Other Auditor Reports 12/31/2003

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Significant Accounting Policies Management has the responsibility for selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by the City of Lino Lakes are described in Note 1 to the financial statements. During the year ended December 31, 2003, the City of Lino Lakes, Minnesota adopted Governmental Accounting Standards Board No. 34, Basic Financial Statements — and Management's Discussion and Analysis — for State and Local Governments. The implementation of GASB Statement No. 34 caused the opening fund balance at December 31, 2002, to be restated in terms of "net assets" as explained further in Note 1. We noted no transactions entered into by the City during the year that were both significant and unusual, and of which, under professional standards, we are required to inform you, or transactions for which there is a lack of authoritative guidance or consensus. Accounting Estimates Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were: Management's estimate of the cost of infrastructure (streets, storm sewers, and trails) is based on the current replacement cost of such infrastructure deflated to the year of construction using price indexes. We evaluated the key factors and assumptions used to develop the estimated cost of the City's infrastructure in determining that it is reasonable in relation to the basic financial statements taken as a whole. Annual depreciation is provided using rates sufficient to fully depreciate the related fixed assets over their useful lives based on past experiences. The year end valuation of investments at fair value. The City has recognized a liability for earned sick leave benefits. The amount recorded includes amounts earned through December 31, 2003 by employees eligible for retirement at that date. In addition, an amount is recorded for those individuals not eligible for retirement at December 31, 2003, but for whom pay-out of the amount earned to that date is reasonably expected. This estimate is derived by an analysis of the pay-out history and current and anticipated future employment conditions. We evaluated the key factors and assumptions used to develop the above estimates in determining that it is reasonable in relation to the financial statements taken as a whole. Significant Audit Adjustments For purposes of this letter, professional standards define an audit adjustment as a proposed correction of the financial statements that, in our judgment, may not have been detected except through our auditing procedures. An audit adjustment may or may not indicate matters that could have a significant effect on the City's financial reporting process (that is, cause future financial statements to be materially misstated). In our judgment, none of the adjustments we proposed, whether recorded or unrecorded by the City, either individually or in the aggregate, indicate matters that could have a significant effect on the City's financial reporting process. Management did not identify and we did not notify them of any uncorrected financial statement misstatements. (5)