Have You Utilized the Management Letter From Your Audit Team?
A useful tool that accompanies an auditor’s annual report for an organization is the management letter. It may provide suggestions on how to fortify internal control systems, streamline operations and reduce expenses.
Managers generally appreciate the suggestions found in management letters, but they may not have time to implement those suggestions because they’re concentrating on daily business operations. Don’t let this happen at your organization!
What’s covered in a management letter?
A management letter addresses a broad range of topics, including segregation of duties, account reconciliations, physical asset security, credit policies, employee performance, safety, Internet use, and expense reduction. Generally, the write-up for each deficiency includes the following elements:
- Observation: Describes the condition, identifies the cause (if possible), and explains why it needs improvement
- Impact: Quantifies the problem’s potential monetary effects and identifies any qualitative effects, such as decreased employee morale or delayed financial reporting
- Recommendation: Suggests a solution or lists alternative approaches if the appropriate course of action is unclear
Some letters present deficiencies in order of significance or the potential for cost reduction. Others organize comments based on functional area or location.
What elements are required in a management letter?
AICPA standards specifically require auditors to communicate two types of internal control deficiencies to management in writing:
- Material weaknesses: These are defined as “a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the organization’s financial statements will not be prevented or detected and corrected on a timely basis.”
- Significant deficiencies: These are “less severe than a material weakness, yet important enough to merit attention by those charged with governance.”
Operating inefficiencies and other deficiencies in internal control systems aren’t required to be communicated in writing. However, most auditors include these less significant items in their management letters to inform their clients about risks and opportunities to improve operations.
Has your organization improved over time?
When you review last year’s management letter, consider comparing it to the letters you received for previous years, since, quite often, the same items recur year after year. Comparing consecutive management letters can help track the results over time. Be aware, certain issues may autocorrect (or worsen) based on factors outside of management’s control, such as changes in technology or external market conditions. If you’re unsure how to implement a particular suggestion from your management letter, reach out to your audit team for more information.
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