VIRGINIA HOUSING DEVELOPMENT AUTHORITY MULTIFAMILY DIVISION MORTGAGOR/GRANTEE S AUDIT GUIDE

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1 VIRGINIA HOUSING DEVELOPMENT AUTHORITY MULTIFAMILY DIVISION MORTGAGOR/GRANTEE S AUDIT GUIDE Control and Management of the Development As an inducement to the Virginia Housing Development Authority (VHDA) or the Department of Housing and Community Development (DHCD) to provide financing for a housing development, the Mortgagor/Grantee agrees to be regulated in the manner set forth in a Deed of Trust, Regulatory Agreement, Grant Agreement and/or other regulatory documents. These documents are incorporated in and made a part of the mortgage/grant security. In addition, the Mortgagor/Grantee and the Management Agent agree to conduct the operation and management of the development in accordance with the provisions of the regulatory documents. Organizational Relationships VHDA has formal relationships with several federal and state agencies that affect the monitoring of those loans/grants with which these agencies are affiliated and the regulations that are imposed. Often there is more than one type of funding or agency involvement in VHDA loans. Generally speaking, the most stringent requirements for each program are used for compliance purposes. It is important that auditors determine the nature of the financing and the relationship VHDA has with any other agency involved in the financings of the development of the Mortgagor/Grantee being audited. This will enable the auditor to determine which agency s rules take precedence not only in program requirements but also for audit purposes. Some basic information on VHDA financing and affiliated agencies follows. Virginia Housing Development Authority (VHDA) - VHDA provides direct financing of multifamily developments through various programs financed by taxable bonds, taxexempt bonds, the Virginia Housing Fund (VHF), and/or the VHDA General Fund. Department of Housing and Community Development (DHCD) - VHDA assists in underwriting and administers loan and grant programs for the Virginia Housing Partnership Revolving Fund (VHPRF) in coordination with the Department of Housing and Community Development. The VHPRF finances the Affordable Housing Production Program. Prior to 1998, the VHPRF financed several individual programs including the Multifamily Rehabilitation, Multifamily Production, SHARE Energy, SHARE Expansion, and Congregate programs. VHDA monitors compliance with DHCD program guidelines, including rent and occupancy restrictions, services the mortgages 1 of 20

2 and grants, and analyzes financial data (monthly and/or annually). reported directly to DHCD. All findings are Department of Housing and Urban Development (HUD) - VHDA is the mortgagee for HUD-insured and uninsured loans under several programs. VHDA has a number of HUD-insured loans in its portfolio. For the majority of these developments, HUD serves as the contract administrator and approves rents, monitors eligibility, authorizes reserve releases, and determines audit procedures. The servicing of HUD-insured loans is either handled directly by VHDA or through a servicing company approved by VHDA. VHDA performs management reviews, physical inspections and monitors the financial performance of these developments in its role as a mortgagee. VHDA is also the mortgagee of Section 236 and Section 8 uninsured loans that were financed through the Housing Finance Agency Set-Aside program. All servicing of these mortgages/grants is conducted in-house by Virginia Housing. VHDA also serves as the contract administrator for its Section 236 and Section 8 uninsured loan portfolio. As mortgagee and contract administrator, VHDA authorizes rent increases and reserve releases, monitors compliance with program requirements, and monitors compliance with the terms of the regulatory documents. Annual physical inspections, management and marketing reviews, and financial monitoring of the developments are performed by the Multifamily Asset Management staff. VHDA pays Housing Assistance Payments (HAP) to the Section 8 developments based on data supplied through the TRACS automated system. VHDA also administers through administrative agents the Section 8 Mod Rehab and Housing Choice Voucher programs for many localities throughout the Commonwealth of Virginia. These programs are handled by the Special Programs staff of Virginia Housing. Internal Revenue Service - Section 42 Tax Credits - VHDA is the housing credit agency for Virginia and issues Federal Low-Income Housing Tax Credits under Section 42 of the IRS code. After allocation of tax credits to a development, the Multifamily Development staff at VHDA conducts record inspections to ensure compliance with the monitoring regulations. Discrepancies are reported directly to the IRS. Department of Mental Health, Mental Retardation, Substance and Alcohol Abuse Services (DMHMRSAS) - VHDA offers various programs for special needs populations. For these programs, funding is provided in conjunction with Memoranda of Understanding with DMHMRSAS that provide for financial commitments by that agency to ensure the continued viability of the loan. These programs include both conventional and subsidized financing. 2 of 20

