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Significant Accounting Policies Management has the responsibility for 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 City aze described in Note 1 to the financial statements. During the 2003 fiscal yeaz the City adopted the provisions of Government Accounting Standards Board Statement No. 34 Basic Financial Statements-and Management's Discussion and Analysis- for State and Local Governments. Adopted in June 1999, GASB 34 introduced a new financial reporting model. The Statement integrates the traditional focus of government fund financial statements, relating to fiscal accountability and the modified accrual basis of accounting, with new forms of reporting to meet users' needs for longer-term financial information, and to ensure that the operational accountability objective of governments is fulfilled. We noted no transactions entered into by City during the yeaz that were both significant and unusual, and of which, under professional standazds, we aze required to inform you, or transactions for which there is a lack of authoritative guidance or consensus. Accounting Estimates Accounting estimates are an integral part of the financial statements prepazed by management and aze based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates aze 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. Significant estimates affecting the financial statements included uncollectible amounts of receivables, depreciation on capital assets, accrued compensated absences, and incurred but not reported health claims. We evaluated the key factors and assumptions used to develop these estimates in determining that they aze reasonable in relation to the financial statements taken as a whole. Audit Adjustments For purposes of this letter, professional standazds define an audit adjustment as a proposed correction of the financial statements that, in our judgment, may not have been detected except through our auditing procedures. An audit adjustment may or may not indicate matters that could have a significant effect on the City`s financial reporting process (that is, cause future financial statements to be materially misstated). In our judgment, the adjustments we proposed, which were all recorded by City, either individually or in the aggregate, indicate matters that could have a significant effect on the City's financial reporting process. We have attached all of the adjustments and reclassifications that we proposed, including the adjustments to reflect full accrual financial reports in accordance with GASB 34, for your review. We have also attached entries proposed and posted by the City staff during audit fieldwork. Disagreements with Management For purposes of this letter, professional standazds define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter that could be significant to the fmancial statements or the auditors' report. We are pleased to report that no such disagreements arose during the course of our audit. 1 1 Greem+ay Plaza, Suite 1515 • Houston, TX 77046 • (713) G21-1515 • Fax: (71.>) 621-1570 2117 Post Office Street • Galveston, TX 77550 • (409} 762-8380 • Fax: (409) 763-1749 l1E~IHiRS~ AMERTI'AY I~CTITti fE U~f CGRT(FIfiT) YVBt.TI' ACCOI.ihT.4ti'1:5, TFXAC UCIETY UP f.TRTiP(P_D PL7ii,If, ACCULI~TA YTS, CPA AS50C'IATES i~'RRYATIUYAi.. IYC. WITH ASS6fiATED UPPICES N PRIYCIPAi, U.S. AtiT) fY7T:R~tiATIU\AI_ f, ITffiS