Every company appoints an external professional auditor from a trusted auditing firm to conduct an audit of the financial functions. The funding source requires the audit report, but do you know? Along with the audited information, the auditor also provides a letter of weakness?
But what is the letter of weakness? Well, a letter of weakness issued by a statutory auditor is a letter that contains all the details of everything they found wrong with the internal control of the company during the audit.
The purpose of every auditor while performing an audit is to issue an opinion on the company’s financial statement. The auditor does this so that he does not need to investigate and find reportable situations. However, he should be familiar with them when evaluating factors of the internal control structure, by using audit operations on transactions or balances, or in some other way within the duration of the audit review.
Why do auditors prepare the letter of weakness?
Auditing norms require auditors to convey in writing to the management the deficiencies in internal controls they discovered during the audit. A letter of weakness is a report that contains information stating the flaws in the internal control mechanism.
The auditor will need clear information on internal control as part of the planning process; however, that does not mean that the auditor needs to test the internal control in all audits. In most cases, to have a better understanding, the auditors use walkthrough procedures. They will review the company’s processes, noting the executed internal controls, and then follow specific through the process to make sure the internal controls are working correctly. The auditors send this letter to the BOD informing them about deficiencies they have recognized during the audit. They also suggest how to correct or fix the weakness & create a better, protected control system.
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How does the auditor recognize weaknesses in the internal control system?
The auditor collects a list of internal control deficiencies or operating inefficiencies during the auditing process. This deficiency or combination of deficiencies is listed so that there is a fair possibility that a material misstatement of financial statements will be detected or prevented and fixed on a timely basis.
How to avoid the letter of weakness by statutory auditors in the future?
If you want to avoid getting the letter of weakness, correct all the deficiencies in the internal control identified by the auditor and ensure to follow all current internal control; The auditor’s report a flaw in the internal control only if it exists. Otherwise, a letter is not required.
What will the funding sources think if they receive this letter of weakness from the auditor?
The auditor prepares the letter of weakness for the management, board of directors, the audit committee, etc. The letter acts as a tool to help the company management improve the internal control and should not be or avoid sharing with anyone other than these specified people. The letter of weakness does not intend to or should not play a role in the future funding for the company.
Final thoughts:
If the organization uses the letter of weakness issued by the statutory auditor properly, it can be a great tool to ensure the proper functioning of the internal control. They can use the letter to ensure the internal controls are working accurately and assist in creating improvements to detect, prevent, and correct misstatements that may occur.
