Audit Report Template With Exhibits
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OFFICE OF THE AUDITOR DEPARTMENT OF AVIATION AYALA’S INCORPORATED REVENUE AND CONTRACT COMPLIANCE AUDIT OCTOBER 2004 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 • Denver, Colorado 80202 • 720-913-5000, FAX 720-913-5247 www.denvergov.org/auditor Dennis J. Gallagher Auditor October 15, 2004 Ms. Vicki Braunagel, Co-Manager Mr. Dan R. Ayala, President Mr. Turner West, Co-Manager Ayala’s Incorporated Department of Aviation 145 East Reno Avenue, Suite E-6 City and County of Denver Las Vegas, Nevada 89119 Dear Ms. Braunagel, Mr. West, and Mr. Ayala: Attached is the Auditor’s Office Internal Audit Division’s report of their revenue and contract compliance audit of Ayala’s Incorporated (Ayala) for operations at Denver International Airport. The purpose of the audit was to determine whether Ayala properly reported gross revenues and paid the City’s percentage, space rent, and other charges in accordance with their contracts and associated amendments. The Internal Audit Division found one reportable condition as detailed in the accompanying report. We commend Ayala for their timely payments of monthly compensation fees. If you have any questions, please call Mike Clark, Director of Internal Audit at 720-913-5029. Sincerely, Dennis J. Gallagher Auditor DJG/kh cc: Honorable John Hickenlooper, Mayor Honorable ...
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OFFICE OF THE AUDITOR
D
EPARTMENT OF
A
VIATION
A
YALA
’
S
I
NCORPORATED
R
EVENUE
A
ND
C
ONTRACT
C
OMPLIANCE
A
UDIT
O
CTOBER
2004
Dennis J. Gallagher
Auditor
The prudent stewardship of Denver’s finances, resources and financial records!
We are also committed to
improving accountability, efficiency, effectiveness and performance in city government.
We will scrupulously
protect the taxpayer’s interests and work collaboratively with all concerned to improve our city and its government.
1
City and County of Denver
201 West Colfax Ave., Dept. 705
•
Denver, Colorado 80202
•
720-913-5000, FAX 720-913-5247
www.denvergov.org/auditor
Dennis J. Gallagher
Auditor
October 15, 2004
Ms. Vicki Braunagel, Co-Manager
Mr. Turner West, Co-Manager
Department of Aviation
City and County of Denver
Mr. Dan R. Ayala, President
Ayala’s Incorporated
145 East Reno Avenue, Suite E-6
Las Vegas, Nevada 89119
Dear Ms. Braunagel, Mr. West, and Mr. Ayala:
Attached is the Auditor’s Office Internal Audit Division’s report of their revenue and contract
compliance audit of Ayala’s Incorporated (Ayala) for operations at Denver International Airport.
The purpose of the audit was to determine whether Ayala properly reported gross revenues and
paid the City’s percentage, space rent, and other charges in accordance with their contracts and
associated amendments.
The Internal Audit Division found one reportable condition as detailed in the accompanying
report. We commend Ayala for their timely payments of monthly compensation fees.
If you have any questions, please call Mike Clark, Director of Internal Audit at 720-913-5029.
Sincerely,
Dennis J. Gallagher
Auditor
DJG/kh
cc:
Honorable John Hickenlooper, Mayor
Honorable Members of City Council
Ms. Cheryl Cohen-Vader, Chair, Audit Committee
Mr. Cole Finegan, City Attorney
Mr. John Bennett, City Council Staff Director
Mr. Pete Gingras, Assistant Deputy Manager of Aviation/Property
Mr. Stan Koniz, Assistant Deputy Manager of Aviation/Finance
Mr. John Noe, Assistant Deputy Manager of Aviation/Technical Service
TABLE OF CONTENTS
Transmittal Letter
1
Table of Contents
2
Internal Auditor’s Report
3
Executive Summary
4
Background, Scope, Objective, and Methodology
5
Findings, Recommendations, and Responses
6
Schedule of Amounts Due and Paid and Related Notes
8
2
The prudent stewardship of Denver’s finances, resources and financial records!
We are also committed to
improving accountability, efficiency, effectiveness and performance in city government.
We will scrupulously
protect the taxpayer’s interests and work collaboratively with all concerned to improve our city and its government.
3
City and County of Denver
201 West Colfax Ave., Dept. 705
•
Denver, Colorado 80202
•
720-913-5000, FAX 720-913-5247
www.denvergov.org/auditor
Dennis J. Gallagher
Auditor
INTERNAL AUDITOR’S REPORT
We have completed a revenue and contract compliance audit for Ayala at Denver International
Airport for the year ended December 31, 2003.
