to the col lec tor in one year. In some coun ties the prac tice is to fix the bond at ap proxi -mately one third of the tax du pli cate. The cost or pre mium for the bond is pro rated among the tax ing dis trictswithin the ju ris dic tion of the tax col lec tor or treas urer in volved. Veri fi ca tion of bonds must be made at thecounty clerk’s of fice and with the in sur ance agency writ ing the bond.

Audit Pro ce dures - Ex pen di tures and Re lated Li abili ties

The ob jec tive of the audit is to ob tain evi dence that ex pen di tures in curred dur ing the pe riod have been iden ti -fied and prop erly sup ported, re corded, and clas si fied in the cor rect amounts, funds, ac counts and ac count ing pe -ri ods.

Audit Pro ce dures

1. Ver ify cash dis burse ments -

a. Com pare paid checks, cash dis burse ments jour nals and in voices or other sup port ing docu mentsto as cer tain agree ment of amounts, proper ap prov als,ade quate can cel la tions and cor rect fundand ac count clas si fi ca tions.

2. De ter mine whether the gov ern men tal unit com plied with ap pli ca ble laws for award ing con tracts forthose tested ex pen di tures re quir ing such com pli ance.

a. Re view bids, con tracts, in sur ance cov er age re quired of con trac tors, and prog ress pay ments.

b. De ter mine whether the ex pen di tures are fi nanced through the Gen eral or some other fund suchas Bond Fund or Spe cial As sess ment Fund.

Audi tors should re view the fol low ing code pro vi sions re gard ing bid ding and con tract ing re quire ments:

Sec tions 1401- 1411 of The Bor ough Code;

Sec tions 1801- 1811 of The First Class Town ship Code;

Sec tions 3101- 3109 of The Sec ond Class Town ship Code.

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3. Ana lyze ac crued li abili ties at year end.

a. Ob tain a trial bal ance of ac counts pay able and/or vouch ers pay able.

b. Ex am ine sup port ing docu men ta tion not ing re ceipt of goods or serv ices within the fis cal year.

c. Ver ify pay ment in sub se quent pe riod.

Audit Pro ce dures - In ter fund Trans fers

1. De ter mine that in ter fund trans ac tions are prop erly ap proved by ex am in ing min utes and other sup -port ing docu men ta tion.

2. As cer tain that trans fers are prop erly ac counted for as to amount, ac count, fund.

Audit Pro ce dures - Pay roll

1. Com pare can celled checks with pay rolls.

2. Check the mathe mati cal ac cu racy of pay rolls.

3. If a sepa rate bank ac count is used for pay roll dis burse ments, com pare to tal pay roll with amount de -pos ited in a pay roll ac count and with the Gen eral Fund dis burs ing check.

4. Com pare in di vid ual earn ings rec ords with (a) authori za tion of em ploy ment and (b) rate of pay.

5. Test changes in rates, em ploy ment and dis missal of per son nel by ref er ence to ap proval by coun cil,com mis sion ers or su per vi sors.

6. Test ba sis for pay ments to sup port ing rec ords such as time cards, tem po rary em ployee rec ords, ab -sence rec ords.

7. Com pare sal ary lists with W-4 with hold ing ex emp tion slips on file.

8. Re view pay roll tax re turns for regu lar ity.

9. De ter mine pay ments, if any, made to pen sion funds, hos pi tal in sur ance agency or other agen cies forwhich pay roll de duc tions have been made.

5. Spe cial Reve nue Funds

Pur pose of Spe cial Reve nue Funds

Spe cial reve nue funds are simi lar to the Gen eral Fund, ex cept that the spe cial reve nue source and the rec ords for its funds have been es tab lished for one spe cific pur pose. In these cases, it is par ticu larly im por tant for theaudi tors to en sure reve nues re ceived for a par ticu lar pur pose are ac tu ally spent for that des ig nated pur pose. Ex -am ples of spe cial reve nue funds in clude street light and hy drant as sess ments. These are of ten used in mu nici -pali ties where only a por tion of the town ship is serv iced by street lights or fire hy drants.

These spe cial as sess ments are lev ied on a front foot ba sis, and must be dis tin guished from any mil lage levyin the re port. Such as sess ments are more fre quently found in town ships with clus ters of de vel op ment re quir ingcer tain spe cial serv ices not needed in more sparsely set tled por tions of the town ship. The resi dents of the sec -ond area should not be ex pected to fi nance im prove ments in tended only for other ar eas.

Audit Pro gram - Spe cial Reve nue Funds

A pro gram simi lar to the pro gram for the Gen eral Fund should be fol lowed con sist ing of:

1. Audit of cash.

2. Audit of reve nue re ceipts.

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3. Audit of gov ern men tal ex pen di tures.

Re fer to Chap ters 3 and 4 for spe cific pro ce dures re gard ing the audit ing of these cate go ries.

6. Util ity Funds

Pur pose of Util ity Funds

This term is used when a bor ough or town ship owns and op er ates a wa ter works, elec tric plant, or sani tary sew ersand sew age dis posal plant. Un der such situa tions, the gov ern men tal unit will col lect fees or serv ice charges for use of wa ter, elec tric ity and sani tary sew ers. The pur pose of such a fund is to ac count for the reve nue re ceipts, non reve nuere ceipts, op er at ing ex pen di tures, capi tal out lay, non gov ern men tal ex pen di tures, and trans fers to other funds. The dif -fer ent pos si ble meth ods of han dling the utili ties in the vari ous lo cal gov ern men tal units are dis cussed be low.

1. A bor ough or town ship might pur chase a pri vate wa ter com pany or es tab lish its own wa ter works.This is usu ally done by is su ing bonds to ac quire or es tab lish the mu nici pal wa ter works. The Wa terFund un der dis cus sion is used to re flect the op era tions of the wa ter works and its fi nanc ing. Since itis im por tant that the wa ter sys tem be main tained on a self- supporting ba sis, its trans ac tions must besepa rately re corded and re ported in the Wa ter Fund. It is not sound ac count ing or good ad min is tra -tive prac tice to per mit any of the wa ter de part ment trans ac tions to be re flected in the Gen eral Fund.

2. A mu nici pal ity may cre ate a mu nici pal author ity to ac quire or es tab lish and op er ate a wa ter sys tem.In this event, the wa ter author ity be comes an in de pend ent po liti cal sub di vi sion or gan ized to pro videwa ter serv ices to the com mu nity. Such an author ity is not un der the su per vi sion or con trol of thebor ough or town ship gov ern ment. The audit of the author ity is not the job of the mu nici pal audi tors.

3. A bor ough or town ship may con struct and op er ate a sani tary sewer sys tem and sew age dis posal plant as a part of its Gen eral Fund op era tions. In such a case, the fi nanc ing is done by taxa tion and otherreve nues of the Gen eral Fund and no spe cial charge is made to the us ers of the serv ice. The electedaudi tors will ex am ine the trans ac tions per tain ing to the sani tary sewer sys tem and sew age dis posalop era tions as a part of the audit of the Gen eral Fund.

4. An other plan is to op er ate the sani tary sewer sys tem and sew age dis posal plant as a pub lic util ity fi -nanced largely by sewer rents col lected from the us ers of the serv ice. In this event, the Sewer Fundre flects the trans ac tions per tain ing to sani tary sew ers and sew age dis posal. The sewer sys tem is thusmain tained on a self- supporting ba sis un der a Sewer Fund in de pend ent of gen eral tax money.

5. Still an other plan is to op er ate the sewer sys tem as a mu nici pal author ity. In this case, the sewerauthor ity, like the wa ter author ity, be comes an in de pend ent po liti cal sub di vi sion or gan ized to pro -vide the com mu nity with sewer serv ice, and the audit of mu nici pal authori ties is out side the ju ris dic -tion of mu nici pal audi tors.

6. Many bor oughs and town ships cre ate a mu nici pal author ity to fi nance the con struc tion of util ity fa -cili ties, but the author ity then leases the fa cili ties to the bor ough or town ship for op era tion. In caseswhere fa cili ties owned by an author ity are be ing op er ated by a bor ough or town ship on a lease back,the elected mu nici pal audi tors must audit the Util ity Funds since it is their re spon si bil ity to audit allfunds that are han dled by bor ough or town ship of fi cers or em ploy ees.

The lease back agree ment may pro vide for an audit of the Util ity Fund by a cer ti fied pub lic ac count ant. Such an agree ment does not re lieve the elected audi tors of their re spon si bil ity. If such an agree ment ex ists, then theUtil ity Fund is audited twice.

The ac counts of a mu nici pal author ity must be audited by a cer ti fied pub lic ac count ant, but a lease backagree ment pro vid ing for such an audit of any bor ough or town ship Util ity Fund is purely a dis cre tion ary mat terwith the mu nici pal gov ern ing body.

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All bor ough or town ship funds must be kept on the ba sis of a sin gle fis cal year. A bor ough or town ship maynot have one fis cal year for one fund and a dif fer ent fis cal year for an other fund. If the fis cal year of theauthor ity does not co in cide with the fis cal year of the bor ough or town ship, this may pres ent a prob lem wherethere is a lease back agree ment. Nev er the less, the bor ough or town ship Util ity Fund must be kept on the samefis cal year ba sis as the other bor ough or town ship funds. These are gen er ally pro prie tary type funds.

Varia tions on and com bi na tions of the pos si ble or gan iza tional struc tures men tioned above may ex ist, butthey should not af fect the ba sic audit ing pro ce dures.

The clas si fi ca tion of Wa ter Fund re ceipts and dis burse ments is out lined be low:

Reve nue Re ceipts

1. Wa ter sales

a. Me tered sales—in dus trial and com mer cial

b. Me tered sales—resi den tial

c. Me tered sales—other

d. Un me tered sales

2. Other reve nue re ceipts, such as serv ice on cus tom ers’ in stal la tions, mer chan dis ing and in ter est

Non reve nue Re ceipts

1. Bor rowed mon eys

2. Other non reve nue re ceipts

3. Trans fers from other funds

Gov ern men tal Ex pen di tures

1. Op era tion and main te nance

a. Wa ter col lec tion

b. Pu ri fi ca tion

c. Pump ing

d. Dis tri bu tion

e. Gen eral ex penses

2. Capi tal out lay

3. In ter est

Other Dis burse ments

1. Pay ments to mu nici pal author ity

2. Prin ci pal paid on in debt ed ness

3. Re funds

4. Trans fers to other funds

The clas si fi ca tions of items of re ceipts and ex pen di tures for the Elec tric Fund and Sewer Fund dif fer some -what as to op era tion and main te nance, but in gen eral they fol low the same pat tern as the Wa ter Fund clas si fi ca -tion.

