Management Report and Recommendations 12/31/1988

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City of Lino Lakes, Minnesota Management Report, Page 45 be necessary to express an opinion on the system of internal accounting control taken as a whole or on any of the categories of controls identified. The City of Lino Lakes is responsible for establishing and maintaining a system of internal accounting control. The objective of internal accounting control is to provide reasonable, but not absolute, assurance as to the safeguarding of assets against loss from unauthorized use or disposition, and the reliability of financial records for preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance recognizes that the cost of a system of internal accounting control should not exceed the benefits derived and also recognizes that the valuation of these factors necessarily requires estimates and judgments by management. There are inherent limitations that should be recognized in considering the potential effectiveness of any system of internal accounting control. In the performance of most control procedures, errors can result from misunderstanding of instructions, mistakes of judgment, carelessness, or other personal factors. Control procedures whose effectiveness depends upon segregation of duties can be circumvented by collusion. Similarly, control procedures can be circumvented intentionally by management either with respect to the execution and recording of transactions or with respect to the estimates and judgments required in the preparation of financial statements. Also, projection for any evaluation of the system to future periods is subject to the risk that the procedures may become inadequate because of changes in conditions and that the degree of compliance with the procedures may deteriorate. Our study and evaluation made for the limited purpose described in the first paragraph would not necessarily disclose all material weaknesses in the system. Accordingly, we do not express an opinion on the system of internal accounting control of the City of Lino Lakes taken as a whole. However, our study and evaluation disclosed that a substantial portion of certain accounting processes are performed by a single employee. Ideal conditions call for segregation of duties to establish a system of internal testing of procedures performed. Additionally, our evaluation disclosed that the City does not maintain a system of control over fixed assets. These conditions are common to cities of this size. Any modification of internal controls in this area, however, must be viewed from a cost/benefit perspective. These conditions were considered in determining the nature, timing, and extent of the audit tests to be applied in our examination of the December 31, 1988 financial statements and this report does not affect our report on the financial statements dated June 9, 1989. This report is intended solely for the use of the City of Lino Lakes and should not be used for any other purpose.