May 18, 2016 WASHINGTON SUBURBAN SANITARY COMMISSION INITIAL AUDIT COMMUNICATION WITH THE COMMISSIONERS FOR FISCAL YEAR 2016 FINANCIAL STATEMENTS, A-133, OPEB TRUST AND RETIREMENT PLAN AUDITS

Agenda 2 Introductions Objectives BCA Watson Rice’s Responsibilities Audit Approach & Timing Communications – End of Audit Matters For Discussion New Government Accounting Standards & A-133 Audit Requirements

Introductions 3 BCA Watson Rice, LLP Marshall Blair, Engagement Principal Albert Lucas, Quality Assurance Partner Kiyesha Holliday, Audit Senior

Objectives 4 Communicate clearly with those charged with governance the responsibilities of the auditor regarding the financial statement audit and an overview of the planned scope and timing of the audit. Obtain from those charged with governance information relevant to the audit. Provide those charged with governance with timely observations arising from the audit that are significant and relevant to their responsibility to oversee the financial reporting process. Promote effective two-way communication between the auditor and those charged with governance.

Objectives 5 Communication regarding the planned scope and timing of the audit may assist: those charged with governance to discuss issues of risk and materiality with the auditor; those charged with governance to understand better the consequences of the auditor's work and to identify any areas in which they may request the auditor to undertake additional procedures; and the auditor to understand better the entity and its environment.

Responsibilities – Year Ended June 30, Financial Statements Audits – Opine on WSSC’s financial statements OMB Circular A-133 Audit: Report on Internal Control Over Financial Reporting and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards Report on Compliance with Requirements that Could have a Direct and Material Effect on each Major Program and on Internal Control over Compliance in Accordance with OMB Circular A-133

Responsibilities – Year Ended June 30, Report to those Charged with Governance (SAS114): Initial communication – Today’s meeting. Final communication – Usually done in November each year Report on Internal Control Deficiencies and/or Management letter, if required (SAS112/115): Material weaknesses, if identified Significant deficiencies, if identified Control deficiencies, if identified

Responsibilities – Year Ended June 30, Audit of the OPEB Trust and Retirement Plan OPEB – Fieldwork completed and draft reports have been prepared. Awaiting confirmations. Reports are to be finalized. Retirement Plan – Fieldwork is in progress. Audit of significant areas continues; however, draft report dependent on final actuarial valuation.

Responsibilities Summary 9 We are responsible for forming and expressing an opinion about whether the financial statements that have been prepared by management with the oversight of those charged with governance are presented fairly, in all material respects, in conformity with generally accepted accounting principles.  The audit of the financial statements does not relieve management or those charged with governance of their responsibilities.  Our scope does not include expressing an opinion on the effectiveness of internal control over financial reporting, but assessing internal controls to design audit procedures. WSSC may increase the scope to include an audit of internal controls.

Audit Approach Summary 10 BCA Watson Rice Audit Phases:  Planning – some key planning activities include:  Materiality and significant accounts/class of transactions determination  Preliminary analytics  Update our understanding of WSSC and its environment  Update our understanding of WSSC’s entity level controls  Update financial reporting process/controls  Assess fraud risk and controls relevant to fraud  Identify Risk of Material Misstatement (RMM) at entity and account levels  Determine evidence gathering approach, confidence levels & risks  To be accomplished by: Interviews with key directors and managers Interviews/inquiries, inspections, observations, analytics, walkthroughs.

Audit Approach Summary(Cont’d) 11 BCA Watson Rice Audit Phases (Cont’d):  Interim Audit  Determine inherent and control risk for significant areas  Test internal controls (key controls) of significant areas  Conduct audit of major financial systems – Assess general and application controls. Use data analytics to test certain areas.  Design and plan remaining audit procedures  Final Audit  Apply substantive audit procedures to significant areas  Investigate any audit differences, and evaluate findings  Reporting  Form audit opinion and report

