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• City Council City of Laguna Beach, California Page 2 of 3 Scope and Timing of the Audit We performed the audit according to the planned scope and timing previously communicated to you in our letter about planning matters dated May 9, 2009. Significant Audit Findings Qualitative Aspecfs of Accounting Practices Management is responsible for the 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 are described in Note 1 to the financial statements. As described in Note 12 to the financial statements, the City changed its accounting policies related to other postemployment benefits by adopting Governmental Accounting Standards Board (GASB) Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, for the fiscal year ended June 30, 2009. 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. Examples of significant judgments and estimates reflected in the City's financial statements and disclosures include: Judgments concerning which capital projects represent ordinary maintenance activities necessary to keep an asset operational for its originally intended useful life versus significant improvement, replacement, and life extending projects that should be capitalized as additions to capital assets. • Estimates involving revenues and expenses to be accrued as of year end. • Estimates of liabilities for claims and judgments. Significant Difficulties Encountered in Performing the Audit We encountered no difficulties in performing our audit. Corrected and Uncorrected Adjustments Professional standards require us to communicate to you all known and likely adjustments identified during the audit, other than those that are trivial. The corrected adjustment detected as a result of audit procedures involved an adjustment for deferred revenue. The net effect of uncorrected adjustments (relating to accrued payroll and accrued interest receivable) amounted to less than 1 % of total assets for the related opinion unit (major fund, nonmajor fund, etc.).