Audit Pro gram - Util ity Funds

1. Re fer to audit pro grams con tained in Chap ters 3 and 4 as ap pli ca ble.

2. Ad di tional ac counts re ceiv able pro ce dures:

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a. Ex am ine bill ing pro ce dure for ef fi ciency and ac cu racy.

b. Con struct a sum mary for the year. To tal re ceiv ables at the be gin ning of the year plus the to talbilled for the year for wa ter serv ices, less cash col lec tions on ac count, plus ad just ments,cor rec tions or write-offs should give the to tal ac counts re ceiv able out stand ing and un col lected at the close of the year.

c. Ob tain a list of un col lected ac counts at close of year and com pare to tal of the list with re sultob tained in (b) above. The two amounts should agree. If there is a dif fer ence in ves ti gatefur ther to find the cause.

d. Com pare the to tal cash col lec tions cred ited to the cus tom ers’ ac counts with the to tal cashre ported as wa ter sales.

e. If deemed nec es sary, the amounts out stand ing should be con firmed by send ing a state ment toeach cus tomer ow ing money at the close of the year with a re quest that the cus tomer re portdi rectly to the audi tors as to the cor rect ness of the ac count.

7. Spe cial As sess ment Funds

Pur pose of Spe cial As sess ment Funds

This type of fund is es tab lished for the fi nanc ing of lo cal im prove ment proj ects such as curb ing, street pav -ing, street wid en ing and con struc tion of sewer mains. Spe cial as sess ment funds are no longer ap pro pri ate un der gen er ally ac cepted ac count ing prin ci ples but are still found in many Penn syl va nia mu nici pali ties. The proj ectsare usu ally fi nanced by levy ing spe cial as sess ments against the abut ting prop erty own ers whose prop erty is im -proved by the proj ect.

The ac count ing for such proj ects is rather com pli cated and should pro vide for re cord ing the fol low ing:

1. Pe ti tion to bor ough coun cil, town ship com mis sion ers or su per vi sors signed by prop erty own ers abut -ting on the street where the im prove ment proj ect is sought;

2. Tem po rary fi nanc ing of con struc tion costs pend ing sale of bonds;

3. En gi neer’s de ter mi na tion of cost of en tire proj ect and the as sess able cost per front foot;

4. Bill ing of prop erty own ers for each own er’s share of cost. The to tal of such charges will equal thespe cial as sess ments ac counts re ceiv able for the proj ect un der re view;

5. Bill ing prop erty own ers for re cord ing liens against their prop er ties in the of fice of the pro thono taryat the county court house;

6. Pro vi sion must be made for pe ri odi cally bill ing the in ter est due on the un paid bal ance of the spe cialas sess ments, which is usu ally pay able over a pe riod of five to ten years;

7. The dis burse ments of the pro ceeds from the sale of bonds in for the proj ect should gen er ally be made from the fund where such pro ceeds were de pos ited. Such bond pro ceeds must be used solely to payfor the costs in curred in con struc tion of the proj ect be ing fi nanced.

Since all bond is sues used to fi nance spe cial as sess ment proj ects since 1941 have been, and un der ex ist inglaw must be, gen eral ob li ga tions of the mu nici pal ity pledg ing the full faith and credit of the mu nici pal ity aswell as proj ect reve nues, it is per haps most com mon to rec ord all trans ac tions in volv ing a spe cial as sess mentproj ect in a Spe cial As sess ment Fund. How ever, there may be no le gal ob jec tion to ac count ing for such proj -ects in a Util ity Fund (if the na ture of the proj ect in volves a util ity serv ice) or Gen eral Ob li ga tion Bond Fund.The audi tors should sim ply make sure a com plete and logi cal pro ce dure is fol lowed.

8. The mu nici pal ity may have a share in the con struc tion cost which it must fi nance from the Gen eralFund.

9. Pay ments of in ter est and prin ci pal on bonds sold to fi nance spe cial as sess ment proj ects may be

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han dled in ac cor dance with ei ther of the fol low ing plans:

a. In ter est and prin ci pal pay ments may be paid di rectly from the Spe cial As sess ment Fund; or

b. In ter est and prin ci pal al lot ments may be first trans ferred to a Sink ing Fund and then pay ments made to the bond hold ers from the Sink ing Fund es tab lished for each bond is sue.

The par ticu lar plan to fol low will de pend upon the terms of the bond in den ture.

Com ments

The above ac count ing pro ce dure re lates to one proj ect. How ever, a par ticu lar mu nici pal ity may have a largenumber of proj ects spread over a sev eral year pe riod. The audi tors should keep in mind the stated prin ci ple ofcre at ing as few new funds as pos si ble. A number of dif fer ent proj ects to be started in a sin gle year may becom bined un der a sin gle bond is sue if that is the method of fi nanc ing. Fur ther more, if bond is sues are made ona too fre quent ba sis, the mu nici pal ity may be on the way to over ex tend ing its ca pa bil ity to fi nance them alongwith other re cur ring ex pen di tures. Pro ce dures in the Lo cal Gov ern ment Unit Debt Act as well as man age mentprac tices dis cussed in such other De part ment of Com mu nity and Eco nomic De vel op ment pub li ca tions as theFis cal Man age ment Hand book will be help ful in pre vent ing prob lems.

Audit Pro gram - Spe cial As sess ments

1. Fol low audit pro ce dures as ap pli ca ble from pre vi ous chap ters.

2. In con nec tion with ac counts re ceiv able bal ances, pre par ing the fol low ing sched ule for each proj ect is sug gested

List of ac count bal ances atbe gin ning of fis cal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $Add:Charges for year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $To tal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $De duct: Cash col lec tions . . . . . . . . . . . . . . . . . . . . . . . . . . . $Ad just ments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $List of ac count bal ances attendof fis cal year (should agree with bankbal ance for ac counts re ceiv able) . . . . . . . . . . . . . . . . . . . . . $

3. Ex am ine the cer tifi cates from the pro thono tary’s of fice to prove liens have been filed and are stillvalid.

4. Re quest prop erty own ers to send a state ment di rectly to the audi tors in di cat ing whether or not theirac count is cor rect.

8. Debt and Debt Serv ice Ac counts

Gov ern ments may, with proper ap prov als, make short- and long- term bor row ings. Short- term bor row ingscould be in the form of tax reve nue an tici pa tion notes which are col lat er al ized by the col lec tion or re ceipt oftaxes, sales of bonds and grants. Short- term bor row ings are gen er ally ac counted for within the fund re ceiv ingthem.

Long- term debt is gen er ally used to fi nance con struc tion or other ma jor proj ects. It in cludes gen eral ob li ga -tion bonds, spe cial or lim ited ob li ga tion bonds, capi tal leases, as well as other ob li ga tions hav ing a long- termre pay ment sched ule. Gen eral ob li ga tion bonds are backed by the full faith and credit of the is su ing gov ern menten tity; spe cial bonds are simi larly pledged, but also pledge spe cific re ceipts such as taxes; an ex am ple of othertypes of ob li ga tions would be an equip ment pur chase con tract con tain ing an in stall ment pay ment term. Long-

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term debt is gen er ally ac counted for in the long- term debt group of ac counts rather than through a fund. Re pay -ments of in ter est and prin ci pal are made through sink ing funds.

Audit Pro gram - Debt and Debt Serv ice Ac counts

Audit ob jec tives

To de ter mine that:

- Debt is author ized, and fairly pre sented as to fund, ac count, and amount in the fi nan cial state ments.

- Re lated in ter est ex pense is fairly pre sented.

Audit pro ce dures

1. Ob tain or pre pare an analy sis of notes or other long- term debt in clud ing a de scrip tion (date in curred,type, face amount, in ter est rate, amount of pay ments); prin ci pal bal ance at be gin ning of year,changes dur ing the year and bal ance at end of year; and in ter est ex pense in curred dur ing the year,paid dur ing the year, and ac crued at the end of the year.

2. Trace to tals to the re spec tive fund or group of ac counts (see sec tion on sink ing funds, fol low ing).

3. Trace authori za tion for new debt to board/coun cil min utes.

4. Ex am ine sup port ing docu men ta tion for all debt and re lated in ter est, such as note agree ments and cor -re spon dence.

5. Con sider con firm ing out stand ing bal ances or terms with the credi tor.

6. Ex am ine debt can celled and/or paid dur ing the year.

7. Re com pute in ter est or test lo cal gov ern ment’s com pu ta tions.

8. Where in ter est is paid by re deem ing bond cou pons, the audi tors must check the cou pons with out -stand ing bonds, ver ify that the paid cou pons are can celled by the bank pay ing the cou pons, or in spect the bank’s cer tifi cate of cre ma tion.

9. Where some of the bonds are re deemed dur ing the year, the audi tors should in spect the can celledbonds and make note of the num bers on the cou pons.

10. A con trol over the en tire bond is sue should be es tab lished show ing (for ex am ple):

Origi nal is sue at par. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000

Less: Re demp tion in prior years . . . . . . . . . . . . . . . .$30,000

Re demp tion in cur rent year. . . . . . . . . . . . . . . . . . . .$10,000. . . . . . . .$40,000

Bonds out stand ing at close of fis cal year. . . . . . . . . . . . . . . . . . . . . . . $160,000

The to tal bonds out stand ing should cor re spond with a list of bonds known to be out stand ing and on whichcou pons are be ing paid.

9. Sink ing Funds

Pur pose of Sink ing Funds

Sink ing funds are cre ated to pro vide for the regu lar pay ment of in ter est and the re tire ment of bonds or notesas they come due. The mo nies to meet these pur poses may come from a number of sources in clud ing taxes ortrans fer from other funds. A sepa rate sink ing fund is cre ated for each bond is sue.

