Eide Bailly Audit AgreementTHE CITY OF Dubuque
DUB E ~~.~~~
~ r
Masterpiece on the Mississippi
2007
TO: The Honorable Mayor and City Council Members
FROM: Michael C. Van Milligen, City Manager
SUBJECT: Eide Bailly Audit Engagement Agreement for Fiscal Year Ending June 30,
2008
DATE: July 2, 2008
Finance Director Ken TeKippe advises that the annual audit engagement letter has
been signed.
" 1J~~-----_."
Mi ael C. Van Milligen
MCVM/jh
Attachment
cc: Barry Lindahl, City Attorney
Cindy Steinhauser, Assistant City Manager
Ken TeKippe, Finance Director
THE CITY OF
DUB E
~~
Memorandum
TO: Mike Van Milligen, City Manager
FROM: Ken TeKippe, Finance Director '' ~~'~~
SUBJECT: Eide Bailly Audit Engagement Agreement for fiscal year ending June 30, 2008
DATE: June 26, 2008
New auditing standards require that the City Manager advise the City Council that the
annual audit engagement letter has been signed and share information contained in the
audit engagement letter. This is the third year of our five year agreement with Eide
Bailly for providing audit services to the City of Dubuque.
If there are any questions or concerns, David Cahill or Brian Unsen of Eide Bailly can be
contacted at 563-556-1790.
KT/jg
Enclosure
~-»1
EideBailly~
CPAs & BUSINESS ADVISORS
May 14, 2008
Mr. Ken TeKippe
Honorable Mayor and Members of the City Council
City of Dubuque, Iowa
50 West 13`~ Street
Dubuque, IA 52001
We aze pleased to confirm our understanding of the services we aze to provide the City. of Dubuque for the yeaz ending
June 30, 2008. We will audit the financial statements of the governmental activities, the business-type activities, the
discretely presented component unit, each major fund, and the aggregate remaining' fund information, which
collectively comprise the basic financial statements, of the City of Dubuque as of and for the yeaz ending June 30,
2008. Accounting standazds generally accepted in the United States provide for certain required supplementazy
information (RSI), such as management's discussion and analysis (NID&A), to accompany the City's basic financial
statements. As part of our engagement, we will apply certain limited procedures to the City's RSI. These limited
procedures will consist principally of inquiries of management regarding the methods of measurement and
presentation, which management is responsible for affirming to us in its representation letter. Unless we encounter
problems with the presentation of the RSI or with procedures relating to it, we will disclaim an opinion on it. The
following RSI is required by generally accepted accounting principles and will be subjected to certain limited
procedures, but will not be audited:
Management's discussion and analysis.
2. Budgetary comparison schedule.
Supplementary information other than RSI, also accompanies the City of Dubuque's basic fmancial statements. We
will subject the following supplementary information to the auditing procedures applied in our audit of the basic
financial statements and will provide an opinion on it in relation to the basic financial statements:
1. Schedule of expenditures of federal awards.
2. Combining fund financial statements.
The following additional information accompanying the basic financial statements. will not be subjected to the
auditing procedures applied in our audit of the financial statements, and for which our auditor's report will disclaim
an opinion.
Introductory section.
2. Statistical tables.
PEOPLE. PRINCIPLES. POSSIBILITIES.
www.eidebailly.com
3999 Pennsylvania Ave., Ste. 100 1 Dubuque, Iowa 52002-2273 1 Phone 563.556.17901 Fax 563.557.7842 1 EOE
Audit Objectives
The objective of our audit is the expression of opinions as to whether your basic financial statements are fairly
presented, in all material respects, in conformity with U..S. generally accepted accounting principles and to report on
the fairness of the additional information referred to in the first paragraph when considered in relation to the basic
financial statements taken as a whole. The objective also includes reporting on-
• Internal control related to the financial statements and compliance with laws, regulations, and the
provisions of contracts or grant agreements, noncompliance with which could have a material effect on
the financial statements in accordance with Government Auditing Standards.
