Management letters: Follow up on your auditor’s recommendations

Take your audit to the next level with management letters

In today’s uncertain market, maintaining the status quo might be dangerous. Businesses must “level up” by being proactive and adaptable if they want to prosper. However, some managers might not know where to begin or be at a loss for fresh ideas. Fortunately, audited financial statements deliver more than just that. They’re accompanied by a management letter that suggests ways to maximize your company’s efficiency and minimize its risk. These letters offer new, outside viewpoints and innovative ways to handle supply chain constraints, inflationary pressures, and other recent changes.

Auditing standards

Generally Accepted Auditing Standards require auditors to report any material weaknesses or significant deficiencies in internal controls found during audit fieldwork in writing. A material weakness is “a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.”

Material weaknesses are more severe than significant deficiencies. A significant deficiency is “a deficiency, or a combination of deficiencies, in internal control that are… important enough to merit attention by those charged with governance.”

During an audit, auditors could find less severe weaknesses and operational inefficiencies. Although reporting these items is optional, the management letter frequently contains them. In addition, each deficiency comes with a detailed description. That includes an observation (and, if applicable, a reason), the financial and qualitative effects, and a suggested path of action.

The management letter

Audits ought to involve more than merely checking for compliance. Management letters highlight the takeaways from the audit fieldwork on how to enhance many facets of the business operations.

For instance, a management letter can note a considerable increase from the previous year in the typical accounts receivable collection period. The letter might offer reasonably priced advice on how to speed up collections. Some of that advice may include creating early-bird discounts and utilizing electronic payment systems to enable real-time bills and online payment. Finally, the letter can discuss how increased collections might increase operating cash flow and reduce bad debt write-offs.

Consider the management letter, but remember that your auditor is not giving you a grade for your performance. Instead, the letter’s purpose is to offer guidance based on best practices that the audit team has gathered from dealing with other clients over time.

Observant auditors may offer commentary on a variety of problems they run into while conducting an audit. In addition to internal controls, examples include:

  • Cash management
  • Operating workflow
  • Scheduling control
  • Capacity concerns
  • Flaws and waste
  • Employee benefits
  • Safety
  • Website administration
  • Technological advancements
  • Energy usage

Take your audit to the next level

Never file the management letter with your audited financial statements without taking the time to read it. The same talking points come up far too frequently year after year. Proactive managers should contact our RRBB accountants and advisors to discuss how to make improvements as quickly as possible after realizing these letters’ significant insights.

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