Audit Approach Summary(Cont’d) 12 BCA Watson Rice Audit Phases – IT Review(Cont’d):  Scope of Information Technology (“IT”) review will be focused on systems and processes supporting WSSC’s financial processing environment and key supporting infrastructure components.  IT scope of application controls testing will be fully determined during the planning stages of the audit.  The following general control areas are usually assessed:  Access controls  Application development and change controls  Segregation of duties  System software controls  Service continuity  CISCO SSAE 16 Type II report review.  Using data analytics techniques to test certain areas

Audit Approach Summary(Cont’d) 13  A-133 Audit  Obtain SEFA and populations for listed programs  Determine risks for the various programs  Determine type A, type B and major programs  Test internal controls over compliance  Test WSSC’s compliance with the various requirements of selected programs  Summarize findings and obtain management’s comments, if any  Prepare audit report

Audit Timing OPEB and Retirement Plans 14 PhasePlanned Dates* OPEB - Planning, internal control assessment and testing of key controls, substantive audit procedures April 11 – 22, 2016 OPEB - Issue draft financial statementsApril 29, 2016 OPEB - Finalize financial statementsMay 6, 2016 Retirement - Planning, internal control assessment and testing of key controls, substantive audit procedures May 2 – 13, 2016 Retirement - Issue draft financial statementsMay 20, 2016 Retirement - Finalize financial statementsMay 27, 2016 (* Audit timing depends upon receiving requested schedules and information timely. )

Audit Timing WSSC Financial Statements and A PhasePlanned Dates* Planning, internal control assessment and testing of key controls May 16 – June 10, 2016 Substantive audit proceduresJuly 18 – August 19, 2016 Complete field work, review draft report and provide comments on the financial statements August 21, 2016 Issue audit report on the financial statementsAugust 26, 2016 OMB Circular A-133 Audit (BCA Watson Rice prefers concurrent audit with financial statements) September 14, 2016 Presentation to the Commissioners TBD (* Audit timing depends upon receiving requested schedules and information timely. )

Communications - End Of Audit 16 Matters to be communicated at the end of the audit include: Audit adjustments, if any Uncorrected misstatements, if any Disagreements with management Difficulties encountered during the audit Change in, or adoption of new, accounting policies, if any

Matters For Discussion 17 We seek the Commissioners’ input on the following matters: The appropriate person(s) in WSSC's governance structure with whom to communicate WSSC’s objectives and strategies, and the related risks that may result in material misstatements. Matters those charged with governance believe warrant particular attention during the audits, and any areas the Commissioners would require additional procedures be undertaken. Significant legal matters. Knowledge of any fraudulent activities. Any ethics and conflict of interest concerns. Other matters those charged with governance believe are relevant to the audit of the financial statements

18 New Government Accounting Standards No.Statement TitleEffective Dates 72Fair Value Measurement and ApplicationJune 16, Accounting and Financial Reporting for Pensions and Related Assets that are not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 June 16, 2016 / June 16, Financial Reporting for Postemployment Benefit Plans Other than Pension Plans June 16, Financial Reporting for Postemployment Benefits Other than PensionsJune 16, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments June 16, Tax Abatement DisclosuresDecember 16, Pensions Provided Through Certain Multiple ‐ Employer Defined Benefit Pension Plans December 16, External Investment PoolsJune 16, 2016 / December 16, Blending Requirements for Certain Component UnitsJune 16, 2017

19 The new rules took effect for single audits of fiscal years that commenced on or after January 1, One significant change is, OMB has raised the threshold for OMB A-133 compliance audits of entities that receive federal award money from $500,000 per fiscal year to $750,000 per fiscal year. Another significant change centers around the risk assessment purposes whereby OMB A-133 classifies major programs as Type A programs, which are the larger programs, or as Type B, which are programs on the smaller size. The new requirements increase the Type A/B threshold from $300,000 to $750,000 for organizations that spend between $750,000 and $25 million in total federal awards per fiscal year; with higher thresholds for higher levels of Federal grant expenditures. The minimum coverage rules for the percentage of federal awards that must be audited also changed the new Uniform Grant Guidance. For entities meeting the low-risk criteria noted above, the percentage of audit coverage dropped from 25 percent to 20 percent. Entities not meeting the low-risk criteria now have a percentage of audit coverage of 40 percent, which is down from 50 percent in the current A-133 rules. New A-133 Audit Requirements