• Internal control related to major programs and an opinion (or disclaimer of opinion) on compliance with
laws, regulations, and the provisions of contracts or grant agreements that could have a direct and
material effect on each major program in accordance with the Single Audit Act Amendments of 1996 and
OMB Circulaz A-133, Audits of States, Local Governments, and Non-Profrt Organizations.
The reports on internal control and compliance will each include a statement that the report is intended solely for the
information and use of the body or individuals chazged with governance, others within the entity, management,
specific legislative or regulatory bodies, federal awarding agencies, and if applicable, pass-through entities and is not
intended to be and should not be used by anyone other than these specified parties.
Our audit will be conducted in accordance with generally accepted auditing standazds established by Auditing
Standazds Board (United States); the standards for financial audits contained in Government Auditing Standards,
issued by the Comptroller General of the United States; the Single Audit Act Amendments of 1996; and the
provisions of OMB Circular A-133, and will include tests of accounting records, a determination of major program(s)
in accordance with Circular A-133, and other procedures we consider necessary to enable us to express such opinions
and to render the required reports. If our opinions on the financial statements or the Single Audit compliance
opinions are other than unqualified, we will fully discuss the reasons with you in advance. If, for any reason, we are
unable to complete the audit or are unable to form or have not formed opinions, we may decline to express opinions or
to issue a report as a result of this engagement.
Management Responsibilities
Management is responsible for the basic financial statements and all accompanying information as well as all
representations contained therein. We will prepare the trial balance for use during the audit. Our preparation of the trial
balance will be limited to formatting information into a working trial balance based on management's chart of
accounts. As part of the audit, we will prepare a draft of your financial statements, schedule of expenditures of federal
awards, and related notes. You are responsible for making all management decisions and performing all management
functions relating to the financial statements, schedule of expenditures. of federal awazds, and related notes and for
accepting full responsibility for such decisions. You will be required to acknowledge in the management representation
letter that you have reviewed and approved the financial statements, schedule of expenditures of federal awards, and
related notes prior to their issuance and have accepted responsibility for them. Further, you aze required to designate an
individual with suitable skill, knowledge, or experience to oversee any nonaudit services we provide and for evaluating
the adequacy and results of those services and accepting responsibility for them.
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Management is responsible for establishing and maintaining internal controls, including monitoring ongoing activities;
for the selection and application of accounting principles; for the fair presentation in the financial statements of the
respective financial position of the governmental activities, the business-type activities, the discretely presented
component unit, each major fund, and the aggregate remaining fund information of the City and the respective
changes in financial position and, where applicable, cash flows in conformity with U.S. generally accepted
accounting principles; and for federal award program compliance with applicable laws and regulations and the
provisions of contracts and grant agreements.
Management is also responsible for making all financial records and related information available to us, including
identifying significant vendor relationships in which the vendor has the responsibility for program compliance and for
the accuracy and completeness of that information. Your responsibilities include adjusting the financial statements to
correct material misstatements and confirming to us in the representation letter that the effects of any uncorrected
misstatements aggregated by us during the current engagement and pertaining to the latest period presented aze
immaterial, both individually and in the aggregate, to the financial statements taken as a whole.
You aze responsible for the design and implementation of programs and controls to prevent and detect fraud, and for
informing us about all known or suspected fraud or illegal acts affecting the government involving (1) management,
(2) employees who have significant roles in internal control, and (3) others where the fraud or illegal acts could have a
material effect on the financial statements. Your responsibilities include informing us of your knowledge of any
allegations of fraud or suspected fraud affecting the government received in communications from employees, former
employees, grantors, regulators, or others. In addition, you aze responsible for identifying and ensuring that the entity
complies with applicable laws, regulations, contracts, agreements, and grants. Additionally, as required by OMB
Circular A-133, it is management's responsibility to follow up and take corrective action on reported audit findings
and to prepare a summary schedule of prior audit findings and a corrective action plan.