3 Reference Material The following documents, where applicable, are necessary in order to conduct the audit and should be obtained from the Mortgagor/Grantee and/or Management Agent prior to starting the examination. 1. Regulatory Agreement 2. Deed(s) of Trust 3. Deed of Trust Note(s) and Note Agreement, if applicable 4. Housing Management Agreement 5. Grant Agreement(s) 6. Any subsidy contracts in force at the development, including, where applicable, Housing Assistance Payments Contract, Rental Assistance Payments Contract, Interest Reduction Payments Contract, etc. 7. Rent schedule(s) in effect during the audited year. For assisted properties, the signed HUD 92458, Rent Schedule should be obtained. For conventional properties, schedules should be provided by the Management Agent. 8. Final Closing Determinations (VHDA Form No. CD:1500, CD- 1500A, or CD-1500B) or other closing settlement statements 9. Any notices of default or other regulatory non-compliance 10. Any mortgage or grant instruments including modification, forbearance and workout agreements and arrangements 11. Any contracts for services or supplies executed on behalf of the development 12. Confirmation from VHDA of loan, escrow and reserve balances, principal, interest, escrows, and reserves paid, etc. (VHDA Account Summary Status and Reserve History Report(s)) 13. Latest Management and Marketing Review, Physical Inspection Report and occupancy audit reports (Report of Occupancy Audit Findings, Occupancy Review, and Conclusion) issued by VHDA s Asset Management staff. The Management Agent s response and 3 of 20

4 supplemental follow-up to any of these reports, if any, should be obtained. 14. Any applicable HUD Handbooks, including but not limited to HUD , Occupancy Requirements of Subsidized Multifamily Housing Programs. Note: Directives, including handbooks, notices, interim notices and special directives, may be ordered by calling HUD at (800) , by faxing HUD at (202) , or by downloading from the Internet at or In addition, VHDA instructions for implementing occupancy changes are available at each development. Questions should be addressed to VHDA s Multifamily Program Manager at (804) Submission 15. Additional program information, including HUD policy, procedures and notices are available at HUD Internet sites including and OMB circulars, forms and updates can be located at The most current version of any applicable auditing directives and standards, including but not limited to VHDA s Mortgagor/Grantee s Audit Guide, located at Inspector General s (HUD) Audit Guide (Handbook Consolidated Audit Guide for Audits of HUD Programs) available at Government Auditing Standards (the Yellow Book) available at and OMB circulars available at Note: Applicability of IG s Consolidated Audit Guide is referenced in Appendix C. 17. Virginia Residential Landlord Tenant Act, available at Any other agreements or correspondence considered pertinent. All audits must be conducted in accordance with generally accepted accounting principles (GAAP). VHDA will allow departures from GAAP only for the treatment of depreciation, amortization, and syndication costs. Income tax basis audits will not be accepted by Virginia Housing. Appendices C and D address Audit Guide applicability and reporting requirements required by various programs in VHDA s portfolio. VHDA requires that financial statements be prepared and certified by an independent Certified Public Accountant, unless otherwise excepted by specific 4 of 20

