Management Report and Recommendations 12/31/1986

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City of Lino Lakes, Minnesota Management Report, Page 38 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. 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 eva- luation disclosed that a substantial portion of the accounting processes are per- formed 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 modifica- tion of internal controls in these areas 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, 1986 financial statements, and this report does not affect our report on the financial statements dated June 16, 1987. This report is intended solely for the use of the City of Lino Lakes and should not be used for any other purpose. Developer Deposits The City collects deposits from developers for costs which the City incurs during the permit process. Remaining amounts are returned to the developer. The City's system of calculating amounts to be returned to developers does not always produce adequate verifiable documentation. We recommend that the City review the system and improve reconciliation procedures. Our office is available to assist in this review.