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The sig nifi cance of sink ing funds has de clined be cause of the wise use of se rial bonds to day. The his tori calpur pose was to man date the pe ri odic de posit of funds suf fi cient to pay off term bond is sues. For term bonds the en tire prin ci pal amount of the bond comes due upon ma tur ity. Term bonds are no longer gen er ally in use. Mu -nici pali ties now use a se ries of bonds which re quire regu lar pay ments on the prin ci pal through out the life of the bond is sue. Thus, the use of sink ing funds to in sure that the mu nici pal ity has set aside suf fi cient funds to coverma tur ing debts is largely ir rele vant. None the less, the re quire ment re mains in the law and sink ing funds are nor -mally seen as sim ply an ac count ing trans ac tion through which funds are trans ferred be fore they are ac tu allyused to pay a por tion of a bond is sue.

Sources and Uses of Sink ing Fund As sets

Sources:

Taxes

Cash from sale of in vest ments

In ter est on de pos its or se cu ri ties

Trans fers from other funds

Uses:

In ter est ex pense

Bonds re tired

Cash paid for in vest ments

Trans fers to other funds

The bal ances of this fund at both the be gin ning and close of the fis cal year may be com posed of cash and se -cu ri ties or in vest ments held. Thus the ac count ing for this fund can be com pli cated by hold ing, pur chase andsale of se cu ri ties in which Sink ing Fund mo nies are in vested.

Sink ing Fund In vest ments

The gov ern ing body is charged with the man age ment and in vest ment of sink ing fund money. How ever, thepro vi sions of the Lo cal Gov ern ment Unit Debt Act spec ify the types of in vest ments which may be made:

1. De pos its in bank ing in sti tu tions and sav ings and loan as so cia tions so long as they are cov ered byFed eral De posit In sur ance or se cured for any amount in ex cess of in sur ance cov er age.

2. Se cu ri ties author ized for the in vest ment of Com mon wealth funds at the time the in vest ment is made.

Audit Pro ce dures - Sink ing Funds

1. Audit cash in each sepa rate Sink ing Fund for a des ig nated bond is sue (See Chap ter 3).

2. Audit reve nues, re ceiv ables, and re ceipts from taxes ear marked for debt serv ice in the man ner out -lined in Chap ter 3.

3. Audit in vest ments and re lated in come per Chap ter 3.

4. Re view trans fers from Gen eral Fund or other funds.

5. Audit debt and debt serv ice per Chap ter 8.

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Com ments

Re fer also to Chap ter 2 de scrib ing in ter nal con trol of se cu ri ties.

A sim pli fied ex am ple for de ter min ing re main ing none lec toral debt ca pac ity is as fol lows:

10. Capi tal Pro jects Fund

Pur pose of Capi tal Pro jects Funds

The capi tal proj ects fund is gen er ally used to rec ord the ac qui si tion of ma jor fa cili ties through pur chase orcon struc tion. These fa cili ties are then used in gen eral gov ern ment op era tions. The proj ects can be fi nancedthrough debt pro ceeds, taxes, grants from other gov ern ments or trans fers from other funds. When proj ects arefunded by way of debt pro ceeds, these pro ceeds are in cluded un der “other fi nanc ing sources” in the reve nuessec tion of the Audit Re port. The debt li abil ity is ac counted for sepa rately in the gen eral long- term debt ac count group. When proj ects are funded by grants from other gov ern ments, the grants are rec og nized as reve nues tothe capi tal proj ects fund as they are ex pended for eli gi ble proj ect pur poses. Prior to that they are re corded as li -abili ties. Upon com ple tion, capi tal as sets are re corded in the fixed as set ac count group.

Audit Ob jec tives

The ob jec tive of the audit is to ob tain evi dence that—

1. The fi nan cial state ment(s) for capi tal proj ects funds are fairly stated.

2. Capi tal ex pen di tures com ply with budg et ary, le gal, gran tor and con trac tual re quire ments

Audit Pro gram - Capi tal Pro jects Funds

1. Re fer to the audit pro grams for cash, in vest ments, re ceiv ables, pay ables, trans fers, reve nues and ex -pen di tures in Chap ters 3, 4 and 6.

2. If proj ects are funded through grants from other gov ern ments, re view any grant agree ments to de ter -mine any con tract terms the gov ern men tal unit must meet and test these if ma te rial.

3. Con sider in spect ing capi tal proj ects in pro cess to ver ify their ex is tence.

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SIM PLI FIED EX AM PLE FOR DE TER MIN ING RE MAIN ING NONE LEC TORAL DEBT1996 1997 1998

ALL MONEY RE CEIVED $70,000 $55,000 $65,000

less in ter est re ceived on sink ing fund de pos its 200 -0- 300

less one- time grant funds 3,800 5,000 7,700

less reve nue from sale of as sets $20,000 $ 3,000 -0-

“TO TAL REVE NUE” $46.000 $47,000 $57,000

“BOR ROW ING BASE” = 46,000 +47,000 +57,000 = 150,000 = $50,000

3 3

“DEBT LIMIT” = 50,000 x 250% = 50,000 x 2.5 = $125,000

GROSS OUT STAND ING PRIN CI PAL (elec toral and none lec toral) $92,000

less elec toral debt out stand ing $60,000

“GROSS NONE LEC TORAL DEBT” $32,000

less amount in Sink ing Fund -0-

less debts due mu nici pal ity $4,000

less as sess ments and liens ex pected $5,000

less sur plus un ap pro pri ated cash $5,000

“NET NONE LEC TORAL DEBT” $22,000

Limit on new none lec toral debt is “debt limit” less ex ist ing “net none lec toral debt” e.g., $125,000 - 22,000 =$103,000 re main ing none lec toral debt limit.

11. Other Bor ough and Town ship Funds

Vari ous spe cial funds are of ten cre ated for spe cific pur poses such as pro vid ing spe cial serv ices or meet ingpar ticu lar lo cal needs. The funds are of two gen eral types:

1. Those used to set aside money for a ma jor capi tal ex pen di ture.

2. Those serv ing as “op er at ing funds” for pro vid ing par ticu lar serv ices.

The op er at ing funds are of ten not cre ated when the number of trans ac tions is lit tle enough to con tinue the use of a sepa rate ac count within the Gen eral Fund. This meets the de sired ob jec tive of keep ing the number of funds in a munici pali ty’s sys tem to a mini mum. Where they are cre ated, they fre quently deal with such serv ices asrec rea tion pro grams or solid waste col lec tion and dis posal. Audit ing pro ce dures for these funds should fol lowthose es tab lished for other simi lar ac tivi ties in clud ing the Gen eral Fund and Spe cial Util ity Funds.

Capi tal Re serve Funds

The bor ough and town ship codes author ize es tab lish ing capi tal re serve funds to pre pare for the even tual ex -pen di ture of large sums of money for spe cific proj ects or equip ment. Capi tal re serve funds are, in es sence, a

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sav ings pro gram to ac cu mu late money for fu ture uses. The author ity to es tab lish such funds is con tained in thefol low ing sec tions of the re spec tive mu nici pal codes:

Bor ough Code, Sec tion 1201 (33).

First Class Town ship Code, Sec tion 1502 (LVIII).

Sec ond Class Town ship Code, Sec tion 1508.

Money is trans ferred into this fund as budg eted and avail able. Be cause such funds are only drawn upon in -fre quently, the money should be main tained in interest- bearing se cu ri ties.

Dis burse ments from this fund will be for only two pur poses:

1. Pur chases of in vest ment se cu ri ties

2. Ac tual pur chases of land, build ings or equip ment.

The Fis cal Man age ment Hand book pre pared by the De part ment of Com mu nity and Eco nomic De vel op mentis an ex cel lent ref er ence for more in for ma tion on the es tab lish ment and proper use of these funds. It should benoted that it is pos si ble to change the in tended use of these funds by proper ac tion of the gov ern ing body.These ac tions must be taken in ac cor dance with the par ticu lar sec tion of the mu nici pal code regu lat ing the es -tab lish ment and use of the fund.

Audit Pro gram - Capi tal Re serve Fund

1. Pro ce dures dis cussed in pre vi ous chap ters as ap pli ca ble.

12. State High way Aid Fund

In 1956 the state leg is la ture passed Act No. 655 (P.L. 1944) al lo cat ing part of the state liq uid fu els tax to bedis trib uted among cit ies, bor oughs, in cor po rated towns and town ships to pro mote con struc tion and mod erni za -tion of lo cal roads and streets. The money al lo cated un der Act 655 must be de pos ited in this fund and keptsepa rate from all other mo nies. Ex pen di tures from this fund may be made only for road and street work author -ized by the De part ment of Trans por ta tion.

All mu nici pali ties must an nu ally sub mit to the De part ment of Trans por ta tion both a sum mary ac count ing ofstate fund ex pen di tures and a rec ord of checks drawn on the state fund in the pre vi ous year. Forms are mailed to mu nici pal sec re tar ies some time prior to the first meet ing of the year, and should be com pleted and sub mit ted tothe Dis trict Of fice on or about Janu ary 15. De lays in sub mit ting the re ports re sult in de lays in pay ments of thean nual al lo ca tions.

The sum mary re port of liq uid fu els ex pen di tures for the pre vi ous year is sub mit ted on Form 965 and must becer ti fied by the presi dent of the coun cil or town ship com mis sion or board of su per vi sors and at tested by thesec re tary. The re port shows the amounts ex pended in both con struc tion and non con struc tion ac cord ing to pre -scribed classes of work. The re port must in clude the end ing bal ance of the pre vi ous year, state al lot ment re -ceived dur ing the cur rent year, amount ex pended and the bal ance.

In or der to ver ify liq uid fu els funds have been ex pended for author ized pur poses, Form 965S must be com -pleted to show for each check is sued the date, check number, budget item number, payee and the amount andpur pose. Both forms must be sub mit ted in quad ru pli cate to the ap pro pri ate dis trict of fice, and one copy is re -turned by the dis trict of fice for the lo cal files.

