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Honora6le Mayor and City Council Members <br />City of Pequot Lakes <br />Page 3 <br />Significant issues discussed with management prior to engagement <br />We generally discuss a variety of matters, including the application of accounting principles and auditing <br />standards, with management each year prior to engagement as the City's auditors. However, these discussions <br />occurred in the normal course of our professional relationship and our responses were not a condition to our <br />engagement. <br />Other audit findings or issues <br />The following describes findings or issues arising from the audit that are, in our professional judgment, <br />significant and relevant to your oversight of the financial reporting process: <br />• Limited Segregation of Duties — The City has limited employees with primary responsibility for all of the <br />accounting and financial duties and receipting of utility billings. As a result, many of those aspects of internal <br />accounting control which rely upon an adequate segregation of duties are, for all practical purposes, not <br />available in this staffing scenario. We recognize that the City's cost/benefit analysis has concluded the <br />employment of additional persons for the purpose of segregating duties is not practicable from a financial <br />standpoint, but we are required, under our professional responsibilities, to call the situation to your <br />attention. The City should continue to utilize the City Council's oversight of the budgeting, cash reconciling, <br />and receipts and disbursements process to the maximum extent possible to mitigate the absence of <br />segregation of duties. This condition increases the possibility that errors or irregularities may occur and not <br />be detected on a timely basis <br />• Oversight of the Financial Reporting Process — Management is responsible for establishing and maintaining <br />internal controls for the fair presentation of the financial position, results of operations, cash flows, and <br />disclosures in the financial statements, in conformity with U.S. generally accepted accounting principles <br />(GAAP). The City does not have a system of internal controls that would enable management to conclude the <br />financial statements and related disclosures are complete and presented in accordance with GAAP. As such, <br />management requested us to prepare a draft of the financial statements, including the related footnote <br />disclosures. The outsourcing of these services is not unusual in organization of your size and is a result of <br />managemenYs cost/benefit decision to rely on our accounting expertise rather than incurring this internal <br />resource cost. The design of internal controls over the financial reporting process affects the ability of the <br />organization to report their financial data consistently with the assertions of management in the financial <br />statements. <br />We understand this material weakness is already known to management and represents a conscious decision <br />by management and the City Council as a result of cost or other considerations. We acknowledge <br />management is responsible for making decisions concerning costs and the related benefits. We are <br />responsible to communicate significant deficiencies and material weal<nesses in accordance with professional <br />standards regardless of managemenYs decisions to ensure that the City Council is aware of this situation. <br />Other information in documents containing audited financial statements <br />With respect to the required supplementary information (RSI) accompanying the financial statements, we made <br />certain inquiries of management about the methods of preparing the RSI, including whether the RSI has been <br />measured and presented in accordance with prescribed guidelines, whether the methods of ineasurement and <br />preparation have been changed from the prior period and the reasons for any such changes, and whether there <br />were any significant assumptions or interpretations underlying the measurement or presentation of the RSI. We <br />compared the R51 for consistency with managemenYs responses to the foregoing inquiries, the basic financial <br />statements, and other knowledge obtained during the audit of the basic financial statements. Because these <br />