This Blog is written by Mr. Waheed Ahmed, Associate, Audit and Assurance Services. Please read this blog and provide your valued comments.
Although the statutory reporting requirements of the companies Act only call for the auditor to make a report to the members as to whether the financial statements show a true and fair view, in addition to this auditors provide management with a summary of their findings concerning the strengths and weaknesses of the accounting and internal control system as well as material issues arising from the review of the financial statements.
Purpose of the management letter
- To enable the auditor to give his comments on the accounting records, accounting system and related controls examined during the audit. Weaknesses in the ICS that have come to his attention and might lead to material errors should be highlighted and brought to management’s attention. The auditor should also give recommendations on ways of improving the system.
- To provide management with advice e.g. suggest how resources could be utilized more efficiently.
- To communicate matters that have come to the auditor’s attention that might have an impact on future audits. E.g. introduction of a new accounting standard.
A report to management will normally be a natural way of adding value to the client and the auditor should incorporate the need to report in the planning the audit. Before documenting the weaknesses in the management letter, the auditor should discuss these with appropriate officials involved. this will eliminate the possibility that the auditor may have misunderstood the operation of the system and will also enable the company to make quick corrective action. The management letter should be addressed to the board of directors or the audit committee.
The timing of the report will vary. It will often be useful to complete the compliance testing before submission, in order that weaknesses in the accounting system may be included. However, serious weaknesses discovered should be reported immediately. This might make it necessary to submit more than one letter. in most instances a management letter is usually sent after each audit attendance and finally one should be sent after the end of the audit.
This letter acts as effective feedback that assists management in running their company more efficiently and this in turn helps to promote a constructive relationship between the auditor and client’s management, which will assist in the conduct of future audits.
Such a report would also protect the audit firm should things go wrong because if weaknesses are merely discussed without confirmation in writing, there is always the danger that the client could blame the auditors for any subsequent problems resulting from failure to rectify the weaknesses.
The letter should be both objective and constructive. The auditor should request for comments from management to all the points raised, indicating what action management intends to take as a result of the comments made in the report.