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A REPORT
TO THE
ARIZONA LEGISLATURE
Financial Audit Division
Single Audit
State of Arizona
Year Ended June 30, 2005
Debra K. Davenport
Auditor GeneralThe Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five
senators and five representatives. Her mission is to provide independent and impartial information and specific
recommendations to improve the operations of state and local government entities. To this end, she provides financial
audits and accounting services to the State and political subdivisions, investigates possible misuse of public monies, and
conducts performance audits of school districts, state agencies, and the programs they administer.
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.azauditor.govState of Arizona
Single Audit Reporting Package
Year Ended June 30, 2005


Table of Contents Page

Comprehensive Annual Financial Report

Issued separately

Single Audit Section

Report on Internal Control over Financial Reporting and on Compliance and
Other Matters Based on an Audit of Basic Financial Statements Performed
in Accordance with Government Auditing Standards 1

Report on Compliance with Requirements Applicableto EachMajorProgram
and on Internal Control over Compliance in Accordance with OMB Circular A-133 3

Schedule of Expenditures of Federal Awards7

Schedule of Findings and Questioned Costs

Summary of Auditors’ Results 53

Federal Award Findingsand Questioned Costs55

Appendix

State of Arizona Agency Codes76

State Responses

Corrective Action Plan 79

SummaryScheduleofPriorAudit Findings103




STATE OF ARIZONA
OFFICE OF THE
DEBRA K. DAVENPORT, CPA WILLIAM THOMSON AUDITOR GENERAL AUDITOR GENERAL DEPUTY AUDITOR GENERAL

Independent Auditors’ Report on Internal Control over Financial Reporting
and on Compliance and Other Matters Based on an Audit of Basic Financial
Statements Performed in Accordance with Government Auditing Standards


The Honorable Janet Napolitano, Governor
State of Arizona

The Honorable Ken Bennett, President
Arizona State Senate

The Honorable James P. Weiers, Speaker
Arizona House of Representatives

The Honorable Ruth V. McGregor, Chief Justice
Arizona Supreme Court

We have audited the financial statements of the governmental activities, business-type activities,
aggregate discretely presented component units, each major fund, and aggregate remaining fund
information of the State of Arizona as of and for the year ended June 30, 2005, which collectively comprise
the State’s basic financial statements, and have issued our report thereon dated March 31, 2006. Our
report was modified as to consistency because of a change in the application of an accounting principle
for a change in the method of calculating depreciation on research buildings at Arizona State University
and a change in accounting principle for the implementation of Governmental Accounting Standards
Board Statement No. 40. Finally, our report was modified due to our reliance on the reports of the other
auditors. We conducted our audit in accordance with U.S. generally accepted auditing standards and the
standards applicable to financial audits contained in Government Auditing Standards, issued by the
Comptroller General of the United States. The financial statements of the discretely presented component
units (except for the Water Infrastructure Finance Authority) and the fiduciary fund financial statements of
the Arizona State Retirement System, Public Safety Personnel Retirement System, Elected Officials’
Retirement Plan, and Corrections Officer Retirement Plan were not audited by the other auditors in
accordance with Government Auditing Standards

Internal Control over Financial Reporting

In planning and performing our audit, we considered the State’s internal control over financial reporting in
order to determine our auditing procedures for the purpose of expressing our opinions on the basic
financial statements and not to provide an opinion on internal control over financial reporting. Our
consideration of internal control over financial reporting would not necessarily disclose all matters in
internal control that might be material weaknesses. A material weakness is a reportable condition in which
the design or operation of one or more of the internal control components does not reduce to a relatively
th2910 NORTH 44 STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
low level the risk that misstatements caused by error or fraud in amounts that would be material in relation
to the basic financial statements being audited may occur and not be detected within a timely period by
employees in the normal course of performing their assigned functions. We and the reports of the other
auditors noted no matters involving internal control over financial reporting and its operation that we and
the other auditors consider to be material weaknesses. However, we noted other matters involving internal
control over financial reporting that we will report to various state agencies’ management in separate
letters at a future date.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether the State’s basic financial statements are free of
material misstatement, we performed tests of its compliance with certain provisions of laws, regulations,
contracts, and grant agreements, noncompliance with which could have a direct and material effect on the
determination of financial statement amounts. However, providing an opinion on compliance with those
provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The
results of our tests and the reports of the other auditors disclosed no instances of noncompliance or other
matters that are required to be reported under Government Auditing Standards. However, we noted certain
immaterial instances of noncompliance or other matters that we will report to various state agencies’
management in separate letters at a future date.

This report is intended solely for your information and use and that of the Chairperson and Vice
Chairperson of the Joint Legislative Audit Committee, federal awarding agencies, and pass-through
entities and is not intended to be and should not be used by anyone other than these specified parties.
However, this report is a matter of public record, and its distribution is not limited.