Management is responsible for establishment and maintenance of a process for tracking the status of audit findings and
recommendations. Management is also responsible for identifying for us previous audits or other engagements or
studies related to the objectives discussed in the Audit Objectives section of this letter. This responsibility includes
relaying to us corrective actions taken to address significant findings and recommendations resulting from those
audits or other engagements or studies. You aze also responsible for providing management's views on our current
findings, conclusions, and recommendations, aswell asyour planned corrective actions.
Audit Procedures-General
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements; therefore, our audit will involve judgment about the number of transactions to be examined and the areas
to be tested. We will plan and perform the audit to obtain reasonable rather than absolute assurance about whether the
financial statements are free of material misstatement, whether from (1) errors, (2) fraudulent financial reporting, (3)
misappropriation of assets, or (4) violations of laws or governmental regulations that are attributable to the entity or
to acts by management or employees acting on behalf of the entity. Because the determination of abuse is subjective,
Government Auditing Standards do not expect auditors to provide reasonable assurance of detecting abuse.
Because an audit is designed to provide reasonable, but not absolute assurance and because we will not perform a
detailed examination of all transactions, there is a risk that material misstatements or noncompliance may exist and
not be detected by us. In addition, an audit is not designed to detect immaterial misstatements or violations of laws
or governmental regulations that do not have a direct and material effect on the financial statements or major
programs. However, we will inform you of any material errors and any fraudulent financial reporting or
misappropriation of assets that come to our attention. We will also inform you of any violations of laws or
governmental regulations that come to our attention, unless cleazly inconsequential. We will include such matters in
the reports required for a Single Audit. Our responsibility as auditors is limited to the period covered by our audit and
does not extend to any later periods for which we are not engaged as auditors.
Our procedures will include tests of documentary evidence supporting the transactions recorded in the accounts, and
may include tests of the physical existence of inventories, and direct confirmation of receivables and certain other
assets and liabilities by correspondence with selected individuals, funding sources, creditors, and financial institutions.
We will request written representations from your attorneys as part of the engagement, and they may bill you for
responding to this inquiry. At the conclusion of our audit, we will require certain written representations from you
about the financial statements and related matters.
Audit Procedures-Internal Controls
Our audit will include obtaining an understanding of the entity and its environment, including intemal control,
sufficient to assess the risks of material misstatement of the financial statements and to design the nature, timing, and
extent of further audit procedures. Tests of controls may be performed to test the effectiveness of certain controls that
we consider relevant to preventing and detecting errors and fraud that are material to the financial statements and to
preventing and detecting misstatements resulting from illegal acts and other noncompliance matters that have a
direct and material effect on the financial statements. Our tests, if performed, will be less in scope than would be
necessary to render an opinion on internal control and, accordingly, no opinion will be expressed in our report on
internal control issued pursuant to Government Auditing Standards.
As required by OMB Circular A-133, we will perform tests of controls over compliance to evaluate the effectiveness
of the design and operation of controls that we consider relevant to preventing or detecting material noncompliance
with compliance requirements applicable to each major federal awazd program. However, our tests will be less in scope
than would be necessary to render an opinion on those controls and, accordingly, no opinion will be expressed in our
report on internal control issued pursuant to OMB Circulaz A-133.
An audit is not designed to provide assurance on internal control or to identify significant deficiencies. However,
during the audit, we will communicate to management and those charged with governance internal control related
matters that are required to be communicated under AICPA professional standards, Government Auditing
Standards, and OMB Circular A-133.
Audit Procedures-Compliance
As part of obtaining reasonable assurance about whether the financial statements aze free of material misstatement,
we will perform tests of the City's compliance with applicable laws and regulations and the provisions of contracts
and agreements, including grant agreements. However, the objective of those procedures will not be to provide an
opinion on overall compliance and we will not express such an opinion in our report on compliance issued pursuant to
Government Auditing Standards.