5 programs. The CPA must have no business relationship with the Mortgagor/Grantee except for the performance of the audit, accounting systems work, and tax preparation. An individual who performs manual or automated bookkeeping services and/or maintains the official accounting records is prohibited from performing the audit of a Mortgagor/Grantee. Where Government Auditing Standards apply, the auditor must meet the auditor qualifications of Government Auditing Standards, including the qualifications relating to independence and continuing professional education. Additionally, the audit organization must meet the quality control standards of Government Auditing Standards. The audit engagement letter or arrangements for the audit between the auditor and Mortgagor/Grantee must allow duly authorized agents of VHDA to examine the auditor s working papers supporting the audit report. One copy of the complete annual financial statements, including the signed Mortgagor/Grantee and Management Agent Certifications, must be submitted to the Asset Manager assigned to the development at the following address: Virginia Housing Development Authority Multifamily Division - Asset Management 601 South Belvidere Street Richmond, Virginia Submission is required within ninety (90) days after the end of each fiscal year. Extensions specifying extenuating circumstances must be requested by the Mortgagor/Grantee, in writing, from the assigned Asset Manager in the Multifamily Division. Note: Financial statements for HUD-insured loans must be submitted electronically to HUD within the filing deadlines established by HUD. Detailed requirements for transmitting financial statements electronically to HUD are available at In addition, a paper copy of the audit is required to be submitted to VHDA within ninety (90) days after the end of the fiscal year. On developments with construction financing provided by VHDA or the VHPRF, the initial audit period should cover from the date of initial occupancy through the end of the fiscal year of the development. On acquisition, bond refunding and rehab financings, the initial audit period should cover from the date of construction (initial) closing through the end of the fiscal year of the development. A multi-year audit (i.e., up to 23 months) is acceptable to VHDA. If a multi-year audit is presented, two Statements of Profit and Loss must be included (one reflecting the partial year; the other reflecting a full fiscal year). Audit Scope and Approach The primary purpose of the audit is to report to the Mortgagor/Grantee and VHDA on the financial aspects of the operations of the development. The auditor must also report on any failure to comply with VHDA s and other regulatory requirements. VHDA is interested in the financial solvency of the Mortgagor/Grantee, its ability to meet operating expenses and debt service requirements and, ultimately, to avoid mortgage default. Should the auditor during the course of the review have concerns about the solvency of 5 of 20

6 the mortgagor trading as the development(s), such concerns and an evaluation of the extent of the credit risk should be reported in the audit report. The objectives of the audit are to determine: 1. Whether the financial statements fairly present the financial position of the Mortgagor/Grantee trading as the development(s) and the results of its operations; and 2. Whether operating practices and controls comply with the HUD or VHDA requirements contained in Appendix A, A-8, Supplemental Information, pages A-16 through A-35, Audit Compliance and Internal Control Questionnaire (Appendix A, A-8, Supplemental Information, pages A-32 through A-35) and Government Auditing Standards, where applicable. The audit must be sufficiently comprehensive in scope to permit the expression of an opinion on the financial statements and supplemental information in the report, and it must be performed in accordance with generally accepted accounting principles and Government Auditing Standards, where applicable, in addition to audit requirements set forth in this Audit Guide. "Expression of Opinion" includes: 1) an unqualified opinion; 2) a qualified opinion; 3) a disclaimer of opinion; or 4) an adverse opinion. If anything other than an unqualified opinion is given, the reasons for such must be stated. The opinion should state whether the basic financial statements present fairly the financial position of the Mortgagor/Grantee trading as the development(s) as of the audit date, and the results of its operations and changes in cash flows for the period then ended in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding period. In addition, the opinion should state that the supplemental information has been subjected to the audit procedures applied in the audit of the basic financial statements, and whether it is fairly stated in all material respects in relationship to the financial statements taken as a whole. For VHDA purposes, no amounts are considered immaterial. The auditor must assess the risk of material misstatement of the financial statements due to fraud and should consider such in designing the audit procedures to be performed. The auditor should consider fraud risk factors contain in Statement on Auditing Standards (SAS) No. 82, Consideration of Fraud in a Financial Statement Audit. If the auditor becomes aware of illegal acts or fraud that have occurred, the auditor should prepare a separate written report and include all questioned costs. The report should be submitted in accordance with Government Auditing Standards Sections , if applicable. A copy of the report should also be provided to the VHDA Asset Manager assigned to the development. Where applicable, the auditor is required: 1) to perform tests of controls to evaluate the effectiveness of the design and operation of internal control policy and 6 of 20

