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must remain aware of this situation and should continually monitor the accounting system, including changes that occur. Response: This is a common condition for city finance departments, especially those of our size (7 employees). We have received this comment in the past since it is and remains a significant deficiency as defined by the American Institute of Certified Public Accountants. We are very aware of this issue and take reasonable precautions while developing, reviewing and implementing our practices and procedures. The Finance Department reviews and makes changes and recommendations as necessary and appropriate relating to internal controls on a regular basis. For this year as well as future years, our annual work plan includes reviewing internal controls. The Finance Department staff is encouraged to bring suggestions regarding internal controls to the attention of their supervisor. In March 2006, the Auditing Standards Board issued Statements of Auditing Standards numbers 104 through 111. These new standards provided guidance concerning the auditor's assessment of risks of material misstatement in a financial statement. The auditors are now required to evaluate the design of internal controls and determine if those controls are being implemented. Anticipating this new requirement, the Finance Department prepared flowcharts of our procedures and their internal controls. Various procedures and internal controls were discussed with appropriate personnel of operating departments and divisions. As a result, a number of improvements to our internal controls have been implemented during the past year. Comments from our auditors are thoroughly discussed with their merits evaluated. With a staff of only seven in the department, segregation of duties is limited. I do not believe (nor do the auditors) that the cost/benefit analysis justifies adding staff to address this issue. 2. Prompt Payment to Subcontractors Auditors' Comment: Minnesota Statutes 471.425, Subd. 4a requires contracts of a municipality to have prime contractors pay any subcontractor within 10 days of the prime contractor's receipt of payment. The contract also must require that the prime contractor pay interest of 1.5% per month or any part of a month to the subcontractor for any undisputed amount not paid to the subcontractor within the 10 days. Response: This recommendation was first made during the audit fieldwork for the 2005 Comprehensive Annual Financial Report (CAFR) performed in the spring of 2006. At that time, all department heads were informed of this issue so that their contracts could be drafted accordingly. Public Works' "City prepared" contracts have this verbiage included. The recommendation was given again in 2007. It dealt with a contract that was already in place since 2005 and still active during 2006. It was basically a carry over of same issue, same contract over two years, not a new issue. For 2007, it is a new contract. The Public Works Department is aware of the issue and simply overlooked it in a contract for the Water Treatment Plant No. 4 which was prepared by consultants.