An nual al lo ca tions of these funds are de ter mined by a 50/50 for mula based on the number of miles of of fi cial streets and popu la tion. Al leys, courts or ways are ex cluded in the Act. The De part ment of Trans por ta tion willrec og nize only those streets or roads which have been of fi cially adopted, as evi denced by or di nances, reso lu -

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tions, plot plans or sur vey plans sub mit ted to the De part ment to gether with cer ti fi ca tion that the street or roadhas been re corded in the or di nance book, or with the Clerk of Courts. Hav ing once se cured ap proval of the ini -tial street plan, sec re tar ies are re spon si ble for no ti fy ing the De part ment as changes oc cur in the street sys tem ofthe mu nici pal ity.

State funds al lot ted un der the Liq uid Fu els Act may not be com min gled with any other lo cal funds. A sepa -rate check ing ac count must be es tab lished for de pos its and pay ments, and an an nual check rec ord of this ac -count must be sub mit ted to the De part ment of Trans por ta tion. How ever, the De part ment per mits mu nici pali ties to ex pend money for high way pur poses di rectly from the Gen eral Fund and to re im burse the Gen eral Fund bytrans fer from the Liq uid Fu els Fund. Such trans fers can only be made if the mu nici pal ity can iden tify the re im -bursed costs, and the costs must be al low able as liq uid fu els fund ex pen di tures. The trans fers must be by checkdrawn on the liq uid fu els fund and re ported on the an nual check rec ord ac count.

Mu nici pali ties are en cour aged to take ad van tage of in creas ing in ter est in come by com bin ing funds from vari -ous ac counts, in clud ing the High way Aid Fund. Here a dis tinc tion must be made be tween “com bin ing” and“com min gling.” In the first in stance, a clear rec ord is kept of the sources and amounts of money com binedfrom vari ous ac counts to make a larger to tal in vest ment. Com min gling, which is il le gal, is the mix ing of fundsin such a way that there is no clear de linea tion of how much money was ob tained from each of sev eral funds orac counts or how much of the to tal in ter est earn ings should be cred ited to each of the vari ous sources.

An opin ion of the At tor ney Gen eral of Penn syl va nia dated Oc to ber 11, 1974, finds the prac tice of com bin ing funds for in vest ment pur poses to be both le gal and within the re spon si bili ties of mu nici pal of fi cials to seek in -vest ment with a high rate of re turn. This is dis cussed at greater length else where in this guide. State High wayAid Funds are eli gi ble for com bin ing with other funds so long as a clear audit trail is main tained and the otherguide lines of the At tor ney Gen er al’s opin ion are fol lowed.

The cur rent year’s al lot ment will be for warded to the mu nici pal ity when all quali fy ing forms have been re -ceived and ap proved by the Har ris burg Of fice of the Bu reau of Mu nici pal Serv ices. Main te nance funds may be spent with out fur ther ap proval of the De part ment. Funds budg eted for con struc tion or re con struc tion of streets,roads and bridges can be ex pended only upon ap pli ca tion to the De part ment.

De tailed in struc tions for com plet ing forms re quired to qual ify for Liq uid Fu els al lo ca tions are con tained inPub li ca tion No. 9, avail able from the De part ment of Trans por ta tion, Bu reau of Mu nici pal Serv ices. Ad di tionalcop ies are avail able through the De part ment of Trans por ta tion’s Pub li ca tions Sales Store, P. O. Box 2028, Har -ris burg, PA 17105.

Audit Pro gram - State High way Aid Fund

1. Fol low audit pro ce dures dis cussed in pre vi ous chap ters as ap pli ca ble.

2. Ad di tional audit pro ce dures for ex pen di tures:

a. Ex am ine pay roll, ma te rial and equip ment in voices and vouch ers in the usual man ner.

b. De ter mine that the ex pen di tures are in curred to im prove and main tain the lo cal roads andstreets in ac cor dance with the pro vi sions of Act number 655.

c. De ter mine all work done con forms to the re quire ments and regu la tions of the De part ment ofTrans por ta tion.

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Com ments

Grants from the county as county aid for high way pur poses must be de pos ited and ex pended from the Gen -eral Fund.

The ac count ing sys tem de signed and pub lished by the De part ment of Trans por ta tion as Form 903 is en ti tled“Treas ur ers Ac count Book. “ It could be used by town ships and bor oughs.

Lo cal audi tors are re spon si ble for fil ing the fol low ing re port with the De part ment of Trans por ta tion:

1. A copy of the Bond Cer ti fi ca tion Form 904 DUE DATE: Janu ary 15th.

13. Agency and Trust Funds

Pur pose of Agency and Trust Funds

Where a bor ough or town ship serves in the ca pac ity of a trus tee or cus to dian in ad min is ter ing cer tain as setsto be held in trust for the bene fit of cer tain per sons or for car ry ing out some par ticu lar pub lic pur pose, such afund is called a Trust Fund. An Agency Fund is es tab lished to ac count for as sets re ceived by a bor ough ortown ship act ing as an agency for some other gov ern men tal unit. There are so many types of agency and trustsitua tions that it is im prac ti cal to at tempt a dis cus sion of all pos si ble types. There fore, it is pro posed to con -sider, as ex am ples, one Agency Fund and one Trust Fund.

Agency Fund

In the ex am ple, both a town ship and its school dis trict levy a mer can tile tax. By joint agree ment, the town -ship treas urer serves as col lec tor for both taxes. Busi nesses file quar terly re turns with the treas urer. The treas -urer then splits the re ceipts be tween the town ship and school dis trict. The town ship treas urer is act ing as anagent for the school dis trict, and mer can tile tax col lec tions for the school dis trict are re corded in an agencyfund.

Audit Pro gram - Agency Fund for Joint Tax Col lec tion

1. Fol low audit pro ce dures in pre vi ous chap ters as ap pli ca ble.

2. Re view or test quar terly re turns filed by busi nesses.

3. Con firm with the school treas urer the amount re ceived from the town ship treas urer.

4. As cer tain what bal ance of col lected mon eys ex ists, if any, and de ter mine the town ship or other ac -count to which it be longs.

Com ments

The cost of op er at ing the tax col lec tion op era tion is as sumed by the town ship and is charged un der gen eralgov ern ment ex pen di tures.

The school dis trict makes a pay ment to the town ship for its share of the cost of op er at ing the mer can tile taxof fice. These pay ments are clas si fied as de part men tal earn ings in re port ing the re ceipts of the town ship.

The audit of an Agency Fund ac count of the above type should not be con fused with the audit of taxes re -ceived by the school dis trict or town ship or with the audit of tax col lec tors’ ac counts.

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Trust Fund

A Po lice Pen sion Fund will be used as an ex am ple of a Trust Fund. Un der the Act of May 29, 1956, P.L.1804, as amended, a Po lice Pen sion Fund is man da tory in bor oughs or town ships where a po lice force of threeor more mem bers is main tained. The money re ceived by the Pen sion Fund may be used to es tab lish an ac tualfund ad min is tered by the bor ough or town ship, or the money may be used to pur chase an nui ties for each mem -ber of the po lice force. For our ex am ple the an nu ity plan has been adopted.

The re ceipts of money to sup port such a plan come from the fol low ing sources:

1. Con tri bu tions or as sess ments from the mem bers of the force.

2. An nual ap pro pria tions made by the bor ough or town ship, if needed.

3. Gen eral mu nici pal pen sion sys tem state aid al lo ca tions.

4. Gifts, grants, de vises or be quests of money or prop erty.

5. Divi dends, in ter est or re funds from the in sur ance com pa nies.

6. Earn ings from in vest ments.

The dis burse ments from the fund are made for the fol low ing pur poses:

1. Pre mi ums to in sur ance com pa nies in curred in con nec tion with the pur chase of an nu ity con tracts topay re tire ment bene fits when the mem ber of the force re tires be cause of age or dis abil ity.

2. Other ex penses of the fund. State aid mo nies can be used to de fray ad min is tra tive ex penses of pen -sion plans in clud ing ac tu ar ial costs.

Note that pen sion trust funds can be con sid ered in this cate gory.

Audit Pro gram - Trust Fund for Po lice Pen sions

1. Fol low audit pro grams in Chap ters 3, 4, and 6.

2. Ex am ine an nu ity con tracts and as cer tain whether or not such con tracts com ply with the pro vi sions of the Pen sion Fund Law (Act of May 29, 1956, P.L. 1804, as amended).

3. Ex am ine pay roll rec ords to see that any pay roll de duc tions made from sala ries and wages of mem -bers of the po lice force are cor rectly trans ferred from the Gen eral Fund to the Po lice Pen sion Fund.

4. Ver ify or con firm interest- bearing mo nies on de posit with the in sur ance com pany.

5. Con firm that ac tu ar ial stud ies as re quired by Act 205 of 1984 have been com pleted and re ported tothe Pub lic Em ploy ees Re tire ment Study Com mis sion.

14. Ac counts of Tax Col lec tors, Town ship Treas ur ers and Dis trict Jus tices

There are cer tain of fi cials who col lect reve nues for a bor ough or town ship which must be turned over in tactto the mu nici pal ity and which must be audited. They are:

1. Tax col lec tor in bor oughs and sec ond class town ships

2. Treas urer who also serves as tax col lec tor in first class town ships

3. Dis trict jus tices in bor oughs and town ships.

Tax Col lec tor in Bor oughs and Sec ond Class Town ships

These of fi cials are elected and are re spon si ble for the col lec tion of real es tate taxes shown in the tax du pli -cates. They are also fre quently ap pointed to col lect Act 511 per cap ita or oc cu pa tion taxes. The du pli cates con -

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tain names, as sessed val ues of prop erty or oc cu pa tions and the per cap ita rate. The du pli cates are de liv ered tothe tax col lec tor by the tax ing dis trict. The col lec tor then has thirty days to send out the tax no tices. Tax pay ers are en ti tled, by stat ute, to a two per cent dis count for pay ment dur ing the first two months af ter the date of thetax no tice. They pay the face rate dur ing the two fol low ing months, and a pen alty of up to ten per cent is added four months af ter the date of the no tice.

