<img height="1" width="1" style="display:none;" alt="" src="https://px.ads.linkedin.com/collect/?pid=938154&amp;fmt=gif">

How to Best Utilize Your Auditor's Management Letter



Auditors want to help their clients succeed. Throughout the audit process, they typically compile a list of internal control weaknesses and operating inefficiencies that may warrant management’s attention. These may be formally communicated through a “management letter.”

This letter can provide innovative ideas, based on industry best practices, about ways to beef up internal control systems, streamline operations and cut back on expenses.

(Download Video Transcript)

Beyond Compliance

Think of management letters as an extra bonus to issuing audited financial statements. AICPA standards specifically require auditors to communicate two types of 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 necessarily 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.

Key Elements

A management letter may cover a broad range of topics, including segregation of duties, account reconciliations, physical asset security, credit policies, employee performance, safety, Internet use and expense reduction. In general, the write-up for each deficiency includes three elements:

  1. Observation. The auditor describes the condition, identifies the cause (if possible) and explains why it needs improvement.
  2. Impact. This section quantifies the problem’s potential monetary effects and identifies any qualitative effects, such as decreased employee morale or delayed financial reporting.
  3. Recommendation. Here, the auditor suggests a solution or lists alternative approaches if the appropriate course of action is unclear.

Some letters present deficiencies in order of significance or potential for cost reduction. Others organize comments based on functional area or location.

Continuous Improvement

When your CPA delivers your audited financial statements, pay close attention to the management letter — and compare it to the previous year’s letter. Too often, the same items recur year after year.

Commit to making some targeted improvements this year and use the write-ups in the management letter to help track the results.

Request More Information

© 2016

Share this post:


Biz Tip Topic Expert: Lynn Heslinga, CPA

Lynn Heslinga, CPA

Lynn is a Principal with SVA Certified Public Accountants with focused expertise in nonprofit and real estate industries. In her role, she oversees and performs audits for owners of affordable multifamily housing units receiving Section 42 Low-Income Housing Tax Credits. Lynn also provides traditional audit, accounting, and tax services for nonprofits as well as advising nonprofit organizations on board governance, public charity status and public support test, internal control matters, and unrelated business income.

Awards and Affiliations

milwaukee-business-journal-largest-milwaukee-area-accounting-firms-2022-logo2
sva-certified-public-accountant-affiliation-wicpa
SVA_US_English_2024_Certification_Badge-white
AT-Regional Leaders-Logo-white-2024
IPA - Award Logo - Top 200 Firms-02
sva-certified-public-accountant-affiliation-m-power-business-champion-program
sva-certified-public-accountant-affiliation-aicap-ebpaqc-member
2023ECA_Finalist-white
sva-certified-public-accountant-affiliation-aicpa

Locations

Madison, WI
1221 John Q Hammons Dr, Suite 100
Madison, WI 53717
(608) 831-8181

Milwaukee, WI
18650 W. Corporate Drive, Suite 200
Brookfield, WI 53045
(262) 641-6888

Colorado Springs, CO
1880 Office Club Pointe, Suite 128
Colorado Springs, CO 80920
(719) 413-5551

SVA BBB Business Review Man Standing

Contact

(888) 574-4782
info@SVAaccountants.com
BizTips

Are you in the know on the latest business trends, tips, strategies, and tax implications? SVA’s Biz Tips are quick reads on timely information sent to you as soon as they are published.

Connect With Us

Copyright © 2024 SVA Certified Public Accountants | Privacy Policy | Cookie Policy | CCPA