7 procedures; 2) to test, review, evaluate and comment on the adequacy of the accounting records and procedures as well as the system of internal controls maintained, including the handling of funds; and 3) to test and report on the Mortgagor/Grantee's compliance with certain specific provisions of the Regulatory Agreement, Housing Management Agreement and VHDA, DHCD, and HUD regulations and procedures applicable to the operation of the development in order to comply with Government Auditing Standards. The VHDA Audit Compliance and Internal Control Questionnaire is required to be included in all financial statements except as noted in Appendix D. Internal control and compliance reporting is required as specified in Appendix D. Where applicable, compliance reporting in adherence with Government Auditing Standards is required. Compliance requirements and suggested audit procedures detailed in HUD s audit guide should be used as guidance in performing internal control and compliance reporting. Further, in order that the Mortgagor/Grantee and VHDA may be assured of the effectiveness of the development in meeting its program objectives, an Audit Compliance and Internal Control Questionnaire is provided which will guide the auditor in the review of compliance and internal control matters which are of particular interest to VHDA. The auditing firm should examine the following areas: mortgage status, books and records, cash activities, management activities, rents and occupancy, and subsidy payments. The questionnaire has been designed so that "No" answers may be indicative of an adverse condition that must be described in the audit report. The auditor should also cite alternative conditions that mitigate weaknesses as disclosed by the questionnaire. The Audit Compliance and Internal Control Questionnaire must be submitted to VHDA with all financial statements except as noted in Appendix D. Definitions 1. Total Rent Revenue Potential at 100% Occupancy - The total rent potential shown on the rent roll prior to adjustments for concessions or additional charges such as pet fees, washer/dryers, carports, etc. Rent potential should not exceed the rents for all units based on full occupancy. 2. Concessions - Money uncollected because of marketing incentives. Concessions must be reflected in Account 5290, Miscellaneous Vacancies on the Statement of Profit and Loss. Note: Non-income-producing units should be expensed under the appropriate category. 3. Distribution - Any withdrawal or taking of cash or other assets of the development, excluding payment for reasonable expenses necessary and essential to the operation and maintenance of the development (including repayment of owner advances), but including cash or assets segregated for subsequent withdrawal. 7 of 20

8 Distributions are subject to the terms of the Regulatory Agreement or other governing documents. Distribution earnings (return on equity investment) commence upon the permanent (final) closing of the loan, unless otherwise specified in the regulatory documents. The amount of equity investment and the maximum allowable return thereon are determined at permanent (final) closing. Distributions may not be made: 1) from borrowed funds, 2) prior to permanent (final) closing of the mortgage loan/grant, 3) when the development is not in good repair or condition based on VHDA s or other regulatory entity s physical inspection or management and marketing review, 4) when the development is in a non-surplus cash position as defined hereunder, 5) when restricted by a modification agreement, or 6) when there is any default under the Regulatory Agreement, Deed of Trust Note and/or other regulatory documents. 4. Surplus Cash - Cash remaining as of the last day of the fiscal year of the development after all reasonable expenses necessary and essential to the operation of the development have been paid or funds have been set aside for such payment and all reserve requirements have been met. Note: Partnership cash and obligations must be excluded from the calculation. It includes all funds received by the Mortgagor/Grantee in connection with the operation of the development and remaining after: a. The payment of: (1) All sums due under the terms of the Note, Deed of Trust, Regulatory Agreement, or other regulatory documents as of the last day of the fiscal year of the development; (2) All amounts required to be deposited in the Replacement, Miscellaneous and/or Operating Reserves as of the last day of the fiscal year of the development; (3) All other obligations of the development except to the extent that funds for payment of any such obligations are set aside or deferment of payment has been approved by an Authorized Officer of VHDA; and 8 of 20

9 b. The segregation of: (1) An amount equal to the aggregate of all special funds required to be maintained by or with respect to the development; and (2) Resident security deposit liability, including accrued interest as of the last day of the fiscal year of the development. 5. Identity-of-Interest - A Management Agent and other parties having business relationships with a development owner or any officer, director, partner, member or manager of the Mortgagor/Grantee. Transactions with identity-of-interest relationships occur when there are common controlling equity interests and/or management control between the entities. Such a relationship should be construed to exist when the owner and the Management Agent are not the same person but 1) the development owner; or 2) any officer or director of the development owner; or 3) any person who directly or indirectly controls 10 percent or more of the development owner s voting rights or directly or indirectly owns 10 percent or more of the development owner; is also 1) an officer or director of the Management Agent; or 2) a person who directly or indirectly controls 10 percent or more of the Management Agent s voting rights or directly or indirectly owns 10 percent or more of the Management Agent. For purposes of this definition, the term person includes any individual, member of the Board of Directors, partnership, corporation, or other business entity. Any ownership, control or interest held or possessed by a person s spouse, parent, child, grandchild, brother or sister is attributed to that person. 6. Essential, Necessary and Reasonable Expenses - Limited to those obligations specifically incurred directly by the operations and maintenance of the development. The auditor will have to make a judgment as to the propriety of development disbursements. However, some expenditures, such as for expenses incurred by the partnership, the fee for the preparation of a partner's, shareholder's or individual's federal, state or local income tax returns, or the payment for advice to an owner on the tax consequences of foreclosure, clearly are not expenses essential, necessary and reasonable to the operations of the development and, therefore, constitute distributions of 9 of 20