Re fer to Chap ter 3 for ex ten sive com ments con cern ing the audit of the tax col lec tor’s ac counts par ticu larly in re la tion to the cash re ceipts from taxes. The audit of the tax col lec tor’s ac counts and the audit of re ceipts fromtaxes may be com bined so that there is no du pli ca tion of ef fort on the part of the audi tors.

Audit Pro gram Tax Col lec tor in Bor oughs and Sec ond Class Town ships

1. As cer tain the tax col lec tor is bonded. This may be veri fied in the county com mis sion ers’ of fice andwith the in sur ance agency sell ing the surety bond. The bond will cover the tax col lec tor’s re spon si -bil ity in col lect ing taxes for a bor ough or town ship, a school dis trict and a county.

2. As cer tain the cor rect as sessed valua tion of tax able prop erty in the bor ough or town ship, the amountof taxes lev ied on the du pli cates, and all ad di tions to the du pli cates.

3. De ter mine the amount of pen al ties added.

4. As cer tain the amount of dis counts al lowed.

5. Ex am ine the lists of ex on era tions and make sure ex on era tion lists have been ap proved by the bor -ough coun cil or the town ship com mis sion ers or su per vi sors.

6. Ex am ine the list of real es tate taxes re turned to the county as de lin quent taxes. Check the list withthe county tax claim bu reau and also be sure the pen alty is added.

7. Ex am ine the re ceipts is sued by the bor ough or town ship treas urer (in town ships of the sec ond class)and see all mo nies col lected have been turned over to the gov ern men tal unit un der audit.

8. Se cure the tax col lec tor’s agree ment as to the cor rect ness of the un col lected taxes out stand ing at theclose of the fis cal year.

9. Ex am ine prior year du pli cates in re gard to trans ac tions from the close of the pre ced ing year to thedate of set tle ment: for ex am ple, Janu ary 1 to April 30 of the year fol low ing the year of the ivy, sincereal es tate taxes must be turned over to the county no later than the April 30 of the year fol low ing the levy.

10. If it ap pears the tax col lec tor has not turned over to the tax ing unit all of the mo nies col lected, it may be nec es sary to hold the tax col lec tor strictly ac count able for the du pli cates plus ad di tions and pen al -ties less dis counts, ex on era tions and re turns to the county. This dif fer ence is due the bor ough ortown ship and should be cov ered by the tax col lec tions turned over to the bor ough or town ship.

Where the regu lar elected tax col lec tor is called upon to col lect spe cial taxes such as amuse ment, wage, mer -can tile or busi ness privi lege taxes re fer to Chap ter 3.

Treasurer- First Class Town ship

The treas urer in first class town ships is an elected of fi cial. His re spon si bili ties cover two ar eas:

1. Town ship Treas urer. In this ca pac ity, the treas urer is in charge of town ship mo nies and keeps the ac -counts of the town ship gov ern ment.

2. Town ship Tax Col lec tor. As tax col lec tor, the treas urer col lects town ship, school and in most cases,county real es tate taxes. In gen eral he has all pow ers, du ties and re spon si bili ties im posed uponelected tax col lec tors in bor oughs and sec ond class town ships by the Lo cal Tax Col lec tion Law. Theaudit of the treas ur er’s ac counts for taxes should fol low the same pat tern set forth in Chap ter 3 and in this Chap ter.

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Dis trict Jus tices

The dis trict jus tices have ju di cial du ties in con nec tion with a va ri ety of of fenses and vio la tions of lo cal andstate laws, as well as crimi nal cases. They im pose fines, pen al ties and for fei tures and col lect costs. These itemsare dis posed of as fol lows:

1. Fines be long ing to the county must be re ported and turned over to the county treas urer quar terly.

2. Fines be long ing to the Com mon wealth must be re ported and paid monthly into the state treas urythrough the De part ment of Reve nue.

3. Fines be long ing to a bor ough or town ship must be re ported and paid monthly to the treas urer of thebor ough or town ship.

4. The costs col lected are re mit ted by the dis trict jus tices to the county.

The dis trict jus tices are re quired to keep dock ets and rec ords which will en able them to re port in af fi da vitform to each agency noted above the fol low ing in for ma tion:

1. Names and ad dresses of of fend ers.

2. Of fenses charged and dates of of fenses.

3. Amounts col lected.

The county con trol ler or audi tors must an nu ally audit the ac counts of every dis trict jus tice within the countyand re port the re sults to the county com mis sion ers, the Audi tor Gen eral and to the gov ern ing body of each po -liti cal sub di vi sion which is en ti tled or has a right to re ceive any mo nies or funds col lected by the dis trict jus tice. In ad di tion to the county audit, the lo cal audi tors are also re quired to audit the ac counts of the dis trict jus tice.

Sug gested Audit Pro gram - Re cords of Dis trict Jus tices

1. De ter mine from dock ets and rec ords what per sons have been fined by the dis trict jus tice and theamount of fines and costs im posed on the of fend ers.

2. As cer tain what fines, pen al ties, for feits and costs be long to the mu nici pal ity un der audit and tracethose into the mu nici pal treas ury.

3. If any fines have not been turned over to the mu nici pal ity, the dis trict jus tice shall be re quested tomake good the de fi ciency.

4. It is the dis trict jus tice’s re spon si bil ity to see any fines be long ing to the county or state are paid intothe treas ury of each agency.

5. In all cases, watch for a timely trans fer of money to the mu nici pal ity since it rep re sents po ten tial in -ter est in come.

15. In terim Audit Check List for Elected Audi tors

When any of the of fices you are re quired to audit be comes va cant dur ing the cal en dar year, the audi tors must meet and audit the ac counts of the former in cum bent. There is no other le gal guid ance or re quire ment for anin terim audit; what fol lows is rec om mended prac tice.

Goal: The goals of the in terim audit pro cess should be:

– To re view and set tle the ac counts of the former in cum bent. If bal ances are due to the mu nici pal ity fromthe of fi cial, ac tion to col lect from the of fi cial or his bond ing com pany can not pro ceed un til theamounts due are iden ti fied by the audi tors in their re port.

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– To pro duce a firm set of fig ures for the in com ing of fi cial to be gin with.

– To pro vide fig ures and work pa pers to ease the work of the year- end audi tors.

The re port of this ex ami na tion need only be com mu ni cated to the gov ern ing body. Work pa pers pre paredin the course of the in terim audit should be re tained by the audi tors.

Mini mum ac tion on an in terim audit is not rec om mended; rather, the audi tors should con sider the stepsneeded for a nor mal year- end audit for the funds han dled by the former in cum bent, and de part from those stepsonly where such de par ture seems jus ti fied.

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IV. An nual Fi nan cial Re ports

1. Fi nan cial State ments

Ob jec tives of Audit

The ma jor ob jec tive of an audit is to ana lyze the books, rec ords and trans ac tions of the mu nici pal ity to in sure the fi nan cial state ments fairly and ac cu rately pres ent the fi nan cial po si tion of the mu nici pal ity. A sec ond ob -jec tive is to check that funds have been prop erly han dled and all trans ac tions have been made in ac cor dancewith good prac tices and le gal re quire ments. The fi nan cial state ments in clude bal ance sheets and state ments ofcash re ceipts and dis burse ments.

An im por tant dis tinc tion be tween state ments of reve nue and ex pen di tures ver sus bal ance sheets is the timepe riod cov ered by the re port. State ments of reve nues and ex pen di tures al ways cover a pe riod of time, such as a month, a quar ter or a year. The audit state ment re quired by the De part ment of Com mu nity and Eco nomic De -vel op ment in cludes all trans ac tions for the fis cal year from Janu ary through De cem ber. Bal ance sheets, how -ever, are pre pared as of a spe cific date. This should be done for audit ing pur poses as of the end ing date of thefis cal year be ing re viewed.

All bor ough and town ship audits must be sub mit ted on Form DCED- CLGS- 30 (1-98), ti tled “An nual Auditand Fi nan cial Re port,” to the De part ment of Com mu nity and Eco nomic De vel op ment. A number of gen eralcom ments re gard ing the prepa ra tion of the re port are in or der prior to dis cuss ing the spe cific sched ules in de -tail.

Use of the Chart of Ac counts

A sig nifi cant im prove ment was made in Penn syl va nia mu nici pal ac count ing with the prepa ra tion in 1982 ofa uni form chart of ac counts for all mu nici pal ac count ing sys tems. This num ber ing sys tem pro vides stan dard -ized clas si fi ca tions for the many types of reve nues and ex pen di tures en coun tered in mu nici pal gov ern ment. It is ex pand able to fit the situa tions in large as well as small mu nici pali ties. It can also be used in auto mated ac -count ing sys tems.

The chart of ac counts sys tem has three ba sic ele ments to the ac count number.

1. Pre fix- iden ti fies the fund

2. Ac count Num ber - iden ti fies the spe cific ac count within the fund

3. Suf fix - pro vides ad di tional de tail.

As an ex am ple of the use of the num ber ing sys tem, a typi cal ex pen di ture ac count number is shown be low:

01.432.15 01 - Pre fix 432 - Ac count Num ber 15 -Su ffix

01. in di cates the gen eral fund

400.00 in di cates an ex pen di ture

430.00 in di cates an ex pen di ture on high ways

432.00 in di cates an ex pen di ture on high ways for snow re moval

432.10 in di cates an ex pen di ture on high ways for snow re moval - sala ries

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432.15 in di cates an ex pen di ture on high ways for snow re moval - sala ries/ em ployee bene fits

In the ac count number sec tion, the 100 se ries des ig nates as sets, the 200 se ries des ig nates eq uity (li abil ity and fund bal ance), the 300 se ries des ig nates reve nues and the 400 se ries des ig nates ex pen di tures.

A copy of the chart of ac counts can be ob tained from the Gov er nor’s Cen ter for Lo cal overn ment Serv ices,De part ment of Com mu nity and Eco nomic De vel op ment, Room 325 Fo rum Build ing, Har ris burg, PA 17120.

