Internal Audit Briefing Presented to the Port of Seattle Audit Committee and Tay Yoshitani, CEO Joyce Kirangi, CPA Director, Internal Audit November 01, 2011 Agenda • Audit Report • Concession and Lease Audits     • Comprehensive Operational Audit- Central Accounting System  • None Limited Operational Audit  • • • Asset Management Third-Party Arrangements Operational Audit  • Ex Offcio LLC Ivar's, Inc. Wendy's Maki of Japan None Survey Results - Lease and Concession Audits 2012 Proposed Internal Audit Budget and Preliminary Work Plan Discussion 2011 Work Plan Status Update Concession and Lease Audit Ex Officio LLC Background Ex Officio is an outdoor and travel clothing company founded in 1986 in Seattle, Washington as De Sar, Inc. The company currently operates three locations in the region including the location at Sea-Tac International Airport. The terms of the agreement provide for: • Minimum Annual Guarantee (MAG) of 85% of the total amount paid or payable in the previous agreement year • Percentage Fee of 12% to 14% of gross revenues to the extent the fee is higher than the MAG. Below are financial highlights for the last three agreement years: Fiscal Year 2008-2009 2009-2010 2010-2011 Source: PeopleSoft Reported Gross Revenue Paid Concession $ 2,021,625 1,991,847 2,355,361 $ 242,269 239,022 289,751 Concession and Lease Audit Ex Officio LLC Audit Objectives The purpose of the audit was to determine the following: 1.Reported concession was complete, properly calculated, and remitted timely to the Port. 2.The lessee complied with significant provisions of the Lease and Concession Agreement. The scope of the audit covered the period of June 1, 2008, through May 31, 2011. Concession and Lease Audit Ex Officio LLC Audit Result  Clean Audit Report Concession and Lease Audit Ivar's, Inc. Background Ivar's Inc. is a private company founded on Pier 54 in Seattle in 1938. Since then, the company has expanded to three full-service waterfront restaurants and 25 fast casual Seafood Bars, including the location at Sea-Tac International Airport. The terms of the agreement provide for: • Minimum Annual Guarantee (MAG) of 85% of the total amount paid or payable in the previous agreement year • Percentage Fee of 10% to 15% of gross revenues to the extent the fee is higher than the MAG. Below are financial highlights for the last three agreement years: Year Reported Gross Revenue Total Rent Paid 2007-08 2008-09 2009-10 $ $ $ $ $ $ Source: PeopleSoft 2,964,296.41 2,848,825.91 2,759,134.16 397,644.46 387,681.50 373,025.16 Concession and Lease Audit Ivar's, Inc. Audit Objectives The purpose of the audit was to determine the following: 1.The revenue reported was reasonable and complete. 2.Rent payments were received in a timely manner. 3.The lessee complied with provisions of the lease and concession agreement. The scope of the audit covered the period of June 1, 2007 and May 31, 2010. Concession and Lease Audit Ivar's, Inc. Audit Result  Clean Audit Report Concession and Lease Audit Latrelle's Express, Inc. (dba Wendy's) Background LaTrelle's Express, Inc. operates nearly two-dozen restaurants located in airports and throughout major cities. LaTrelle's operates a portfolio of well-known restaurant brands, from Wendy's and Subway to Peet's Coffee & Tea and Buffalo Wild Wings. The terms of the agreement provide for: • Minimum Annual Guarantee (MAG) of 85% of the total amount paid or payable in the previous agreement year, provided it is not less than $100,000. • Percentage Fee of 10% to 13% of gross revenues to the extent the fee is higher than the MAG. Below are financial highlights for the last three agreement years: Year 2007-08 2008-09 2009-10 Source: PeopleSoft Reported Gross Revenue $ 3,193,535 $ 3,466,939 $ 3,536,153 Total Rent Paid $ 380,159 $ 415,702 $ 424,699 Concession and Lease Audit Latrelle's Express, Inc. (dba Wendy's) Audit Objectives The purpose of the audit was to determine the following: 1.The concession revenue was complete, properly calculated and remitted timely to the Port. 2.The lessee complied with other significant provisions of the lease and concession agreement. The scope of the audit covered the period of June 1, 2007 and May 31, 2010. Concession and Lease Audit Latrelle's Express, Inc. (dba Wendy's) Audit Result  Clean Audit Report Concession and Lease Audit Food Systems Unlimited, Inc. (dba Maki of Japan) Background