Debbie Davenport
Auditor General

March 31, 2006
2




STATE OF ARIZONA
OFFICE OF THE
DEBRA K. DAVENPORT, CPA WILLIAM THOMSON AUDITOR GENERAL AUDITOR GENERAL DEPUTY AUDITOR GENERAL

Independent Auditors’ Report on Compliance with Requirements
Applicable to Each Major Program and on Internal Control over Compliance in
Accordance with OMB Circular A-133

The Honorable Janet Napolitano, Governor
State of Arizona

The Honorable Ken Bennett, President
Arizona State Senate

The Honorable James P. Weiers, Speaker
Arizona House of Representatives

The Honorable Ruth V. McGregor, Chief Justice
Arizona Supreme Court


Compliance

We have audited the compliance of the State of Arizona with the types of compliance requirements
described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement
that are applicable to each of its major federal programs for the year ended June 30, 2005, except for that
portion of the federal programs administered by the Arizona Health Care Cost Containment System, the
Arizona Department of Transportation, and the Water Infrastructure Finance Authority. Those agencies
were audited by other auditors, and our opinion, insofar as it relates to the compliance of those agencies
with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement,
is based solely on the work of the other auditors. The State’s major federal programs are identified in the
Summary of Auditors’ Results section of the accompanying Schedule of Findings and Questioned Costs.
Compliance with the requirements of laws, regulations, contracts, and grants applicable to each of its
major federal programs is the responsibility of the State’s management. Our responsibility is to express an
opinion on the State’s compliance based on our audit and the work of the other auditors.

We conducted our audit of compliance in accordance with U.S. generally accepted auditing standards;
the standards applicable to financial audits contained in Government Auditing Standards, issued by the
Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments,
and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform
the audit to obtain reasonable assurance about whether noncompliance with the types of compliance
requirements referred to above that could have a direct and material effect on a major federal program
occurred. An audit includes examining, on a test basis, evidence about the State’s compliance with those s and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit and the work of the other auditors provide a reasonable basis for our opinion.
Our audit does not provide a legal determination on the State’s compliance with those requirements.

3
th2910 NORTH 44 STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
As described in the following table, the State did not comply with certain compliance requirements that are
applicable to the following major federal programs. Compliance with such requirements is necessary, in
our opinion, for the State to comply with requirements applicable to those programs.

Program Title (CFDA Number) Compliance Requirement Finding Number

Food Stamp Cluster: Special Tests and Provisions 05-109, 05-111
s (10.551)
State Administrative Matching Grants for Food
Stamp Program (10.561)
Child Nutrition Cluster: Subrecipient Monitoring 05-101

School Breakfast Program (10.553)
National School Lunch Program (10.555)
Special Milk Program for Children (10.556)
Summer Food Service Program for Children
(10.559)

Child and Adult Care Food Program (10.558) Subrecipient Monitoring 05-101

Homeland Security Grant Program Cluster: Cash Management, 05-125, 05-126,
Subrecipient Monitoring, 05-127
State Domestic Preparedness Equipment Special Tests and Provisions
Support Program (16.007) d
Support Program (97.004)
Emergency Management Performance Grants
(97.042)
Citizens Corps (97.053)
Homeland Security Grant Program (97.067)

Title I Grants to Local Educational Agencies Subrecipient Monitoring 05-101
(84.010)
Special Education Cluster: Level of Effort, Subrecipient 05-101, 05-105,
Monitoring, Reporting 05-123, 05-124
Special Education—Grants to States (84.027)
Special Education—Preschool Grants (84.173)
Rehabilitation Services—Vocational Rehabilitation Eligibility 05-114
Grants to States (84.126)

Even Start—State Educational Agencies (84.213) Matching, Subrecipient 05-101, 05-102,
Monitoring 05-103
Temporary Assistance for Needy Families (93.558) Activities Allowed or Unallowed, 05-109, 05-110
Allowable Costs/Cost
Principles, Eligibility

Social Services Block Grant (93.667) Subrecipient Monitoring 05-120
4 In our opinion, based on our audit and the work of the other auditors, except for the noncompliance
described in the preceding table, the State of Arizona complied, in all material respects, with the
requirements referred to above that are applicable to each of its other major federal programs for the year
ended June 30, 2005. The results of our auditing procedures and the work of the other auditors also
disclosed other instances of noncompliance with those requirements that are required to be reported in
accordance with OMB Circular A-133 and are described in the accompanying Schedule of Findings and
Questioned Costs as items 05-104, 05-106, 05-107, 05-110, 05-112, 05-113, 05-115, 05-116, 05-117, 05-
118, 05-119, 05-121, and 05-122.

Internal Control over Compliance

The State’s management is responsible for establishing and maintaining effective internal control over
compliance with the requirements of laws, regulations, contracts, and grants applicable to federal
programs. In planning and performing our audit, we considered the State’s internal control over
compliance with requirements that could have a direct and material effect on a major federal program in
order to determine our auditing procedures for the purpose of expressing our opinion on compliance and
to test and report on internal control over compliance in accordance with OMB Circular A-133.