OMB Circular A-133 requires that we also plan and perform the audit to obtain reasonable assurance about whether
the auditee has complied with applicable laws and regulations and the provisions of contracts and grant agreements
applicable to major programs. Our procedures will consist of test of transactions and other applicable procedures
described in the OMB Circular A-133 Compliance Supplement for the types of compliance requirements that could
have a direct and material effect on each of the City's major programs. The purpose of those procedures will be to
express an opinion on the City's compliance with requirements applicable to each of its major programs in our
report on compliance issued pursuant to OMB Circular A-133.
Audit Administration, Fees, and Other
We understand that your employees will prepare all cash, or other confirmations we request and will locate any
documents selected by us for testing. .
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At the conclusion of the engagement, we will complete the appropriate sections of and sign the Data Collection
Form that summarizes our audit findings. We will provide an original and a copy of our reports to the City; however,
it is management's responsibility to submit the reporting package (including financial statements, schedule of
expenditures of federal awards, summary schedule of prior audit findings, auditors' reports, and a corrective action
plan) along with the Data Collection Form to the designated federal clearinghouse and, if appropriate, to pass-through
entities. The Data Collection Form and the reporting package must be submitted within the earlier of 30 days after
receipt of the auditors' reports or nine months after the end of the audit period, unless a longer period is agreed to in
advance by the cognizant or oversight agency for audits. At the conclusion of the engagement, we will provide
information to management as to where the reporting packages should be submitted and the number to submit.
If you intend to publish or otherwise reproduce the financial statements and make reference to our firm name, you
agree to provide us with printers' proofs or masters for our review and approval before printing. You also agree to
provide us with a copy of the final reproduced material for our approval before it is distributed. Additionally, if
you include our report or a reference to our firm name in an electronic format, you agree to provide the complete
electronic communication using or referring to our name to us for our review and approval prior to distribution.
This engagement letter includes your authorization for us to supply you with electronically formatted financial
statements or drafts of fmancial statements, financially sensitive information, spreadsheets, trial balances, or other
financial data from our files, upon your request.
The audit documentation for this engagement is the property of Eide Bailly LLP and constitutes confidential
information. However, pursuant to authority given by law or regulation, we may be requested to make certain
audit documentation available to federal cognizant or grantor agencies or their designee, a federal agency
providing direct or indirect funding, or the U.S. Government Accountability Office for purposes of a quality
review of the audit, to resolve audit findings, or to carry out oversight responsibilities. We will notify you of any
such request. If requested, access to such audit documentation will be provided under the supervision of Eide
Badly LLP personnel. Furthermore, upon request, we may provide copies of selected audit documentation to the
aforementioned parties. These parties may intend, or' decide, to distribute the copies or information contained
therein to others, including other governmental agencies.
The audit documentation for this engagement will be retained for a minimum of five yeazs after the date of the
auditor's report is issued or for any additional period requested by the federal cognizant or grantor agencies. If we
are awaze that a federal awazding agency, pass-through entity, or auditee is contesting ~an audit finding, we will
contact the party(ies) contesting the audit finding for guidance prior to destroying the audit documentation.
Our fee for these services will be at our standard hourly rates plus out-of-pocket costs (such as report
reproduction, word processing, postage, travel, copies, telephone, etc.) except that we agree that. our gross fee,
including expenses, will not exceed $56,200. Our standazd hourly rates vary according to the degree of
responsibility involved and the experience level of the personnel assigned to your audit. Our invoices for these
fees will be rendered each month as work progresses and are payable on presentation. The above fee is based on
anticipated cooperation from your personnel and the assumption that unexpected circumstances will not be
encountered during the audit. If significant additional time is necessary, we will discuss it with you and arrive at a
new fee estimate before we incur the additional costs.