10 development income. Also not allowed as a development expense is the cost of a fidelity bond (other than for on-site staff) or letter of credit required of the agent or Mortgagor/Grantee. The fee for preparation of the federal, state or local income tax returns of the partnership or corporation is an expense necessary and reasonable to the operations of the development. 7. Tenant Eligibility - Each program contains specific eligibility requirements based on income, family size and similar criteria. The criteria, for the most part, are contained on the application forms for tenant eligibility maintained at the development and/or managing agent s office. The auditor should also have access to the applicable HUD, VHPRF, and/or VHDA handbooks and directives. Any tenant eligibility questions that cannot be resolved through these resources should be directed to VHDA s Multifamily Program Manager at (804) Exit Conference - At the conclusion of the audit, an exit conference is to be held with the Mortgagor/Grantee to discuss the audit findings and obtain comments from the Mortgagor/Grantee on: 1) the accuracy and completeness of the facts presented and whether they agree with the audit conclusions; and 2) any action the Mortgagor/Grantee plans to take or reasons for not taking action. A Corrective Action Plan, if applicable, should be submitted by the Mortgagor/Grantee with the financial statements (Appendix A, A-15, pages A-44 and A-45). Contents Of Annual Financial Statements The audited financial statements delivered to VHDA should conform to the contents of this Mortgagor/Grantee s Audit Guide and should include all schedules and reports as specified in Appendix D. These reports and schedules are defined below and illustrative examples are shown in Appendix A. The sample statements presented in this Audit Guide are designed for a profit-motivated mortgagor/grantee entity. Note: Financial statements for not-for-profit mortgagors/grantees subject to the IG s Consolidated Audit Guide should follow OMB Circular A-133, as affected by HUD Notice H98-25, New Multifamily Project Audit Requirements Office of Management and Budget Circular A-133 Single Audit Act Amendments. Financial statements on not-for-profit mortgagors/grantees not subject to IG s Consolidated Audit must follow VHDA s guide. Financial Statements on all mortgagors/grantees (profit-motivated and not-for profit) are required to be in accordance with GAAP. 1. Mortgagor/Grantee Certification. The report must include a certification signed by an authorized official of the Mortgagor/Grantee entity as to the completeness and accuracy 10 of 20

11 of the financial statements and supplemental information. (Appendix A, A-1a, page A-2). 2. Management Agent Certification. The report must include a certification signed by an authorized official of the Management Agent as to the completeness and accuracy of the financial statements and supplemental information. (Appendix A, A-1b, page A-3). 3. Report On Audited Financial Statements And Supplemental Information (Independent Auditor s Report). Appendix A, A-2, pages A-4 and A-5 includes a sample format to be included in the statement. The auditor s opinion (see page 6 of this Audit Guide) must be included in the report. 4. Balance Sheet. The balance sheet must reflect all prepaid and deferred items. The security deposit asset should reflect the actual cash balance held, and the liability should include accrued interest. Note: Mortgagor/Grantee entity related entries must be detailed separately from those of the development. (Appendix A, A-3, pages A-6 and A-7). 5. Statement of Profit And Loss. The VHDA Statement of Profit and Loss is required (Appendix A, A-4, pages A-8 through A-10). If a facsimile format is used, it must be identical to the VHDA template. Note: Statement of Profit and Loss account numbers and titles must not be altered. Appendix B provides descriptive information on VHDA s prescribed chart of accounts. Note: VHDA has not adopted the revised HUD Chart of Accounts. The Statement of Profit and Loss must conform to the following requirements: a. It must be on an accrual basis. b. It must show total rent revenue potential less vacancies and concessions to arrive at a net rental income. On Section 8 developments, vacancy loss should be net of vacancy payments made by VHDA. Utility allowances received from VHDA must not be reflected as either an income or expense on the Statement of Profit and Loss. All other income items must be identified as to type or source if they exceed the account groupings by 10% or more. 11 of 20

