What is a Management Letter?

A management letter is an auditing document that is submitted to clients after the completion of an external audit. Accounting audits are formal examinations and verifications of an organization’s financial processes and accounting records. They are conducted by licensed professionals, such as certified public accountants, who provide valuable advice to their client through management letters.

Management Letters

The purpose of a letter to management is to identify operational areas or procedures that should be improved or redesigned. Because auditors work with many organizations in a variety of industries, they are aware of unofficial best practices that will benefit an organization. A letter to management is a professional courtesy that is sometimes offered to clients in a rough draft and the final version. This means that many auditors will usually review minor and major non-compliances and opportunities for improvement with managers near the close of the audit. This is an excellent chance for management to quickly fix or ameliorate any minor problems, which will result in the auditor simply mentioning that specific problem was fixed. Management will have the chance to start working on solutions to major problems, which can also be included in the report before it is submitted to executives or the board of directors.

Major Non-Compliance Issues

There are two common types of major non-compliance issues. First, internal control issues refer to weaknesses or vulnerabilities in the systems and procedures that ensure that financial transactions are properly and accurately recorded. Effective internal controls, such as early detection tools, will quickly highlight financial mistakes and irregularities. Quickly correcting these issues will strengthen the integrity of financial statements and will minimize risks during audits.

The second category of major non-compliance issues is operating inefficiencies. Auditors assign red flags to ineffective processes in order to recommend improvements to resolve problems and strengthen operations. It usually takes an auditors’ sharp eye to boldly identify inefficiencies that have been quietly ignored by management over the years. These usually appear in the form of streamlined systems or new technologies that will improve operations.

Audit Checklists

Auditors use standard formats when it comes to drafting letters to management and audit reports. For example, they will identify any limitations placed on the scope or nature of the audit itself. They will consider and recommend which factors and categories should be added to the audit scope and process. Auditors will note if staff were cooperative and if there was an open flow of information. Letters to management will specify if there were any legal and regulatory matters that are not mandatory, but industry best practices. Auditors pay special attention to highlight if there are any potential conflicts of interest between staff and vendors and customers. Auditors will provide a written opinion about the quality and acceptability of the organization’s accounting policies, practices and principles. This will conclude in a letter to management that is reviewed and responded to by leaders with their follow-up report on actions taken.

Auditors point out internal control issues in management letters so that companies can fix these problems. The American Institute of CPAs (AICPA) offers a sample internal control management letter for download here.

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