Should our relationship terminate before our audit procedures aze completed and a report issued, you will be
billed for services to the date of termination. All bills are payable upon receipt. A service charge of 1% per month,
which is an annual rate of 12%, will be added to all accounts unpaid 30 days after billing date. If collection action
is necessary, expenses and reasonable attorney's fees will be added to the amount due.
Government Auditing Standards require that we provide you with a copy of our most recent external peer review
report and any letter of comment, and any subsequent peer review reports and letters of comment received during
the period of the contract. Our 2005 peer review report and letter of comment accompanies this letter.
DISPUTE RESOLUTION
The following procedures shall be used to resolve any disagreement, controversy or claim that may arise out of
any aspect of our services or relationship with you, including this engagement, for any reason (Dispute).
Specifically, we agree to first mediate and, if unsuccessful, then arbitrate all Disputes between us, including
without limitation any issue concerning the extent to which any Dispute is subject to azbitration, any Dispute
concerning this agreement, the limitations of remedy provided by this agreement, or claims for breach of contract,
negligence, fraud, fraud in the inducement, breach of fiduciary duty, violation of statute and any other cause of
action or remedy.
Mediation
All Disputes between us shall first be submitted to non-binding mediation by written notice (Mediation Notice) to
the other party. In mediation, we will work with you to resolve any differences voluntazily with the aid of an
impartial mediator. The mediator will be selected by mutual agreement, but if we cannot agree on a mediator, one
shall be designated by the American Arbitration Association (AAA).
The mediation will be conducted in Dubuque, Iowa, as specified by the mediator and agreed upon by the parties.
The parties agree to discuss their differences in good faith and to attempt, with the assistance of the mediator, to
reach an amicable resolution of the Dispute.
Each party will beaz its own costs in the mediation. The fees and expenses of the mediator will be shared equally
by the parties.
Arbitration
If any Dispute has not been resolved within ninety (90) days after the written mediation notice, the mediation
shall terminate and the Dispute will be settled by arbitration. The arbitration will be conducted in accordance with
the procedures in this document and the Arbitration Rules of the Dispute Resolution Rules for Professional
Accounting and Related Services Disputes of the American Arbitration Association, except where this agreement
differs.
The arbitration will be conducted in Dubuque, Iowa, before a panel of three (3) neutral arbitrators, two (2) of
whom shall be practicing certified public accountants.
Any issue concerning the extent to which any Dispute is subject to arbitration, or concerning the applicability,
interpretation, or enforceability of these procedures, including any contention that all or part of these procedures
are invalid or unenforceable, shall be governed by the Federal Arbitration Act and resolved by the azbitrators.
Indemnity
You agree to indemnify Eide Bailly LLP, its partners, affiliates, officers and employees (collectively Eide Bailly)
against any losses, including settlement payments, judgments, damage awazds, punitive or exemplary damages,
and the costs of litigation (including attorneys' fees) associated with a claim brought against by a third-party and
that arises out of or is in any way related to the negligence of the City of Dubuque.
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To the fullest extent permitted by law, Eide Bailly LLP shall indemnify and hold harmless the City from and
against all claims, damages, losses, and expenses, including but not limited to attorney's fees, azising out of or
resulting from Eide Ballly LLP's negligent performance of the Agreement.
Assignments Prohibited
You agree that you will not and' may not assign, sell, barter or transfer any legal rights, causes of actions, claims
or Disputes you may have against Eide Bailly, its partners, affiliates, officers and employees, to any other person
or party, or to any trustee, receiver or other third party.
If this letter defines the arrangements as you understand them, please sign and date this letter and return it to us.
Thank you for this opportunity to be of assistance to you. We appreciate your business.
EIDE BAILEY LLP
CPAs & Business Advisors
~~ ~.~~
David R. Cahill, Partner
ACCEPTED BY THE CITY OF DUBUQUE
_._._..
