APPENDIX

SCOPE AND METHODOLOGY

The Audit Committee directed the California State Auditor to examine Lincoln’s governance and operational structure, administration of public funds, and assets. Specifically, the Audit Committee requested that we review Lincoln’s policies and procedures, administration of utilities, interfund loans, and accounting for development activities. The table below lists the objectives that the Audit Committee approved and the methods we used to address them.

Audit Objectives and the Methods Used to Address Them
AUDIT OBJECTIVE		METHOD
1	Review and evaluate the laws, rules, and regulations significant to the audit objectives.	Reviewed relevant state laws, rules, and regulations, as well as Lincoln’s city ordinances.
2	Examine Lincoln's governance and operational structure and assess its management controls and practices, including the extent to which management meets any applicable fiduciary duties to Lincoln’s residents. To the extent possible, identify alternative organizational structures that could result in more efficient and effective management of public funds and assets.	Interviewed city staff and councilmembers and reviewed policies, procedures, organizational charts, committee membership, division of responsibilities, and reporting requirements for city management and the city council. Identified the fiduciary duties for select management personnel, including the city councilmembers, the city manager, the director of support services, and the city attorney. Researched alternative organizational structures and best practices to identify efficient and effective management methods. However, we did not identify any deficiencies in Lincoln’s organizational structure that would warrant specific changes.
3	Evaluate the adequacy of Lincoln’s financial processes during the most recent five fiscal years by performing the following: a. Review Lincoln’s audited financial statements and internal controls to determine whether there were any deficiencies and whether Lincoln took recommended corrective actions in a timely manner. b. Assess Lincoln’s practices and processes for determining how it uses public funds and assets, and its policies and procedures related to budgeting and expenditures. c. Assess Lincoln’s policies and practices regarding money transfers. d. Assess Lincoln’s policies and practices for depositing and collateralizing public funds.	Reviewed Lincoln’s CAFRs and single audit reports from fiscal years 2013–14 through 2016–17 and assessed its efforts to address deficiencies through corrective action. The city had not issued its CAFR for fiscal year 2017–18 as of early March 2019. Compared Lincoln’s budgeting policies and procedures for its use of public funds and assets to guidance from the GFOA. Tested a selection of Lincoln’s expenditures to determine if the city followed its policies for approving purchases, contracts, and settlements of claims. Assessed Lincoln’s adherence to its policies regarding interfund loans and transfers by reviewing a judgmental selection of 20 interfund loans and transfers from fiscal years 2013–14 through 2017–18. Compared Lincoln’s policies and practices for depositing and collateralizing public funds to state requirements and found that Lincoln’s deposits are appropriately collateralized. Reviewed Lincoln’s contracts with its investment broker and advisor, examined its quarterly investment reports, and interviewed relevant city staff and the treasurer to determine whether Lincoln complied with its policies and paid appropriate investment fees.
4	Determine whether Lincoln, to the extent it is required by law or regulations, reported its overall financial situation, income, spending, assets, and reserves during the most recent five fiscal years. Further, determine whether Lincoln, to the extent it is required by law or regulations, reported its water and sewage usage, customers, connections, rates, acquisitions, and related data during the most recent five fiscal years.	Identified state reporting requirements pertaining to financial reporting, drinking water, water quality, and water loss. Although the city was late in completing its CAFRs for three of the five years from fiscal years 2013–14 through 2017–18, we found that the city generally complied with its other reporting requirements.
5	Assess Lincoln's process for collecting and reporting residential and commercial fees.	Interviewed staff to determine Lincoln’s practices for charging, collecting, and reporting residential and commercial fees. Reviewed all developer account balances to determine how many accounts were in arrears and the total funds outstanding from fiscal years 2013–14 through 2017–18. We determined that during this period, Lincoln reduced the number of developer accounts with negative balances. Further, the combined amounts of negative balances through fiscal year 2017–18 totaled less than $15,000, which we concluded was not significant. Reviewed a selection of five developer deposit accounts and 10 building permits from fiscal years 2013–14 through 2017–18 and compared the fees the city charged developers and builders to the amounts disclosed in its fee schedule to ensure the city charged the correct fees.
6	Determine whether the fees that Lincoln has been assessing ratepayers for water use have been in excess of the actual costs of providing the service during the most recent five fiscal years.	Interviewed staff and reviewed relevant documentation, including the 2013 and 2018 water rate studies, to determine how Lincoln established its 2018 water rates and evaluated whether the rates were commensurate with the cost to provide water. In May 2018, Lincoln completed a new water rate study, which included consideration for its own use of water. The study recommended and Lincoln ultimately adopted a uniform rate for all customers based on volume, which appears reasonable.
7	Determine whether Lincoln clearly communicates criteria for approving or denying applications for rate changes and whether this process is reasonably transparent.	Reviewed the rate change disclosure requirements in the state constitution and assessed whether Lincoln adhered to the required process in 2013 for disclosing and increasing water rates. We concluded that Lincoln generally complied with the disclosure requirements of Proposition 218 when changing its water rates in 2013. Determined that the rate change in 2018 occurred in October, which was after our audit period.
8	Determine whether Lincoln complies with relevant laws, regulations, policies, and guidelines regarding the use and distribution of redevelopment funds and, to the extent possible, assess the fairness and reasonableness of the criteria and methods Lincoln follows in its use and distribution of such funds.	Compared Lincoln’s redevelopment plans to the requirements set forth in state law and regulations, and determined that Lincoln’s redevelopment implementation plans contain the provisions necessary to comply with state law. Reviewed three outstanding redevelopment projects to determine whether Lincoln complied with its redevelopment plan and relevant laws and regulations when using redevelopment funds and found that these projects complied with state law. Did not further assess the fairness and reasonableness of Lincoln’s criteria and methods to use and distribute redevelopment funds because the State dissolved redevelopment agencies throughout California in 2011, which was before our audit period, and because our testing concluded that historically Lincoln’s redevelopment plans and projects complied with state law.
9	Review and assess any other issues that are significant to the audit.	Obtained and reviewed documentation of whether Lincoln paid for its use of its own utilities from fiscal years 2013–14 through 2017–18, and whether Lincoln paid for these services from appropriate funds. Assessed the city’s reliance on interfund loans to remain solvent.

Source: Analysis of the Audit Committee's audit request number 2018-110 and information and documentation identified in the table column titled Method.

Assessment of Data Reliability

In performing this audit, we relied on electronic data files that we obtained from Lincoln’s accounting and document management databases. The U.S. Government Accountability Office, whose standards we are statutorily obligated to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information we use to support our findings, conclusions, and recommendations. Because the city’s accounting system is paperless, we were unable to perform completeness or accuracy testing. Furthermore, we did not perform a review of the controls over these data because of the significant resources required to conduct such an analysis.

To gain assurance that the financial records were complete and accurate, we identified major funds that were pertinent to our audit procedures for fiscal years 2013–14 through 2016–17—the first four years of our five‑year audit period—and reconciled account totals from the general ledgers for those funds to the amounts reported in Lincoln’s audited CAFRs. We were unable to perform a similar comparison for fiscal year 2017–18 because, as of early March 2019, the city had not yet issued the CAFR for that year. Additionally, because Lincoln’s accounting system does not specifically distinguish transactions pertaining to interfund loans in a manner that would allow us to extract that data, we relied on spreadsheets prepared by city staff to track interfund and interagency loans during our audit period. To obtain assurance that the spreadsheets were complete, we reviewed interfund loan records in the city’s document management system and did not identify any loan agreements that were not included in the spreadsheets. Although we found the financial data to be of undetermined reliability for the purposes of our audit and we recognize that these limitations may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.