We and the work of the other auditors noted certain matters involving internal control over compliance and
its operation that we and the other auditors consider to be reportable conditions. Reportable conditions
involve matters coming to our attention relating to significant deficiencies in the design or operation of
internal control over compliance that, in our judgment, could adversely affect the State’s ability to
administer a major federal program in accordance with the applicable requirements of laws, regulations,
contracts, and grants. Reportable conditions are described in the accompanying Schedule of Findings
and Questioned Costs as items 05-101, 05-102, 05-103, 05-104, 05-105, 05-106, 05-107, 05-108, 05-109,
05-110, 05-111, 05-112, 05-113, 05-114, 05-115, 05-116, 05-117, 05-118, 05-119, 05-120, 05-121, 05-122,
05-123, 05-124, 05-125, 05-126, 05-127.

A material weakness is a reportable condition in which the design or operation of one or more of the
internal control components does not reduce to a relatively low level the risk that noncompliance with the
applicable requirements of laws, regulations, contracts, and grants caused by error or fraud that would be
material in relation to a major federal program being audited may occur and not be detected within a
timely period by employees in the normal course of performing their assigned functions. Our consideration
of internal control over compliance would not necessarily disclose all matters in internal control that might
be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are
also considered to be material weaknesses. However, of the reportable conditions described above, we
consider items 05-101, 05-102, 05-103, 05-105, 05-108, 05-109, 05-110, 05-111, 05-114, 05-120, 05-123,
05-124, 05-125, 05-126, and 05-127 to be material weaknesses.

Schedule of Expenditures of Federal Awards

We have audited the financial statements of the governmental activities, business-type activities,
aggregate discretely presented component units, each major fund, and aggregate remaining fund
information of the State of Arizona as of and for the year ended June 30, 2005, and have issued our report
thereon dated March 31, 2006. Our report was modified as to consistency because of a change in the
application of an accounting principle for a change in the method of calculating depreciation on research
buildings at Arizona State University and a change in accounting principle for the implementation of
Governmental Accounting Standards Board Statement No. 40. Finally, our report was modified due to our
reliance on the reports of the other auditors. Our audit was performed for the purpose of forming opinions
on the financial statements that collectively comprise the State’s basic financial statements. The
accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional
5 analysis as required by OMB Circular A-133 and is not a required part of the basic financial statements.
Such information has been subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, based on our audit and the work of the other auditors, is fairly stated in all
material respects in relation to the basic financial statements taken as a whole.

This report is intended solely for your information and use and that of the Chairperson and Vice
Chairperson of the Joint Legislative Audit Committee, federal awarding agencies, and pass-through
entities and is not intended to be and should not be used by anyone other than these specified parties.
However, this report is a matter of public record, and its distribution is not limited.



Debbie Davenport
Auditor General

April 27, 2006, except for the
Schedule of Expenditures of Federal
Awards, for which the date is March 31, 2006

6 State of Arizona
Schedule of Expenditures of Federal Awards
Year Ended June 30, 2005
Grantee
Federal Grantor/Program Title/ Pass-Through Grantor /Contract Number (Appendix)CFDA/Identifying Number Expenditures
OFFICE OF NATIONAL DRUG CONTROL POLICY
07.I3PSAP549, I4PSA549, High Intensity Drug Trafficking Areas, Arizona Alliance Planning Committee AGA $ 751,007
01-11-A-130615-1001 PSA 1,544,931
I2PSAP549
Total Office of National Drug Control Policy $ 2,295,938
PEACE CORPS
08.031812015, 03181202, Peace Corps ASA $ 32,727
PC-04-8-109
08.031812017000, Peace Corps Coordinator NAA 15,372
44001720
Total Peace Corps $ 48,099
DEPARTMENT OF AGRICULTURE
Food Stamp Cluster
10.551 Food Stamps DEA $ 617,991,357
10.561 State Administrative Matching Grants for Food Stamp Program ASA 11,246 DEA 28,405,319
10.561 HSA 4,491,343
10.561 Subtotal 32,907,908
Food Stamp Cluster Subtotal 650,899,265
Child Nutrition Cluster
10.553 School Breakfast Program DCA 30,160
10.553 DJA 143,523 EDA 42,339,774
10.553 Subtotal 42,513,457
10.555 National School Lunch Program DCA 47,460 DJA 485,740
10.555 EDA 165,047,788 SDA 145,998
10.555 Subtotal 165,726,986
10.556 Special Milk Program for Children EDA 144,978
10.559 Summer Food Service Program for Children EDA 1,162,496
Child Nutrition Cluster Subtotal 209,547,917
Emergency Food Assistance Cluster
10.568 Emergency Food Assistance Program (Administrative Costs) DEA 1,226,664
10.569 Emergency Food Assistance Program (Food Commodities) DEA 6,484,940
Emergency Food Assistance Cluster Subtotal 7,711,604
Other Department of Agriculture Programs
10.001 Agricultural Research—Basic and Applied Research ASA 9,422 Agricultural Research—Basic and Applied Research UAA 6,514
10.001 Subtotal 15,936
10.025 Plant and Animal Disease, Pest Control, and Animal Care AHA 1,147,094 GFA 92,294
10.025 Subtotal 1,239,388
10.156 Federal—State Marketing Improvement Program AHA 4,400
10.164 Wholesale Farmers and Alternative Market Development ASA 10,488
See accompanying notes to schedule.
7

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