J ~xj ~~
Presiden Chairman Date
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Peer Review
To the Owners
EideBailly LLP
and the Center For Public Companies Audit Firms Peer Review Committee
We have reviewed the system of quality control for the accounting and auditing practice of
EideBailly LLP (the firm) applicable to non-SEC issuers in effect for the year ended July 31, 2005.
The firm's accounting and auditing practice applicable to SEC issuers was not reviewed by us
since the Public Company Accounting Oversight Board (PCAOB) is responsible for inspecting
that portion of the firm's accounting and auditing practice in accordance with PCAOB
requirements. A system of quality control encompasses the firm's organizational structure and the
policies adopted and procedures established to provide it with reasonable assurance of complying
with professional standards. The elements of quality control are described in the Statements on
Quality Control Standards issued by the American Institute of Certified Public Accountants (the
AICPA). The design of the system, and compliance with it, are the responsibilities of the firm.
Our responsibility is to express an opinion on the design of the system, and the firm's compliance
with that system based on our review.
Our review was conducted in accordance with standards established by the Peer Review
Committee of the Center for Public Company Audit Firms and included procedures to plan and
perform the review that are summarized in the attached description of the peer review process.
Our review would not necessarily disclose all weaknesses in the system of quality control or alI
instances of lack of compliance with it since it was based on selective tests. Because there are
inherent limitations in the effectiveness of any system of quality control, departures from the
system may occur and not be detected. Also, projection of any evaluation of a system of quality
control to future periods is subject to the risk that the system of quality control may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the system of quality control for the accounting and auditing practice applicable to
the non-SEC issuers of EideBailly LLP in effect for the year ended July 31, 2005, has been
designed to meet the requirements of the quality control standards for an accounting and auditing
practice established by the AICPA, and was complied with during the yeaz then ended to provide
the firm with reasonable assurance of complying with applicable professional standards.
As is customary in a peer review, we have issued a letter under this date that sets forth comments
relating to certain policies and procedures or compliance with them. The matters described in the
letter were not considered to be of sufficient significance to affect the opinion expressed in this
report.
~'PNL<j~"/ ~~~~~T CR.~OC~ ~~ 0
V
Greensboro, North Carolina
November 11, 2005
Related Letter of Comments
To the Partriers of
EideBailly LLP
And the Center for Public Company Audit Firms Peer Review Committee
We have reviewed the system of quality control for the accounting and auditing practice of
EideBailly LLP (the firm) in effect for the year ended July 31, 2005, and have issued our report
thereon dated November 12,2005. The matters described below were not considered to be of
sufficient significance to affect the opinion expressed in that report, which should be read in
conjunction with this letter.
Engagement Performance
Finding -The firm's quality control policies and procedures require the use of standard programs
on audit engagements to document procedures performed and conclusions reached. However, on
several engagements reviewed documentation of the independent corroboration of market values
of investments was incomplete. However, we were able to satisfy ourselves that, in each case,
procedures performed and conclusions reached were appropriate in determining the nature and
extent of auditing procedures for investments.
Recommendation -The firm should hold a training session for all professionals on the matters to
be considered and documented related to corroboration of market value information for
investments. In addition, the firm's practice aids should be reviewed with all professionals to
stress the effective use of these tools to assist the firm in conforming with professional standards.
The partners will be instructed to give special emphasis to this issue in their pre-issuance
engagement review process.
Finding -The firm's quality control policies and procedures and professional standards require
that management representation letters be tailored for matters concerning the industry in which
the client operates as well as unusual matters for which a representation from management is
deemed necessary. Our review disclosed situations where letters were not tailored for industry
consideration, inappropriate representations were included, and certain required matters were
omitted. None of the omissions or inappropriate items were of a magnitude to cause the issuance
of an improper report.
Recommendation -The firm should hold a training session for all professionals on the matters to
be considered in drafting management representation letters. In addition, the firm's practice aids
shou] d be reviewed with all professionals to stress the effective use of these tools to assist the
firm in conforming with professional standards relative to such letters.
