Determining
Reportable Control Deficiencies
According to AU-C
Section 265, only significant deficiencies and material weaknesses are required
to be included in the internal control communication letter. Significant deficiencies and material
weaknesses arise from risks of material misstatements. For small audits, risks of material
misstatements are primarily the absence of key controls at the entity level, either in design or in operation. For
larger entities with more accounting personnel, key controls will exist at both
the entity and activity levels. An identified risk of material misstatement
will be reported to management in the internal control letter, even though it
may have been corrected.
To facilitate the
risk assessment process, and the ultimate reporting of significant deficiencies
and material weaknesses, it is imperative key controls be
identified and evaluated during the planning and risk assessment phases of an audit. Based on internal control documentation, identified risks will impact the
development of cost-beneficial audit strategies, the audit plan (program) and the internal
control communication letter.
Reporting
Deficiencies in Subsequent Years
For some smaller
clients, changes in accounting policies and procedures are slow. Employees that lack necessary qualifications
to make accounting or internal control decisions, no free time to design and
administer internal controls improvements and lack of understanding of the
importance of internal controls, among other reasons, can hinder reception of
an auditor’s suggestions for improving internal controls.
In these situations,
section AU-C 265 requires reporting significant weaknesses and material
weaknesses until management takes appropriate corrective action. If an
auditor’s attempts to help a client improve are not acknowledged or acted on,
or if the recommendations to correct deficiencies are not considered practical by
management, the suggestions must be communicated in the letter each year after
the first.
Suggestions that may
fall into this area are:
- Significant deficiencies
o
Management’s
expertise for selecting and applying accounting principles is lacking
o
No
designed or operating anti-fraud programs
o
No
controls over unusual or extraordinary transactions
o
No
controls over monthly or annual closing in the financial reporting process
- Material weaknesses
o
Ineffective
governance over controls and reporting
o
Material
misstatements requiring adjustment
o
Identification
of any management fraud
o
Management’s
failure to assess the effects of previous deficiencies and take action or
decide not to take action
o
A large
number of control deficiencies indicating a weak control environment
Illustrative Internal Control Communication
Letter
To: Don West,
President
Always Best
Corporation
In planning and
performing our audit of the financial statements of Always Best Corporation
(the "Corporation") as of and for the year ended December 31, 2015,
in accordance with auditing standards
generally accepted in the United States of America, we considered the
Corporation's internal control over financial reporting (internal control) as a
basis for designing audit procedures that are appropriate in the circumstances
for the purpose of expressing our opinion on the financial statements, but not
for the purpose of expressing an opinion on the effectiveness of the
Corporation's internal control. Accordingly, we do not express an opinion on the
effectiveness of the Corporation's internal control.
Our consideration of
internal control was for the limited purpose described in the preceding paragraph
and was not designed to identify all deficiencies in internal control that
might be material weaknesses or material weaknesses or significant deficiencies
and therefore, material weaknesses or material weaknesses or significant
deficiencies may exist that were not identified. However, as discussed below,
we identified certain deficiencies in internal control that we consider to be
material weaknesses or significant deficiencies.
A deficiency in
internal control exists when the design or operation of a control does not
allow management or employees, in the normal course of performing their
assigned functions, to prevent, or detect and correct, misstatements on a
timely basis. A material weakness is a deficiency, or a 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.
We consider the
following deficiencies in the Corporation's internal control to be material
weaknesses (actual letter descriptions would be specific and describe potential
effects):
o
Ineffective
governance over controls and reporting
o
Material
misstatements requiring adjustment
o
Identification
of any management fraud
o
Management’s
failure to assess the effects of previous deficiencies and take action or
decide not to take action
o
A large
number of control deficiencies indicating a weak control environment
A significant
deficiency is a deficiency, or a combination of deficiencies, in internal
control that is less severe than a material weakness, yet important enough to
merit attention by those charged with governance. We consider the following
deficiencies in the Company's internal control to be significant deficiencies (actual
letter descriptions would be specific and describe potential effects):
o
Management’s
expertise for selecting and applying accounting principles is lacking
o
No
designed or operating anti-fraud programs
o
No
controls over unusual or extraordinary transactions
o
No
controls over monthly or annual closing in the financial reporting process
(When only
significant deficiencies are being communicated, a statement would be added
indicating none of the significant deficiencies are material weaknesses.)
This communication
is intended solely for the information and use of management and
the board of directors of Always Best Corporation.
Largess
Ottiter & Co., CPAs
Anywhere, USA
March 15, 2016 (The letter
should be issued within 60 days of the report release date, which is the final
date for completing and locking down engagement files.)
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