The purpose of this audit was to determine if
Ayala properly reported gross revenue and paid the City’s percentage, space rent, and other
charges in accordance with their contracts and associated amendments with the City and County of
Denver. We also determined whether rules and regulations as required under the circumstances
were complied with and the internal controls in place were adequate. This audit was included in
the Auditor’s Office Internal Audit Division’s 2003 Annual Audit Plan and is authorized pursuant
to the City and County of Denver Charter, Article V, Part 2, §5.2.1.
We conducted our audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the enclosed Schedule of the Amounts Due and Paid is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the revenue amounts received and
disclosures reported.
Our conclusion from the audit is that there is evidence of existing contract language discrepancies
and the Schedule of Amounts Due and Paid is free of material misstatement.
We extend our appreciation to all personnel who assisted and cooperated with us during the course
of our examination.
Internal Audit Division
Michael Clark, CPA
Director of Internal Audit
Date: October 15, 2004
Staff: Dick Wibbens, CPA, Audit Manager
Marcus Richardson, Audit Supervisor
Adeniyi Kelani, Ph.D., Lead Auditor
Freddie Martin, Staff Auditor
AYALA’S INCORPORATED
EXECUTIVE SUMMARY
FOR THE YEAR ENDED DECEMBER 31, 2003
This summary highlights the finding identified in this revenue and contract compliance audit
report which is more fully described in the Finding, Recommendation, and Response section
beginning on page six.
The Finding, Recommendation, and Response section also includes the
responses of Denver International Airport (DIA).
Ayala’s Incorporated (Ayala) declined to
respond.
Performance Guarantee
We found a discrepancy in contract language for the City’s performance guarantee amount.
Additionally, Ayala’s submission of the performance guarantee was late.
4
AYALA’S INCORPORATED
BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY
FOR THE YEAR ENDED DECEMBER 31, 2003
Background
Ayala has two agreements and one storage space lease to operate at DIA.
A brief description of
each agreement and the storage lease is noted below.
Ayala has a nonexclusive right to occupy and use concession spaces to sell food and beverages at
DIA.
The company serves gourmet coffees, bakery goods, and croissant sandwiches in the main
terminal and concourse B.
In addition, the concessionaire has a storage space lease with the
City.
Ayala is required to pay $792 annually for storage space.
Ayala is required to pay the City monthly the greater of 16% and 17% of its gross revenues, or a
minimum monthly guarantee of $3,994 and $2,533, derived from its main terminal and
Concourse B locations, respectively.
Scope
Our audit of Ayala at DIA (PeopleSoft fund and organization number 73800/6013000) was for
the year ended December 31, 2003. The scope of our audit was to determine whether Ayala and
DIA complied with various terms and conditions of the contracts, other City rules and
regulations, and good accounting and administrative internal controls.
Objective
The objective of our audit was to determine if Ayala properly reported gross revenue and paid
the City’s percentage, space rent, and other charges in accordance with the contracts. We also
determined whether Ayala and DIA complied with other City rules and regulations, as
applicable.
Methodology
To meet our audit objectives, the following evidence gathering and analysis techniques were
used:
•
Review of internal controls
•
Search for unrecorded revenues
•
Obtain an understanding of the operating system
•
Conduct a walk-through of operating processes
•
Interview Ayala and DIA representatives
•
Utilize analytical procedures as predictive tests
5
AYALA’S INCORPORATED
FINDINGS, RECOMMENDATIONS, AND RESPONSES
FOR THE YEAR ENDED DECEMBER 31, 2003
1.
Performance Guarantee
During our review of contract language we found a discrepancy in the performance guarantee
amount between Section 8.03 and the applicable summary page of the contract.
Section 8.03 of
the contract requires the company to deliver a $792 letter of credit, or surety, equal to 12 months
of monthly rent. The summary page, however, requires the company to delivery a $396 letter of
credit, or surety, equal to 6 months of monthly rent. Accordingly, during the audit, DIA clarified
this contract language with Ayala on May 10, 2004.
We also found that Ayala did not submit their performance guarantee in accordance to the
contract due date.
Contract Section 8.03 requires Ayala to submit a performance guarantee to
the City on November 12, 2003.
Ayala actually submitted their performance guarantee on
May 17, 2004, which was 187 days late, after DIA notified Ayala of this default on
May 12, 2004.
Recommendation
We recommend that DIA and City Attorney should review and monitor contract language more
closely to minimize potential ambiguity or discrepancies from occurring.
We also recommend
that DIA develop a process to notify Ayala of any deficiencies with contract requirements in a
timely manner.
Department of Aviation Response
“DIA has a contract process in place that in most cases prevents lease contradictions to survive
the process. The process is as follows:
1.
The City Attorney’s Office prepares an initial draft agreement.
2.
