Friday, April 2, 2010

Auditor Management Letters

In a previous fraud tip we discussed how it is not the primary role of the auditor to detect fraud. They are engaged to provide an opinion as to the reasonableness of the financial statements. To be able to provide that opinion, one thing that the auditor needs to do is to consider the reasonableness of internal controls.

Issues that the auditor finds, such as weaknesses in internal controls, are provided to the organisation by way of a management letter. The following should be considered in relation to the management letter:
  • If there are a number of issues or if the issues are complex in nature, the auditor should meet with the board to discuss the issues;
  • The board needs to understand the issues raised;
  • The board should consider each of the issues and prioritise the list in order of importance so as to ensure the issues raised are corrected;
  • The board should work with management to ensure issues raised are corrected within a reasonable time frame.
It should also be noted by correcting issues raised in the management letter, problems with internal controls can be corrected which should result in a reduced risk of fraud. Correcting the issues may also save funds by reducing the time needed by the auditor to undertake the audit, thus reducing the audit fee.