12 c. Any apartments or commercial space occupied but not producing income must be shown as an expense under the applicable expense classification, and a supporting schedule must be submitted that identifies such occupants and their connection with the development. If no such expense applies, it should be so indicated on the statement. d. Concessions must be reflected in Account 5290, Miscellaneous Vacancies. e. Any expenses reported as salaries or other compensation to supervisory or administrative employees, officers, directors or stockholders of the Mortgagor/Grantee or Management Agent must be supported by a schedule showing duties and salaries paid. f. Any receipts from charges for facilities or services other than reimbursement for breakage or damage by tenants must be scheduled if they exceed the account groupings by 10% or more. g. Amortization expenses related to organizational costs, including loan fees, organizational expenses, etc. must be reflected in Account 6600 rather than Account h. All monthly payments required to the Replacement, Operating, and/or Miscellaneous reserves should be shown on Part II, 2. Residual Receipts deposits should be excluded. i. As the Statement of Profit and Loss is prepared on an accrual basis, items expensed on Part II, 3 should be for those incurred during the year covered by the financial statement. Reimbursements for prior periods (even if paid during the audit year) should be excluded. j. If a multi-year audit is presented, two Statements of Profit and Loss must be included (one reflecting the partial year; the other reflecting a full fiscal year). 6. Statement Of Changes In Owner's Equity. This should include an explanation of changes in the account other than 12 of 20

13 profit or loss for the operating period. (Appendix A, A-5, page A-11). 7. Statement Of Cash Flows. This statement must be presented using the direct method and should include the cash at the beginning and the end of the year. Changes in cash flows must differentiate between operating and Mortgagor/Grantee-related activities. Note: Owner entity distributions and/or contributions must be reflected in the Cash Flows From Financing Activities section on the Statement of Cash Flows. (Appendix A, A-6, pages A-12 and A-13). 8. Notes To Financial Statements. A suggested format is given in the sample report (Appendix A, A-7, pages A-14 and A-15). The notes should address the development, program(s), number of units, DHCD/HUD/VHDA relationship, maximum distribution, surplus cash, undistributed amount and cumulative distributable to date, handling of depreciation, and loan costs. Funds moved from operating to owner entity accounts are considered distributions and should be reflected in the notes. All notes payable should be covered, including those to VHDA/VHPRF (the mortgagee/grantor), to other mortgagees, if any, to the Mortgagor/Grantee entity and to the management company and the method of repayment. A distinction must be made between obligations incurred against syndication proceeds/mortgagor entity advances and those due from development operating funds. The auditor should consider the effect of risks and uncertainties on the financial statement presentation in the notes. 9. Supplemental Information. Supplemental information in the form of explanatory comments or appropriate schedules (Appendix A, A-8, pages A-16 through A-35) must include the following: a. Accrued Expenses - A statement should be attached supporting any accrued expenses shown, including each type of expense, basis for the accrual and date due. (Appendix A, A-8, Supplemental Information, page A-16). b. Accounts And Notes Receivable (Other Than From Tenants) - A complete detailed analysis should be included of any accounts or notes receivable other than tenant accounts, including date incurred, original amount, terms, name of borrower 13 of 20