Re ceipts and Ex pen di tures Com pared to Trans fers

An im por tant dis tinc tion with re gard to in vest ments must be un der stood if an audit is to fairly rep re sent thefi nan cial situa tion of a mu nici pal ity. Many times through out the fis cal year, idle funds may be used to pur chase in vest ments to earn in ter est in come on money that is not im me di ately needed. Good ac count ing prac tice would call for writ ing a check to pur chase the in vest ment. Simi larly, an other en try would be made when an in vest ment is re deemed and the cash is de pos ited back in the check ing ac count. It is ob vi ous the same amount of moneycould be in vested and re deemed sev eral times dur ing the year. If the amounts of the checks for pur chas ing thein vest ments were to taled and added to ex pen di tures, the to tal ex pen di tures would be far out of line with theamount of money ac tu ally spent since the amount in vested would be counted sev eral times.

The same holds true for re deem ing the in vest ments and de pos it ing the money in a check ing ac count. Theonly true reve nue is the amount of in ter est earned. It is in ac cu rate to show as reve nue money that was ac tu allyonly held in an other form and con verted back to cash even though the bal ance in the check ing ac count is in -creased. Trans ac tions of this type must not be clas si fied as reve nue or ex pen di tures when the audit re port is pre -pared.

2. Re ports Re quired by the De part ment of Com mu nity and Eco nomicDe vel op ment

Parts of Re port

DCED- CLGS- 30 (1-98), “An nual Audit and Fi nan cial Re port” is used by cit ies, bor oughs, town ships andhome rule communities. The in for ma tion re quired must be shown in each of sev eral sched ules:

Bal ance Sheet

State ment of Reve nues and Expen di tures

Debt State ment

State ment of Capi tal Expen di tures

Tax Rates, Cen sus and Other Infor ma tion

Source of Data for Re ports

The bor ough or town ship should main tain ac count books in which the re ceipts and ex pen di tures for eachfund are clas si fied in the same man ner used in the fi nan cial re port forms pre scribed by the De part ment of Com -mu nity and Eco nomic De vel op ment and the De part ment of Trans por ta tion. These books should be footedmonthly and then sum ma rized for the year. If the bor ough or town ship uses a dou ble en try sys tem of ac count -ing, the data will be con tained in a trial bal ance rep re sent ing the bal ances of all ledger ac counts. The bor oughor town ship sec re tary and treas urer may prove help ful in pre par ing a sum mary of the yearly to tals for eachfund.

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The data for the Tax Rates should be avail able from the tax or di nance reso lu tion or mo tion.

The data for the Debt State ment may have to be com piled from many sources such as the min utes, bond is sue rec ord, bank con fir ma tions, bank state ments per tain ing to bond cou pons, bond re demp tions and bank loans.How ever, if the Debt State ment was cor rectly pre pared in the pre ced ing year, it will be only nec es sary to startwith the bal ance out stand ing at the be gin ning of the cur rent year (that is, the bal ance at the close of the pre ced -ing year), add on new debt in curred dur ing the year, and de duct amounts paid on debt dur ing the year. The re -sult will be the debt out stand ing at the close of the cur rent year un der audit. The amount of debt out stand ing atthe be gin ning of the year un der audit must be iden ti cal with the amount of debt out stand ing at the end of thepre vi ous year.

3. Pub lished Fi nan cial State ments

In ad di tion to re quir ing a re port on a uni form form pre pared by the De part ment of Com mu nity and Eco nomic De vel op ment, the mu nici pal codes re quire the audi tors to pub lish a con cise fi nan cial state ment. The state mentmust in clude the cur rent re sources and li abili ties of the mu nici pal ity at the end of the fis cal year, the gross li -abil ity and net debt, the amount of the as sessed valua tions, the as sets of the mu nici pal ity with the char ac ter andvalue thereof, the date of the last ma tur ity of the re spec tive forms of funded debt, and the as sets in each Sink ing Fund. This re quire ment is found in Sec tion 1043 of the Bor ough Code, Sec tion 1003 of the First Class Town -ship Code, and Sec tion 904 of the Sec ond Class Town ship Code.

In or der to meet these re quire ments, the audi tors may use the fi nan cial state ment for mats pre sented be low.They rep re sent all funds com bined, and are highly sum ma rized to mini mize ad ver tis ing costs.

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BOR OUGH/TOWN SHIP OF CON CISE FI NAN CIAL STATE MENTS FOR PUB LI CA TION

PRE PARED ON A CASH BA SIS

CON CISE BAL ANCE SHEET - COM BINED FUNDSDE CEM BER 31, 19XX/20XX

AS SETS

CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $IN VEST MENTS, AT COST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .AC COUNTS RE CEIV ABLE :

TAXES RE CEIV ABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .AS SESS MENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .OTHER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GEN ERAL FIXED AS SETS - AT IN SURED VAL UES (1) . . . . . . . . . . . . . . . . . . . . . . . . . .TO TAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

LI ABILI TIES AND FUND BAL ANCES

BONDED DEBT (LAST MA TUR ITY 19XX/20XX, NET DEBT XXX) . . . . . . . . . . . . . . . . .RE SERVE FOR UN COL LECTED TAXES, AS SESS MENTS & OTHER

RE CEIV ABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .FUND BAL ANCES:

IN VESTED IN GEN ERAL FIXED AS SETS . . . . . . . . . . . . . . .AP PRO PRI ATED(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .UN AP PRO PRI ATED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TO TAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1) Or what ever ba sis used, such as cost (rarely) or es ti mated.(2) The amount con sid ered to be avail able for the suc ceed ing year’s budg et ary pur poses.

CON CISE STATE MENT OF REVE NUES RE CEIVED AND EX PEN DI TURES PAID COM BINED FUNDS YEAR ENDED DE CEM BER 31, 19XX/20XX

BAL ANCE IN TREAS URY, BE GIN NING OF YEARCASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $IN VEST MENTS AT COST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .REVE NUES RE CEIVED:

TAXES- ALL SOURCES (RE AS SESSED VAL.$XXXXXX) . .LI CENSES AND PER MITS . . . . . . . . . . . . . . . . . . . . . . . . . . .FINES AND FOR FEITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .IN TER EST, RENTS AND ROY AL TIES . . . . . . . . . . . . . . . . . .IN TER GOV ERN MEN TAL REVE NUES . . . . . . . . . . . . . . . . . .CHARGES FOR SERV ICES . . . . . . . . . . . . . . . . . . . . . . . . . .MIS CEL LA NE OUS REVE NUES . . . . . . . . . . . . . . . . . . . . . . .OTHER (3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EX PEN DI TURES PAID:GEN ERAL GOV ERN MENT. . . . . . . . . . . . . . . . . . . . . . . . . . .PUB LIC SAFETY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .HEALTH AND WEL FARE . . . . . . . . . . . . . . . . . . . . . . . . . . . .PUB LIC WORKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

-SAN IT ATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -HIG HWAYS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -OTHER PUB. WORKS & EN TER PRISES . . . . . . . . . . . . .

CUL TURE - REC REA TION . . . . . . . . . . . . . . . . . . . . . . . . . . .CON SER VA TION AND DE VEL OP MENT . . . . . . . . . . . . . . .DEBT SERV ICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .MISC. EX PEN DI TURES/EX PENSES(3) . . . . . . . . . . . . . . . . .

BAL ANCE IN TREAS URY, END OF YEAR:CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .IN VEST MENTS AT COST (4) . . . . . . . . . . . . . . . . . . . . . . . .

(3) As sumes all re main ing items to not rep re sent ma jor sources of reve nue or ma jor func tions.(4) Must agree with Bal ance Sheet.

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V. Ap pen dix

1. Glos sary of Terms

Ac count

Any clas si fi ca tion or cate gory for ac cu mu lat ing ad di tions and sub trac tions re lat ing to a sin gle as set, eq uityitem, re ceipt or ex pense. Ex am ples in clude Cash, Hous ing Re ha bili ta tion Ex pense, DCED Grant.

Ac count ing Bases for Reve nue and Ex pen di tures De ter mi na tion

A. Ac crual Ba sis. A sys tem of ac count ing where reve nues are rec og nized when they be come meas ur ableand avail able, and ex pen di tures are rec og nized when the ob li ga tion is in curred.

B. Cash Ba sis. In this case, reve nue is re corded when it is ac tu ally re ceived and ex pen di tures are ac -counted for when paid.

Ac count ing Pe riod

This term re fers to the fi nan cial pe riod used as a ba sis for mak ing pe ri odic fi nan cial re ports. It is fre quentlyre ferred to as the fis cal year. The fis cal year for bor oughs and town ships be gins on Janu ary 1.

Ad just ing En try

An en try made to the Gen eral Jour nal to rec ord trans ac tions or other ac count ing events which, for some rea -son, have not been re corded or have been im prop erly re corded.

Analy sis

The ap praisal of data found in books, rec ords and sup port ing docu ments to de ter mine the rea son able ness and re li abil ity of the data pre sented. An analy sis may take the form of mak ing com pari sons be tween cer tain ac -counts and amounts for the cur rent year with cor re spond ing ac counts and amounts for the pre ced ing fis cal year. The analy sis also may in volve break ing down the bal ance in an ac count or in a cer tain clas si fi ca tion into a de -tailed list com pris ing such to tals. In this way sig nifi cant and un usual items will be iden ti fied for fur ther in ves ti -ga tion, if nec es sary.

Ap pro pria tion

The le gal authori za tion to spend pub lic funds, re ferred to in Sec tion 3202 of the Sec ond Class Town shipCode, Sec tion 1701 of the First Class Town ship Code, and Sec tion 1312 of the Bor ough Code.

As sets or Re sources

The term as sets (or re sources) re fers to all prop erty owned by a gov ern men tal unit. Ex am ples are: cash,taxes re ceiv able, in ven to ries, in vest ment se cu ri ties, land, build ings and equip ment. As sets owned at the closeof the fis cal year ap pear in the bal ance sheet.

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As sessed Valua tion

The value placed upon real es tate, other prop erty or oc cu pa tions by a gov ern men tal unit as a ba sis for taxa -tion. The county com mis sion ers es tab lish a cer tain per cent age of the fair mar ket value as the as sessed value forreal es tate tax pur poses. Coun ties have the sole author ity to set as sessed val ues for real es tate and oc cu pa tionsfor bor oughs and town ships in Penn syl va nia.

