Other Auditor Reports 12/31/2006

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MERE SAS 112: COMMUNICATING INTERNAL CONTROL RELATED MATTERS NOTED IN THE AUDIT This standard includes new language and definitions with which you will need to become familiar. The standard replaces "reportable conditions" and "management points" with new terms as follows: • Control Deficiency — "A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis." • Significant Deficiency — "A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process or report financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the entity's financial statements, that is more than inconsequential, will not be prevented or detected by the entity's intemal control." In other words, judging the impact of control deficiencies, singularly or collectively, could rise to such a level that, in the auditor's judgment, possible misstatements could occur in the financial statements. • Material Weakness — "A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity's intemal control." In other words, depending upon the qualitative analysis of the significant deficiencies above on the financial statements, as well as the number of such items encountered, any or all of the above could rise to the level of material weakness. You will note that these new definitions are broader and more inclusive than the previous "reportable conditions" and "material weakness" that were reported to you under SAS 60. Additionally, and perhaps most importantly to you, our communication of significant deficiencies and material weaknesses must be in writing. Verbal communications of deficiencies will not be acceptable. This means, these items must be included in our "management letter" (formerly SAS 60 report), which state agencies and other constituents often request. Nothing in the new standards precludes the auditor from orally communicating additional items that he /she believes to be of potential benefit to management, such as recommendations for operational or administrative efficiency or improvement in internal controls. If management responses are included in a management letter, we will add a disclaimer according to the appropriateness or accuracy of the response. Remember, auditor awareness of control deficiencies varies with each audit and is influenced by the nature, timing, and extent of audit procedures performed, as well as other factors from one year to the next. Therefore, taking corrective action for all of one year's findings does not guarantee that new exceptions will not present themselves the following year, even though financial procedures and controls may not have changed. (17)