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July 14, 2005 <br /> City of Pequot Lakes <br /> Page 3 <br /> You may request that we perform additional services not contemplated by this engagement letter. If <br /> this occurs, we will communicate with you regarding the scope of the additional services and the <br /> estimated fees. You are responsible for management decisions and functions, and for designating a <br /> competent employee to oversee any additional services. You are responsible for evaluating the <br /> adequacy and results of the services performed and accepting responsibility for the results. You are <br /> also responsible for establishing and maintaining internal controls, including monitoring ongoing <br /> activities. <br /> AUDIT PROCEDURES -GENERAL <br /> An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the <br /> financial statements; therefore, our audit will involve judgment about the number of transactions to be <br /> examined and the areas to be tested. We will plan and perform the audit to obtain reasonable rather <br /> than absolute assurance about whether the financial statements are free of material misstatement, <br /> whether from errors, fraudulent financial reporting, misappropriation of assets, or violations of laws or <br /> governmental regulations that are attributable to the entity or to acts by management or employees <br /> acting on your behalf. Because an audit is designed to provide reasonable, but not absolute assurance <br /> and because we will not perform a detailed examination of all transactions, there is a risk that material <br /> misstatements may exist and not be detected by us. In addition, an audit is not designed to detect <br /> immaterial misstatements, or violations of laws or governmental regulations that do not have a direct <br /> and material effect on the financial statements. However, we will inform you of any material errors that <br /> come to our attention, and we will inform you of any fraudulent financial reporting or misappropriation <br /> of assets that come to our attention. We will also inform you of any violations of laws or governmental <br /> regulations that come to our attention, unless clearly inconsequential. Our responsibility as auditors is <br /> limited to the period covered by our audit and does not extend to matters that might arise during any <br /> later periods for which we are not engaged as auditors. <br /> Our procedures will include tests of documentary evidence supporting the transactions recorded in the <br /> accounts, and may include tests of the physical existence of inventories, and direct confirmation of <br /> receivables and certain other assets and liabilities by correspondence with selected individuals, <br /> creditors, and financial institutions. We will request written representations from your attorneys as part <br /> of the engagement, and they may bill you for responding to this inquiry. At the conclusion of our audit, <br /> we will also require certain written representations from you about the financial statements and related <br /> matters. <br /> Identifying and ensuring that the City of Pequot Lakes complies with laws, regulations, contracts, and <br /> agreements is the responsibility of management. As part of obtaining reasonable assurance about <br /> whether the financial statements are free of material misstatement, we will perform tests of the City of <br /> Pequot Lakes' compliance with applicable laws and regulations and the provisions of contracts and <br /> agreements. However, the objective of our audit will not be to provide an opinion on overall <br /> compliance and we will not express such an opinion. <br /> AUDIT PROCEDURES—INTERNAL CONTROLS <br /> In planning and performing our audit, we will consider the internal control sufficient to plan the audit in <br /> order to determine the nature, timing, and extent of our auditing procedures for the purpose of <br /> expressing our opinion on the City of Pequot Lakes'financial statements. <br /> We will obtain an understanding of the design of the relevant controls and whether they have been <br /> placed in operation, and we will assess control risk. Tests of controls may be performed to test the <br /> effectiveness of certain controls that we consider relevant to preventing and detecting errors and fraud <br />