State of Arizona Single Audit Report Year Ended June 30, 2017 A Report to the Arizona Legislature The Arizona Office of the Auditor General’s mission is to provide independent and impartial information and specific recommendations to improve the operations of state and local government entities. To this end, the Office provides financial audits and accounting services to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits and special reviews of school districts, state agencies, and the programs they administer. The Joint Legislative Audit Committee Representative Anthony Kern, Chair Senator Bob Worsley, Vice Chair Representative John Allen Senator Sean Bowie Representative Rusty Bowers Senator Judy Burges Representative Rebecca Rios Senator Lupe Contreras Representative Athena Salman Senator John Kavanagh Representative J.D. Mesnard (ex officio) Senator Steve Yarbrough (ex officio) Audit Staff Jay Zsorey, Director Nicole Franjevic, Manager and Contact Person Contact Information Arizona Office of the Auditor General 2910 N. 44th St. Ste. 410 Phoenix, AZ 85018 (602) 553-0333 www.azauditor.gov TABLE OF CONTENTS Auditors Section 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 1 Independent auditors’ report on compliance for each major federal program; report on internal control over compliance; and report on schedule of expenditures of federal awards required by the Uniform Guidance 3 Schedule of Findings and Questioned Costs 7 Summary of auditors’ results 7 Financial statement findings 9 Federal award findings and questioned costs 32 State Section Schedule of expenditures of federal awards 59 Notes to schedule of expenditures of federal awards 93 Appendix State of Arizona agency codes 99 State Response Corrective action plan 102 Summary schedule of prior audit findings 119 Universities Responses Corrective action plan 137 Report Issued Separately Comprehensive annual financial report Arizona Auditor General State of Arizona | Year Ended June 30, 2017 PAGE i Arizona Auditor General State of Arizona | Year Ended June 30, 2017 PAGE ii 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 Doug Ducey, Governor State of Arizona The Honorable Steve Yarbrough, President Arizona State Senate The Honorable J. D. Mesnard, Speaker Arizona House of Representatives The Honorable Scott Bales, Chief Justice Arizona Supreme Court We have audited, 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 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, 2017, and the related notes to the financial statements, which collectively comprise the State’s basic financial statements, and have issued our report thereon dated March 15, 2018. Our report includes a reference to other auditors who audited the financial statements of the Arizona Department of Transportation, the Arizona Health Care Cost Containment System, the Arizona State Lottery, the Arizona State Retirement System, the Public Safety Personnel Retirement System, the Corrections Officer Retirement Plan, the Elected Officials’ Retirement Plan, the Early Childhood Development and Health Board, the Arizona Correctional Industries, and certain aggregate discretely presented component units, as described in our report on the State’s financial statements. The other auditors did not audit the financial statements of the Arizona Power Authority and the Universities-Affiliated Component Units, except for those of the Arizona State University Preparatory Academy, Inc., which were reported as discretely presented component units, in accordance with Government Auditing Standards, and accordingly, this report does not include reporting on internal control over financial reporting or instances of reportable noncompliance associated with those discretely presented component units. For those state agencies and discretely presented component units the other auditors audited in accordance with Government Auditing Standards, this report includes our consideration of the results of the other auditors’ testing of internal control over financial reporting and compliance and other matters that the other auditors reported on separately. However, this report, insofar as it relates to the other auditors’ results, is based solely on the other auditors’ reports. Internal control over financial reporting In planning and performing our audit of the financial statements, we considered the State’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in 2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051 the circumstances for the purpose of expressing our opinions on the basic financial statements, but not for the purpose of expressing an opinion on the effectiveness of the State’s internal control. Accordingly, we do not express an opinion on the effectiveness of the State’s internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies, and therefore, material weaknesses or significant deficiencies may exist that have not been identified. However, as described in the accompanying schedule of findings and questioned costs, we and the other auditors identified certain deficiencies in internal control over financial reporting that we consider to be material weaknesses and significant deficiencies. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the State’s basic financial statements will not be prevented, or detected and corrected, on a timely basis. We consider the deficiencies described in the accompanying schedule of findings and questioned costs as items 2017-02, 2017-03, and 2017-04 to be material weaknesses. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We consider the deficiencies described in the accompanying schedule of findings and questioned costs as items 2017-01 and 2017-05 through 2017-22 to be significant deficiencies. Compliance and other matters As part of obtaining reasonable assurance about whether the State’s basic financial statements are free from 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 disclosed an instance of noncompliance that is required to be reported under Government Auditing Standards and that is described in the accompanying schedule of findings and questioned costs as item 2017-11. State of Arizona’s response to findings The State’s responses to the findings identified in our audit are presented in its corrective action plan at the end of this report. The State’s responses were not subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we express no opinion on them. Purpose of this report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the State’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the State’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Jay Zsorey, CPA Director, Financial Audit Division March 15, 2018 PAGE 2 Independent auditors’ report on compliance for each major federal program; report on internal control over compliance; and report on schedule of expenditures of federal awards required by the Uniform Guidance The Honorable Doug Ducey, Governor State of Arizona The Honorable Steve Yarbrough, President Arizona State Senate The Honorable J.D. Mesnard, Speaker Arizona House of Representatives The Honorable Scott Bales, Chief Justice Arizona Supreme Court Report on compliance for each major federal program We have audited the State of Arizona’s compliance