Food System Unlimited, Inc. is a concept restaurant that began its operations in Orlando, Florida in 1991. The company operates in the food courts at the malls and airports around the nation, including a location at the Seattle Tacoma International Airport. The terms of the agreement provide for: • Minimum Annual Guarantee (MAG) of 85% of the total amount paid or payable in the previous agreement year, provided it is not less than $165,000. • Percentage Fee of 14% to 18% of gross revenues to the extent the fee is higher than the MAG. Below are financial highlights for the last three agreement years: Year 2008-2009 2009-2010 2010-2011 Source: PeopleSoft Reported Gross Revenue $2,616,594 2,551,050 2,656,797 Total Rent Paid $418,153 415,987 404,189 Concession and Lease Audit Food Systems Unlimited, Inc. (dba Maki of Japan) Audit Objectives The purpose of the audit was to determine the following: 1.The reported concession was complete, properly calculated, and remitted timely to the Port. 2.The lessee complied with provisions of the Lease and Concession Agreement, as amended. The scope of the audit covered the period of June 1, 2008 and May 31, 2011. Concession and Lease Audit Food Systems Unlimited, Inc. (dba Maki of Japan) Audit Result  Clean Audit Report Comprehensive Operational AuditCentral Accounting System Asset Management Background The Port of Seattle maintains large and diverse asset groups. As of July 28, 2011, the Port has 26,130 in-service capital assets with a historical cost of $6.6 billion across several different categories as follows : Asset Category Land Building Utility and Other Systems Structures Roads & Grounds Land and Air Rights Equipment Improvements Other Source: PeopleSoft Historical Cost (in millions) $1,652 1,485 1,047 1,046 584 306 260 125 120 Comprehensive Operational AuditCentral Accounting System Asset Management Audit Objectives The purpose of the audit was to determine whether management has implemented adequate controls to ensure: 1. Newly created assets are entered in the asset management system timely, efficiently and are complete. 2. Asset retirements are recorded in asset management in a timely, efficient and complete manner. 3. The capital asset list used for the physical inventory in all Divisions is accurate and complete. 4. Capital Services new asset creation and retirement processes are effective and complete. We reviewed information for the period of January 1, 2010, through July 31, 2011. Comprehensive Operational AuditCentral Accounting System Asset Management Audit Result  Clean Audit Report 2012 Proposed Internal Audit Budget  2012 Proposed Internal Audit Budget Regular Budget Items Salaries & Benefits Supplies and General Expenses Outside Services Cont. Prof. Education (CPE) and Prof. Membership Telecommunications Worker's Compensation Expenses Total Regular Items $ One-Time 2012 Items IT Performance Review and Risk Assessment Internal Audit Quality Assurance (peer review) Total One-Time Items 2012 Proposed Budget 1,126,499 11,945 2,780 45,274 7,560 2,418 $ 1,196,476 250,000 50,000 $ 300,000 $ 1,496,476 2012 Proposed Internal Audit Budget  Internal Audit Budget 2008 2009 2010 $848,958 $1,211,366  $1,109,049 $1,214,982 $1,496,476 Internal Audit FTEs 2006 FTEs  2011 Proposed 2012 1 2007 2008 3 2009 5 2010 7 2011 7 Projected 2012 Internal Audit Resources  Available audit resources -- 9,506 hours 8 Preliminary 2012 Work Plan Discussion Risk-Based Internal Audit Steps        Understand Port businesses and objectives Discuss Port risks with Port leadership and Commissioners (see attached) Identify potential Port wide risks Link the risk to specific Port objectives that could be disrupted/impaired Determine and set the scale to be used in the risk assessment Assess and rank risk factors/drivers 2012 project selection based on risk ranking Preliminary 2012 Work Plan Discussion Risk-Based Internal Audit Universe IT Risk Strategic/ Governance Risk Business Units/Departments Operational Risk Compliance Risk Accountability/ Transparency Risk Reporting Risk X X X X X Lease and Concession Central Key Processing Systems X 3RD Party Mgmt. X X X X X Federal Assistance X Financial Reporting X X X X Capital Improvement Program X X X X X Commission Directives/Policies Information Technology (IT) Non-audit Services X X X X X 2011 Work Plan Status Update  2011 Work Plan Status  audit progress attached