14 and balance due. (Appendix A, A-8, Supplemental Information, page A-17). c. Delinquent Tenant Accounts Receivable - A summary analysis should be made of delinquent tenant accounts, segregated by current and former tenants. This should include the number of tenants and amounts delinquent for 30 days, days, days and over 90 days. (Appendix A, A-8, Supplemental Information, page A-18). d. Mortgage Reserve Funds (Replacement, Operating and Miscellaneous) - An analysis (Appendix A, A-8, Supplemental Information, pages A-19 through A-21) should be made of all required reserve funds including the following: (1) A statement as to any payments required to the account. If establishment of more than one fund is required, a separate statement must be submitted for each fund; (2) A statement as to interest earned on the reserve during the audit year. In addition, the form in which these funds are maintained must be disclosed. If in cash, the names of the depository of each fund are required. If not invested by VHDA, in addition to the confirmed balance(s), provide details of type of security, depository, term, etc. For those reserve funds held by VHDA, balances are confirmed at year end; however, details on the terms of investment(s) are not required; and (3) A statement of total withdrawals per reserve account during the year. The withdrawals must be grouped by those capitalized (as shown on the Changes in Fixed Asset Accounts Report, Appendix A, A-8, Supplemental Information, page A-23), and those expensed for the current and prior audit years. 14 of 20

15 e. Schedule Of Funds In Financial Institutions - A schedule specifying the name of each depository by name, type and account balance must be included in the statement. The year end balance(s) should be the reconciled amount(s). Note: Do not include escrow and reserve funds maintained by VHDA. (Appendix A, A-8, Supplemental Information, page A-22). f. Changes In Fixed Asset Accounts - A schedule should be included showing full details and explanations of any changes in fixed asset accounts. (Appendix A, A-8, Supplemental Information, page A-23). g. Accounts Payable (Other Than Trade Creditors) - A list should be included of accounts payable, segregated by those payable within 30 days, days and more than 60 days. The list should segregate those incurred by the development from those of the Mortgagor/Grantee entity. A detailed analysis of accounts payable at least 60 days past due is required, and the auditor should specify any accounts owed to the Management Agent and/or Mortgagors/Grantees. The analysis should include date incurred, original amount, purpose, terms, creditor and balance due. Accounts payable between Limited and General Partners should not be included. Accrued expenses should be shown separately from accounts payable. (Appendix A, A-8, Supplemental Information, page A-24). h. Accounts Payable (Trade Creditors) - A list should be included of accounts payable, segregated by those payable within 30 days, days, and more than 60 days. The list should segregate those incurred by the development from those of the Mortgagor/Grantee entity. A detailed analysis of accounts payable at least 60 days past due including date incurred, original amount, purpose, terms, creditor and balance due is required. Accrued expenses should be shown separately from accounts payable. (Appendix A, A-8, Supplemental Information, page A-25). 15 of 20

16 i. Identity-Of-Interest / Related Party Transactions - A list should be included of all related parties and/or identity-of-interest companies (per definition cited on page 9 of this Audit Guide) which have provided, during the last year, labor, materials or services to the development. The schedule should include the related firm, the amount paid under contract, and the nature of the contracted business. (Appendix A, A-8, Supplemental Information, page A-26). The Mortgagor/Grantee and Management Agent have agreed to obtain contract materials, supplies and services at the best possible cost and on the terms most advantageous to the development and to secure and credit to the development all discounts, rebates or commissions obtainable with respect to purchases, service contracts and other transactions on behalf of the development. The Mortgagor/Grantee and the Management Agent have agreed that all goods and services purchased from individuals or companies having a related party and/or an identity-of-interest with the Agent, Mortgagor/Grantee or Management Agent should be purchased at costs not in excess of those that would be incurred in making arms-length purchases on the open market. When required by the loan documents, the Management Agent should have solicited written cost estimates (i.e., bids) from at least three contractors or suppliers for any work estimated to cost $5,000 or more and for any contract, ongoing supply or service arrangement which was estimated to exceed $5,000 per year. The Management Agent agreed to accept the bid which represented the best price, taking into consideration the bidder's reputation for quality of workmanship or materials and timely performance, and the time frame within which the service or goods was needed. For any contract, ongoing supply or service arrangement obtainable from more than one source and estimated to cost less than $5,000, the Management Agent should have solicited oral or written cost estimates, as necessary to assure that the development was obtaining services, supplies and purchases at the best possible cost. The 16 of 20

