Management Report and Recommendations 12/31/1987

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City of Lino Lakes, Minnesota Management Report, Page 46 Bad Debts Interruptible Sales Increase /(Decrease) Increase /(Decrease) Year Amount Amount Percent Amount Amount Percent 1981 $105,143 1982 118,734 $ 13,591 12.93% 1983 146,092 27,358 23.04 1984 155,626 9,534 6.53 1985 149,590 (6,036) (3.88) 1986 92,822 (56,768) (37.95) 1987 3,334 3,334 3.25 88,509 (4,313) (4.65) Prior to 1987, bad debts were netted with sales. The 1987 bad debt consists mainly of one customer. Internal Accounting Controls As part of our examination, we made a study and evaluation of the system of internal accounting control of the City of Lino Lakes to the extent we considered necessary to evaluate the system, as required by generally accepted auditing standards. The purpose of our study and evaluation was to determine the nature, timing and extent of the auditing procedures necessary for the expression of an opinion on the City's financial statements. Our study was more limited than would 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 safe- guarding of assets against loss from unauthorized use or disposition, and the reliability of financial records for preparing financial statements and main- taining accountability for assets. The concept of reasonable assurance recogni- zes that the cost of a system of internal accounting control should not exceed the benefits derived and also recognizes that the evaluation 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 pre- paration of financial statements. Also, projection of any evaluation of the system to future periods is subject to the risk that the procedures may become inadequate because of changes in con- ditions and that the degree of compliance with the procedures may deteriorate.