The draft is reviewed by the Property Management Section’s assigned Project Manager.
3.
The draft is returned to the City Attorney’s Office with comments and corrections for
final edit.
4.
A signature ready agreement is sent to the second party tenant for review and comment.
In most instances, the tenant’s legal counsel also provides a review for client benefit.
“As noted above, several reviews are performed before the draft agreement is finalized, and it is
a rare exception for a contradiction to occur. However, the Department of Aviation will review
this process and determine if additional checklists are necessary to avoid such contradictions in
the future.
6
FINDINGS, RECOMMENDATIONS AND RESPONSES
AYALA’S INCORPORATED
“Due to the lease contradiction (typographical error regarding twelve months instead of six
months for the performance guarantee) the Property Office Compliance Group delayed sending
stair step letters until the error was corrected. The correction was completed on May 10, 2004
and the first compliance letter was sent May 12, 2004. The cash security deposit was received
May 17, 2004.”
Ayala’s Incorporated Response
Ayala declined to respond.
7
AYALA’S INCORPORATED
SCHEDULE OF AMOUNTS DUE AND PAID
FOR THE YEAR ENDED DECEMBER 31, 2003
Gross Revenue (Note 1)
$1,460,487
Amount
Amount
Due
Due
Balance
(Note 2)
(Note 3)
Due
Compensation Fees
$227,505
$227,505
$
-
Storage Rent
792
792
-
Utility Charges
10,787
10,787
-
Total
$239,084
$239,084
$
-
The accompanying notes are an integral part of this schedule.
8
NOTES TO SCHEDULE OF THE BALANCE DUE AND PAID
AYALA’S INCORPORATED
Note 1.
Gross Revenue
– Gross revenue, as reported in the accompanying schedule, includes
all billings and receipts from sales, services, or doing business from the concession space by the
concessionaire at Denver International Airport.
It includes all transactions whether placed by
telephone, in person or by mail, and regardless of place or time of actual payment.
Reductions to
gross revenues are allowed for returns for credit, sales taxes collected and remitted to the State or
City, tips, and Federal excise taxes that must be separately stated and remitted to the Federal
government.
There are no reductions allowed for bad debts, loss from theft, or any other
deduction except as outlined in Section 5.02 of the Food and Beverage Concession Agreements.
Note 2.
Amounts Due
–
A.
Compensation Fee - According to Sections 5.01, 5.03(A) amended, and 5.03(B) of the
contracts, Ayala agreed to pay the City the greater of a percentage of the gross revenue each
month from its food and beverage operations or the monthly minimum guarantee. The
percentage compensation was greater than the monthly minimum guarantee for the 2003
calendar year.
According to Section 5.08 of the contracts, effective March 1, 2003, the monthly minimum
guarantee increased from $3,768 to $3,994 for the contract dated March 8, 1994, and $2,390
to $2,533 for the contract dated August 4, 1994.
According to amended Section 5.01 of the contracts, effective December 1, 2003, the
percentage fee increased by 1%. Compensation fees, as reported in the accompanying
schedule, include four percentage fees from two food and beverage agreements. We
calculated compensation fee amounts due as follows:
Gross Revenue
(January 1, 2003 to November 30, 2003)
$682,756
Multiplied by Percentage Fee
15%
Compensation Fee Due
$102,413
Gross Revenue
(December 1, 2003 to December 31, 2003)
$
74,617
Multiplied by percentage fee
16%
Compensation Fee Due
$
11,939
Gross Revenue
(January 1, 2003 to November 30, 2003)
$ 637,649
Multiplied by Percentage Fee
16%
Compensation Fee Due
$ 102,024
Gross Revenue
(December 1, 2003 to December 31, 2003)
$
65,465
Multiplied by percentage fee
17%
Compensation Fee Due
$
11,129
The total compensation fee amounts due for 2003 as calculated above was $227,505.
9
NOTES TO SCHEDULE OF THE BALANCE DUE AND PAID
AYALA’S INCORPORATED
B.
Utility Charges – Utility charges, as reported in the accompanying schedule, represent water
and electric amounts due from the two Food and Beverage Agreements. According to
Section 7.02 of the contracts, the company shall pay all utility cost for water used within
concession space. Billings for water charges in the amount of $179 were prepared in
accordance with contract Section 7.02.
According to Section 7.03 of the contracts, the
company is require to maintain an electric meter at a location and type specified by the City
and shall invoice Ayala for the cost of all electricity used in the concession space. Billings
for the electric charges were $10,608.
C.
Storage Rent – According to Section 5.01 of the contract, Ayala agreed to pay the City $792
for the year ended December 31, 2003.
Note 3.
Amounts Paid –
The amounts paid were compiled from Denver International Airport’s
cash receipt records.
10
