MANAGEMENT LETTER

IN AUDITING

DEFINITION

The report issued by an auditor at the conclusion of an interim audit or a final audit which sets out a range of matters that the auditor considers need to be drawn to the attention of the management.

TOPICS/ISSUES TO BE COVERED IN THE

LETTER

An assessment of the efficiency and effectiveness of the o administration o management o and internal control system A description of any specific internal control weaknesses noted in the financial management. Recommendations to resolve/eliminate the internal control weaknesses noted should be included. Management comments/response to audit findings and recommendation

MANAGEMENT LETTER OF WEAKNESSES

It is addressed to the directors of a company and is written by the auditors of that company at a time towards the end of the audit. The letter contains information on weakness in the company's control systems, identified by the auditor, e.g. of errors that could occur because of each weakness and recommendations on how to mitigate those weaknesses. It is also known as Management Letter or Internal Control Letter.

PURPOSES
To enable the auditor to give his comments on the accounting records, systems and controls. To enable the auditor to bring the attention of management areas of weaknesses that might lead to material errors. To provide management with constructive advice. A potential defence in cases of litigation. To improve the quality of the evidence gathering process in future years.

CONTENTS
List of weaknesses identified. Areas where controls are not being applied. Errors identified. Unsuitable accounting policies and practices. Non compliance with accounting standards or legislation.

FORMAT
Opening paragraph explaining the purpose of the letter. A note that it contains only those matters which came to the auditor's attention during the audit and cannot be relied upon as a comprehensive list of all weaknesses. For each weakness give an explanation together with its effect and recommendation Concluding paragraph

FOR EXAMPLE
In sales system-credit controls Present system: o Credit checks are not performed for new or existing customers when orders are received. Implications: o Goods could be dispatched to a bad credit risk. Recommendations o Customer orders are subject to the following checks: o Credit limits are imposed for all customers.

IMPORTANT POINTS AT TIME OF DRAFT OF

LETTER
Not include language that has the effect of being in conflict with the opinion expressed in the audit report. o Provided for use only by management (or another specific named party). o State that it discusses only weaknesses in internal control which have come to the auditors attention as a result of the audit and that other weaknesses in internal control may exist. o State that the accounting and internal control systems were considered only to the extent necessary to determine the auditing procedures to report on the financial statements and not to determine the adequacy of internal control for management purposes or to provide assurances on the WHOLE accounting and internal control systems.
o

TIMING OF THE MANAGEMENT LETTER

Auditors to provide timely communication. It would be usual for the management letter to be provided at the conclusion of the annual audit For larger Organizations, it is likely that the audit will be conducted in two sessions an interim audit during the financial year and a final audit when the financial statements are available. Where an auditor conducts an interim audit a management letter must be provided to the Company at the conclusion of the interim audit to enable any required remedial action arising from the audit to be implemented as soon as possible. This will ensure that any exposure to potential loss is minimized.

DELIVERY OF THE MANAGEMENT LETTER

The auditor should determine the relevant persons who are charged with governance Without limiting the ability of the auditor to exercise such judgment Organization should specify that management letters are to be sent to the o Principal Members o Audit Committee o and the Chief Executive Officer.