State of Arizona June 30, 2003 Single Audit Report

Office Of The Auditor General

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A REPORT
TO THE
ARIZONA LEGISLATURE
Financial Audit Division
Single Audit
State of Arizona
Year Ended June 30, 2003
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 • [phone]
Additionally, many of our reports can be found in electronic format at:
www.auditorgen.state.az.usState of Arizona
Single Audit Reporting Package
June 30, 200 3


Table of Contents Page

Comprehensive Annual Financial Report

Issued separately

Reports on Compliance and Internal Control

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

Report on Compliance with Requirements Applicable to Each Major Program and
on Internal Control over Compliance in Accordance with OMB Circular A-133 3

Schedule of Expenditures of Federal Awards6

Schedule of Findings and Questioned Costs

Summary of Auditors’ Results40

Federal Award 42

Appendix

State of Arizona Agency Codes55


State Responses

Corrective Action Plan 58

Summary Schedule of Prior Audit Findings71




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

Independent Auditors’ Report on Compliance and on Internal Control over
Financial Reporting 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 Franklin L. “Jake” Flake, Speaker
Arizona House of Representatives

The Honorable Charles E. Jones, 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, 2003, which collectively comprise
the State’s basic financial statements and have issued our report thereon dated January 16, 2004, which
was modified for the following reasons as described therein. An adverse opinion was expressed on the
aggregate discretely presented component units because the financial statements of the State
Compensation Fund are presented on a statutory basis of accounting that is not in conformity with U.S.
generally accepted accounting principles. In addition, our report was modified as to consistency because
of a change in reporting entity resulting from fund reclassifications; a change in the application of an
accounting principle for an increase in the capitalization threshold for equipment at the University of
Arizona; and because the State Compensation Fund changed its basis for reporting financial statements
from U.S. generally accepted accounting principles to a statutory basis of accounting. Finally, our report
was modified due to our reliance on the reports of 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 Arizona Power Authority, State Compensation Fund, and University Medical
Center, included in the discretely presented Component Units statements; and the Public Safety
Personnel Retirement System, Corrections Officer Retirement Plan, and Elected Officials’ Retirement Plan
included in the Fiduciary statements; were not audited by the other auditors in accordance with
Government Auditing Standards.

th2910 NORTH 44 STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • [phone] • FAX [phone]
Compliance

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 grants, noncompliance with which could have a direct and material effect on the
determination of basic 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 that
are required to be reported under Government Auditing Standards. However, we noted certain immaterial
instances of noncompliance that we will report to various state agencies’ management in separate letters.

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 financial
statements and not to provide assurance 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 condition in which the design or operation of one
or more of the internal control components does not reduce to a relatively low level the risk that
misstatements in amounts that would be material in relation to the 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 the State’s management in separate letters.

This report is intended solely for your information 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

January 16, 2004
2




STATE OF ARIZONA
OFFICE OF THE
DEBRA K. DAVENPORT, CPA WILLIAM THOMSON AUDITOR GENERAL DEPUTY AUDITOR GENERAL 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 Franklin L. “Jake” Flake, Speaker
Arizona House of Representatives

The Honorable Charles E. Jones, 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, 2003, 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 departments
were audited by other auditors, and our opinion, insofar as it relates to the compliance of those
departments 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 auditin