Greensboro, North Carolina
November 11, 2005
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Attachment to the Peer Review Report of EideSailly LLP
Description of the Peer Review Process
Overview
Firms enrolled in the AICPA Center for Public Company Audit Firms (the Center) Peer Review
Program have their system of quality control periodically reviewed by independent peers. These
reviews are system and compliance oriented with the objectives of evaluating whether:
The reviewed firm's system of quality control for its accounting and auditing practice
applicable to non-SEC issuers has been designed to meet the requirements of the Quality
Control Standards established by the AICPA.
The reviewed firTn's quality control policies and procedures applicable to non-SEC issuers
were being complied with to provide the firm with reasonable assurance of complying with
professional standards.
A peer review is based on selective tests and directed at assessing whether the design of and
compliance with the firm's system of quality control for its accounting and auditing practice
applicable to non-SEC issuers provides the firm with reasonable, not absolute, assurance of
complying with professional standards. Consequently a peer review on the firm's system of
quality control is not intended to, and does not, provide assurance with respect to any individual
engagement conducted by the firm or that none of the financial statements audited by the firm
should be restated.
The Center's Peer Review Committee (PRC) establishes and maintains peer review standards. At
regular meetings and through report evaluation task forces, the PRC considers each peer review,
evaluates the reviewer's competence and performance, and examines every report, letter of
comments, and accompanying response from the reviewed firm that states its corrective action
plan before the peer review is finalized. The Center's staff plays a key role in overseeing the
performance of peer reviews working closely with the peer review teams and the PRC.
Once the PRC accepts the peer review reports, letters of comments, and reviewed firms'
responses, these documents are maintained in a file available to the public. In some situations, the
public file also includes a signed undertaking by the firm agreeing to specific follow-up action
requested by the PRC.
Firms that perform audits or play a substantial role in the audit of one or more SEC issuers, as
defined by the Public Company Accounting Oversight Board (PCAOB), are required to be
registered with and have their accounting and auditing practice applicable to SEC issuers
inspected by the PCAOB. Therefore, we did not review the fnan's accounting and auditing
practice applicable to SEC issuers.
Planning the Review for the Firm's Accounting and Auditing Practice Applicable to Non-
SEC Issuers
To plan the review of EideBailly [.Le, we obtained an understanding of (1) the nature and extent
of the firm's accounting and auditing practice, and (2) the design of the firm's system of quality
control sufficient to assess the inherent and control risks implicit in its practice. Inherent risks
were assessed by obtaining an understanding of the firm's practice, such as the industries of its
clients and other factors of complexity in serving those clients, and the organization of the firm's
persoruiel into practice units. Control risks were assessed by obtaining an understanding of the
design of the firm's system of quality control, including its audit methodology, and monitoring
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procedures. Assessing control risk is the process of evaluating the effectiveness of the reviewed
firm's system of quality control in preventing the performance of engagements that do not
comply with professional standards.
Performing the' Review for the Firm's Accounting and Auditing Practice Applicable to Non-
SEC Issuers
Based on our assessment of the combined level of inherent and control risks, we identified
practice units and selected engagements within those units to test for compliance with the firm's
system of quality control. The engagements selected for review included audits of Employee
Benefit Plans, audits performed under FDICIA, audits performed under Governmental Audit
Standards and multi-office audits. The engagements selected for review represented a cross-
section of the firm's accounting and auditing practice with emphasis on higher-risk engagements.
The engagement reviews included examining working paper files and reports and interviewing
engagement personnel.
The scope of the peer review also included examining selected administrative and personnel files
to determine compliance with the firm's policies and procedures for the elements of quality
control pertaining to independence, integrity, and objectivity; personnel management; and
acceptance and continuance of clients and engagements. Prior to concluding the review, we
reassessed the adequacy of scope and conducted a meeting with firm management to discuss our
findings and recommendations.
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