As sess ment Roll

This rep re sents the of fi cial list of per sons and prop erty sub ject to lo cal taxa tion, to gether with the valueplaced upon each oc cu pa tion and each par cel or tract of real prop erty by the chief county as ses sor.

Audit Trail

The re corded evi dence of a trans ac tion from the be gin ning, through source docu ments, jour nals, ledg ers tothe fi nan cial state ments.

Audit Work Pa pers

The hand writ ten or typed rec ords, lists and sched ules that show the audit ing work it self. Spe cifi cally, theyshow how the audit ex ami na tion sup ports fig ures in cluded in the pub lished Con cise Fi nan cial State ment and in the An nual Audit and Fi nan cial Re port sub mit ted to DCED. Work pa pers should be kept as of fi cial rec ords bythe audi tors be cause they in di cate the ex tent of their work, and are the prop erty of the audi tors. They may becon sid ered evi dence in court pro ceed ings.

Bal ance Sheet

A state ment show ing as sets or re sources, li abili ties and eq uity.

Bond Dis count

The ex cess of the face value of a bond over the price for which it is sold is called bond dis count. For ex am -ple, where a $1,000.00 face or par value bond is sold for $950.00, the bond dis count is $50.00.

Bond Pre mium

The ex cess price for which a bond is sold over its face or par value is the bond pre mium. For ex am ple, where a bond is sold for $1,060.00 and the face value is $1,000.00, the bond pre mium is $60.00. NOTE - in case ofbonds sold at ei ther a pre mium or dis count, the sale price should not in clude ac crued in ter est at the date of thesale.

Books of Origi nal En try

This term re fers to books or rec ords in which trans ac tions are for mally re corded for the first time. Ex am plesare: (a) cash re ceipts jour nal, (b) cash dis burse ments jour nal, (c) pay roll jour nal, and (d) gen eral jour nal.These books, es pe cially (a) and (b) must be kept whether the gov ern men tal unit is us ing the dou ble or sin gleen try sys tem of ac count ing. Ba sic busi ness docu ments are evi dences of busi ness trans ac tions and should not becon fused with books of origi nal en try. Ex am ples of busi ness docu ments are: bank de posit tick ets, re ceipts,checks, in voices, con tracts, leases or deeds.

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Books of Fi nal Entry- Ledgers

In dou ble en try book keep ing, trans ac tions are first ana lyzed, clas si fied and re corded in books of origi nal en -try and then in creases and de creases are posted or trans ferred to ledger ac counts re flect ing dif fer ent types of as -sets, li abili ties, eq ui ties, reve nues and ex penses.

Budget

A plan iden ti fy ing the pur poses for which money will be spent and the ex pected sources of reve nue to fi -nance the ex pen di tures. Mu nici pal budg ets in Penn syl va nia nor mally fol low the for mat of a “Pro gram Budget”which al lo cates money to the func tions or ac tivi ties of a mu nici pal ity, then fur ther clas si fies ex pen di tures ac -cord ing to spe cific ob ject items.

Capi tal Out lay

Ex pen di tures made to ac quire fixed as sets or ad di tions to them.

Cash

This term re fers to cur rency, checks, money or ders, drafts or bank de pos its. Cash is an as set in the fund towhich it be longs and is sub ject to any re stric tions or limi ta tions which ap ply to that fund.

Chart of Ac counts

A list ing of all ac count num bers, with the names of the ac counts they rep re sent.

Con fir ma tion

This term in di cates the audi tor is seek ing ad vice of some agency or in di vid ual out side the gov ern men tal unitin or der to ver ify cer tain items. For ex am ple, bank bal ance re ports are ob tained di rectly from the banks inwhich the bor ough or town ship money is de pos ited.

Credit

As a noun, an en try on the right- hand side of an ac count. Re cords in creases in eq uity and re ceipts; rec ordsde creases in as sets and dis burse ments in a dou ble en try sys tem.

Criti cal Re view

In popu lar par lance, this term means tak ing a “hard look” at the situa tion and the evi dence be ing ex am inedand ana lyzed. The ob jec tive is to be able to de ter mine the rea son able ness and the re li abil ity of the rec ords un -der re view.

Cur rent As sets or Re sources

Those as sets which are read ily avail able to meet the cost of op era tions or to pay cur rent li abili ties. Ex am plesin clude cash, tem po rary in vest ments and cur rent taxes re ceiv able.

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Cur rent Li abili ties

Ob li ga tions which are due and pay able in a year or less.

Debit

As a noun, an en try on the left- hand side of an ac count. As a verb, to make an en try on the left hand side ofan ac count. Deb its rec ord in creases in as sets and dis burse ments; they rec ord de creases in eq uity re ceipts indou ble en try sys tems.

Debt Limit

The maxi mum amount of ob li ga tion for the fu ture pay ment of money per mit ted for a unit of lo cal gov ern -ment. Such debt may be one or two broad cate go ries: (1) debt ap proved by the elec tor ate of the mu nici pal ity;(2) debt in curred with out ask ing for the ap proval of the elec tor ate. There is no limit to the amount of moneywhich the citi zens of a mu nici pal ity may vote to in cur. The none lec toral debt of a mu nici pal ity is lim ited, un -der the Lo cal Gov ern ment Unit Debt Act, to 250 per cent of the bor row ing base. Non- electoral and lease rentaldebt com bined may not ex ceed 350 per cent of the bor row ing base. Bor row ing base is, gen er ally, the arith metic av er age of to tal reve nue over the three pre ced ing years cal cu lated ac cord ing to the pro vi sions of the law.

De ferred Reve nue

A li abil ity en try used to rec ord reve nues re ceived prior to be ing earned (such as ad vance pay ments re ceivedin De cem ber for a Rec rea tion Department- sponsored trip to be held in Janu ary). These would nor mally be rec -og nized as reve nue in a fu ture pe riod.

De lin quent Taxes Re ceiv able

Such taxes as re main un paid at the be gin ning of the pen alty pe riod are con sid ered de lin quent. This date isfour months af ter the date of the origi nal tax no tice. De lin quent real es tate taxes re main the re spon si bil ity of the tax col lec tor un til re turned to the county tax claim bu reau. De lin quent per cap ita and oc cu pa tion taxes re mainthe re spon si bil ity of the tax col lec tor un til col lected or ex on er ated.

De pre cia tion

While a number of defi ni tions ex ist with re spect to de pre cia tion, it is deemed best to con sider de pre cia tion as the por tion of an as set’s origi nal cost which is charged to ex pense to a par ticu lar fis cal year.

Dou ble En try and Sin gle En try Book keep ing

A. Dou ble En try is a sys tem of book keep ing based on the fun da men tal ac count ing equa tion which states thatin every organi za tion’s fi nances the as sets must equal the li abili ties plus the eq ui ties (in clud ing reve nues andex pen di tures), and on the fact that every trans ac tion has two ef fects on those fi nances. Deb its and cred its areused to show the two ef fects, and re cord ing a trans ac tion prop erly re quires that deb its equal cred its. Each typeof ac count has a “nor mal bal ance” and in creases and de creases are con verted to deb its and cred its as fol lows:

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Ac count In crease De crease

As set Debit Credit

Li abil ity and Eq uity Credit Debit

Reve nue Credit Debit

Ex pen di ture Debit Credit

For ex am ple, when tax reve nues are re ceived, both the as set ac count “cash” and the ap pro pri ate reve nue ac -count must in crease. As the chart in di cates, a debit and a credit ac com plish this. When checks are writ ten topay bills, the as set ac count “cash” de creases and the ap pro pri ate ex pen di ture ac counts in crease. Again the chart in di cates that deb its and cred its ac com plish this. All trans ac tions are ana lyzed in this man ner (in clud ing reve -nue and ex pense), and the ba sic equa tion will re main in bal ance as long as equal deb its and cred its are re corded. To of fer an other ex am ple, money bor rowed at the bank re sults in an in crease of the as set “cash” and an in crease in the li abil ity “Bank loans or notes pay able.”

B. Sin gle En try book keep ing is a term cov er ing all sys tems of rec ord keep ing not quali fy ing as a com pletedou ble en try sys tem. For gov ern men tal ac count ing pur poses, the cash re ceipts and dis burse ment jour nalsshould be kept in such a man ner as will ac cu mu late the in for ma tion re quired for the fi nan cial re ports made tothe De part ment of Com mu nity and Eco nomic De vel op ment. The rec ords must be sup ple mented by vari ous ad -di tional rec ords con cern ing taxes, in debt ed ness and prop erty. Sin gle en try has no set stan dards or defi ni tions,ei ther in Penn syl va nia or na tion ally - the term is a catch -all rather than a com monly un der stood defi ni tion. Assuch, an ac count ant or audi tor work ing with such an op era tion must learn its unique char ac ter is tics.

Eq uity

This term re fers to the ex cess of as sets over li abili ties. It is some times called sur plus. If the li abili ties ex -ceed the as sets the term defi cit is used.

Float ing Debt

This term re fers to cur rent li abili ties, such as ac counts pay able, bank loans or notes pay able.

Foot ing

Check ing foot ings, a rou tine audit ing step, is veri fy ing that col umns of fig ures are added cor rectly.

Full Faith and Credit Ob li ga tions

This term is used when the gen eral tax ing power of the mu nici pal ity is pledged for the pay ment of ob li ga -tions. Such gen eral ob li ga tion bonds are used for pur poses which will not, in them selves, gen er ate suf fi cientin come to pay for the debt. Ex am ples are rec rea tion fa cili ties or a mu nici pal build ing. These types of bonds are to be dis tin guished from Reve nue Bonds which are de signed to be paid from re ceipts or charges gen er ated bythe fa cil ity for which the bond was is sued. For ex am ple, a mu nici pal wa ter sys tem charg ing the us ers of thesys tem may use a reve nue bond and not oth er wise ob li gate the tax ing power or other in come of the mu nici pal -ity. Self- liquidating reve nue bonds are not counted against the debt limi ta tion of the mu nici pal ity.