17 Management Agent must have a written record of any oral estimate obtained. Copies of all required bids and documentation of all other written or oral cost comparisons made by the Management Agent should have been made part of the records of the development and should be retained for three years from the date the work was completed. This documentation should be subject to inspection by VHDA, and the Management Agent has agreed to submit such documentation upon request. j. Statement Of Surplus Cash / Residual Receipts and Distributions - A computation in the format shown in the sample statement (Appendix A, A-8, Supplemental Information, page A-27) showing the amount of surplus cash at the end of the fiscal year, a tabulation of limited distribution payments paid and unpaid, distributions allowed per the regulatory documents and any remaining funds (i.e., Residual Receipts) to be deposited to the Operating Reserve account, if applicable, is required. Note: Residual Receipts deposits should not be included with the financial statements submission. Deposits are due to VHDA within thirty days after the mortgagee s written request for such deposit. Note: VHDA Form No. MD:410 (10/86; Revised 5/01) - Statement of Surplus Cash / Residual Receipts and Distributions (Appendix A, A-8, Supplemental Information, page A-27) must be used. Instructions (Appendix A, A-8, Supplemental Information, pages A-28 and A-29) are attached to the sample form. Do not use HUD Form 93486, Computation of Surplus Cash, Distributions and Residual Receipts, unless the development is HUD- Insured. k. Compensation Of Partners Or Officers - If a development is owned by a corporation or partnership, a statement detailing the compensation of officers or partners is required. If no compensation was paid, a statement to that effect will suffice. (Appendix A, A-8, Supplemental Information, page A-30). 17 of 20

18 l. Unauthorized Distribution Of Development Revenue - If any unauthorized distribution of development revenue is revealed during the audit, a separate schedule must be prepared detailing the amounts involved, date of distributions, and any other relevant information. m. Declaration Of Ownership - In the initial report, full details should be included concerning the issuance of all stock and/or investments including names of stockholders or investors, proportionate interest of each and whatever consideration is received by corporate or non-corporate developments (considerations should be itemized to show amount of cash, land, services, etc.). Initially, a list should be furnished by the mortgagor/grantee entity consisting of officers, directors and individuals having a financial interest in the development. Thereafter, details should be furnished of any changes in these positions occurring during the year as required by the Regulatory Agreement and/or other loan/grant documents. If no changes have occurred, it should be so noted. n. Identification Of Engagement Auditor - A statement specifying the name, mailing address, telephone and fax numbers, and address of the lead auditor on the engagement must be included in the statement. This contact should be the individual to whom questions on the report can be addressed. (Appendix A, A-8, Supplemental Information, page A-31). o. Audit Compliance And Internal Control Questionnaire - The questionnaire shown in Appendix A, A-8, Supplemental Information, pages A-32 through A-35, must be included in all financial statements submitted to VHDA. As no responses may be indicative of an adverse condition, details must be described either in the audit report or in a letter supplementing the audit submission. Note: Language used in the questionnaire must not be altered. 18 of 20

19 p. Other - Comments on, and explanations of, all other Balance Sheet items not fully explained by the title of the account should be a part of the report. 10. Compliance and Internal Controls. See pages 5 through 7 of this Audit Guide. Appendices A, A-9 through A-14, pages A-36 through A-43, provide samples of auditor s reports on financial statements on internal controls and on compliance with specific requirements that may be issued in an audit in accordance with this Audit Guide. In order to comply with Government Auditing Standards, reports in addition to those specified in this Audit Guide may be required. In addition, a recommended format for use by the Mortgagor/Grantee in completing a Corrective Action Plan, if necessary, is included in Appendix A, A-15, pages A-44 and A-45. Auditors should exercise professional judgment in tailoring their reports to the circumstances of individual audits. VHDA s Compliance and Internal Control Questionnaire (Appendix A, A-8, Supplemental Information, pages A-32 through A-35) must be included with all audited financial statements submitted to VHDA. 11. Accountant's Certification. The auditor may be requested by VHDA to justify any material departure from the following language. "In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of (Mortgagor/Grantee Entity) as of (date), and the results of its operations and its cash flows and its changes in owners equity for the year then ended in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as whole. The supporting information included in the report (shown on pages to ) is presented for purposes of additional analysis and is not a required part of the basic financial statements of (Mortgagor/Grantee Entity). Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. 19 of 20

20 In accordance with Government Auditing Standards (if applicable), we have also issued a report dated (date) on our consideration of (Mortgagor/Grantee Entity s) internal controls and a report dated (date) on its compliance with laws and regulations. 20 of 20