Fund

A fund is a fis cal and ac count ing en tity con tain ing a self- balancing group of ac counts which in clude as set, li -abil ity, eq uity, reve nue and gov ern men tal op er at ing ex pense ac counts, seg re gated for the pur pose of car ry ingon spe cific ac tivi ties.

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Funded Debt

This term is used in the same sense as bonded debt. It is the fixed li abil ity rep re sented by the bonds out stand -ing at the close of the fis cal year.

Gen eral Jour nal

The for mal rec ord for trans ac tions which can not be re corded in the other books of origi nal en try (the re ceipts and ex pen di tures jour nals). It is used to rec ord open ing bal ances, in ter est cred ited to sav ings ac counts, tele -phone trans fers and cor rec tions in a dou ble en try sys tem.

Gen eral Ledger

The name for the for mal ledger con tain ing all of the ac counts. In a dou ble en try sys tem, it has equal deb itsand cred its as evi denced by the trial bal ance.

Grant

This term re fers to a con tri bu tion of one gov ern men tal unit to an other unit to be used for some par ticu largov ern men tal func tion. For ex am ple, the con tri bu tion made by the state to bor oughs and town ships for high way aid is a grant.

Im prest Sys tem of Petty Cash

Petty cash is a sum of money set aside to cover im me di ate pay ments of com para tively small amounts for ex -pense items. Where a fixed amount is des ig nated as petty cash and is re plen ished pe ri odi cally by a sum equal to the ex act amount spent, it is called the im prest sys tem. At any point in time the cash on hand plus the dis burse -ments made but not re im bursed should equal the origi nal fixed amount. Fur ther dis cus sion of petty cash fundsmay be found in part III.2 un der “In ter nal Con trol of Cash”.

In spec tion

This term re fers to one of the tech niques em ployed by audi tors.It cov ers a va ri ety of pro ce dures, such aslook ing over physi cal as sets, docu ments and other sup port ing evi dence, count ing cash, test ing in ven tory counts, ex am in ing checks and in voices or read ing min utes.

In ves ti ga tion

While this term is loosely used to cover in spec tion and ex ami na tion, its proper use should be lim ited to cover a spe cial ex ami na tion of books and rec ords for some par ticu lar pur pose.

In ven tory

A de tailed list of con sum able sup plies. It shows de scrip tions, quan ti ties, unit prices and to tal costs or val uesof the items in cluded. Fixed as sets are some times listed in an in ven tory.

In vest ments

This term cov ers se cu ri ties held for the pro duc tion of reve nue in the form of in ter est.

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Levy

This term means the im po si tion of taxes or spe cial as sess ments by a gov ern men tal unit. The amount of alevy is equal to the as sessed valua tion times the tax rate.

Li abili ties

This term cov ers debts or other le gally en force able ob li ga tions which must be paid, re newed or re funded atsome fu ture date.

Mu nici pal ity

A unit of gen eral pur pose lo cal gov ern ment which is a po liti cal sub di vi sion of the state, in clud ing coun ties,cit ies, bor oughs, towns and town ships.

Ob li ga tions

This is a broad term cov er ing li abili ties, le gal claims against a gov ern ment unit or other fi nan cial com mit -ments.

Over draft

This term re fers to a situa tion where the pay ments or dis burse ments from a bank ac count ex ceed the cashavail able in the fund. If the over draft is per mit ted by the bank, the over draft is bor row ing from the bank on thepart of the gov ern ment.

Post

To rec ord en tries in an ac count in a ledger; usu ally the en tries are cop ied from a jour nal.

Pre au dit and Post au dit

In some mu nici pali ties it is the duty of some per son, such as a con trol ler, to ex am ine pro posed trans ac tionsbe fore they oc cur in or der to pass upon their le gal ity and to see that such trans ac tions are within the un ex -pended ap pro pria tions. This type of ex ami na tion is known as pre au dit. An ex ami na tion or audit made af ter the close of the fis cal year is called a post au dit.

Pro Forma

This term re fers to a sam ple form which is an ex am ple of a docu ment or state ment. The sam ple for mats pre -sented in Part IV.3 il lus trate the use of the term.

Rec on cile

This term is used when it is nec es sary to de ter mine whether or not two rec ords rep re sent ing the same thingsare in agree ment.

Tax Du pli cate

A du pli cate is an ex ten sion of an as sess ment roll. As as sess ment roll is de liv ered by a county to a tax ing dis -

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trict. The tax ing body com putes the amount of tax due from each tax able, and en ters the amounts on the as sess -ment roll. The as sess ment roll then be comes known as a tax du pli cate, and is is sued to the tax col lec tor by thetax ing dis trict.

Tax Limit

This term re fers to the maxi mum rate of tax which a lo cal gov ern ment unit may levy. These lim its are setforth in the codes and laws per tain ing to bor oughs and town ships. For ex am ple, a bor ough may levy a tax notex ceed ing 30 mills for gen eral bor ough pur poses plus ad di tional mil lage suf fi cient to meet in ter est and Sink ingFund charges and for vari ous spe cial pur poses.

Test ing

This pro ce dure re fers to ex am in ing or check ing a se lected number of items on a ran dom ba sis. If the ran dom sam ple checks out in a sat is fac tory man ner, the bal ance of the items in the group un der re view are as sumed tobe cor rect. The ex tent of the test ing may rest upon the ex pe ri ence

and judg ment of the audi tor. Pro vi sions of the lo cal gov ern ment codes re quire elected audi tors to ex am ineeach voucher and to write “audited” on its face.

Trial Bal ance

A list ing of ac count ing bal ances taken from the gen eral ledger pages in a dou ble en try sys tem; all ac countswith debit bal ances are to taled sepa rately from ac counts with credit bal ances. The two to tals should be equal.

Voucher

A docu ment which con tains the sup port ing evi dence re lat ing to a given trans ac tion, and also in di cates the ac -counts to which the trans ac tions are to be posted.

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2. In ter nal Con trol Ques tion naire

To help evalu ate the munici pali ty’s sys tem of in ter nal con trol over cash re ceipts and dis burse ments, the audi -tor should com plete or have a re spon si ble mu nici pal of fi cial com plete this ques tion naire.

1. List the petty cash funds:

Lo ca tion Amount Cus to dian

Yes No

2. Is the re spon si bil ity for each petty cash fund vested in only one per son?

3. Are per sonal loans from the petty cash fund pro hib ited?

4. Are re im burse ments from the petty cash fund made only on the ba sis of properdocu men ta tion?

5. Is the petty cash fund rec on ciled pe ri odi cally by some one other than thecus to dian?

6. List the bank ac counts main tained, the author ized check sig na tures, em ployeewho pre pares checks and the per son who rec on ciles the ac count.

Em ployee Who Per son WhoBank Author ized Sig na ture Pre pares Checks Rec on ciles Ac count

A.

B.

Yes No

7. Are all dis burse ments, ex cept those from petty cash, made by check?

8. Are all checks pre num bered and ac counted for?

9. Are un used checks prop erly con trolled?

10. Are voided checks mu ti lated and held avail able for sub se quent in spec tion?

11. Is the prac tice of mak ing checks out to “cash” or “bearer” pro hib ited?

12. Is there an en forced rule against sign ing checks in ad vance?

13. Are checks pre pared by a per son other than those who ap prove in voices?

14. Are sup port ing docu ments pre sented with the checks when sub mit ted forsig na ture?

15. Are sup port ing docu ments can celled (stamped) to pre vent re use?

16. Af ter be ing signed, are checks mailed or dis trib uted by em ployes other than thosewho pre pare checks and vouch ers?

17. Are re ceipts of cur rency and checks listed in de tail by the per son who opens themail?

18. Are the listed mail re ceipts com pared with the ac count ing rec ords by anin de pend ent per son?

19. Is the in com ing mail opened by some one other than a per son who has ac cess to theac count ing rec ords?

20. Are cash re ceipts de pos ited daily?

21. Does a per son other than the per son who pre pares the bank de posit make thede posit?

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Yes No

22. Are bank stamped du pli cate de posit tick ets com pared with the cash re ceiptsjour nal?

23. Are pre num bered re ceipt forms in use?

24. Are the re ceipt forms ac counted for and safe guarded?

25. Are the ac count ing rec ords kept up to date and bal anced monthly?

26. The rec ords have been posted through .

27. Are all em ploy ees who are re spon si ble for re ceipt or dis burse ment of fundscov ered by a fi del ity bond?

On the last page of ques tion naire list per sons bonded and amount of bonds.

28. Are names placed on the pay roll only on the ba sis of proper (writ ten)authori za tion?

29. Are writ ten authori za tions re quired for all changes in pay rates?

30. Are bank ac counts rec on ciled by some one other than the per son(s) who pre paredthe checks?

31. Are bank rec on cilia tions pre pared monthly?

32. Are long out stand ing checks prop erly fol lowed up?

33. Is spe cial ap proval re quired for high dol lar value pur chases?

34. Who author izes the in vest ment of agency funds?

35. Who is re spon si ble for mak ing in vest ments?

36. Are in vest ment docu ments pe ri odi cally in spected and rec on ciled to the ac count ingrec ords?

37. Is a de tailed in vest ment reg is ter main tained?

The above ques tions were an swered by:

Sig na ture Ti tle Date

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Revision to Auditor’s Guide

Page 15, Elected Auditors of Second Class Townships

The compensation for elected auditors in Townships of the Second Class, taking officeafter August 15, 1999, is increased to $ 10.00 per hour.

Page 54, State Highway Aid Fund

As a result of the passage of Act 114 of 1998, effective February 1, 1999,municipalities may now use their liquid fuels fund allocation for the maintenance, repair,construction or reconstruction of alleys, courts and ways. The liquid fuels allocationformula is not changed by this legislation, only the usage of funds.

A project application (329) and completion report (999) should be completed forthis work in the same manner that they apply to current highway projects.

Page 56, Comments (top of page)

The certification of the Municipal Treasurer’s Bond (MS-904) has beenincorporated into the MS 965 the Actual Use Report of State Funds.

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auditors guide

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