At the end of your audit, you received a Letter on Internal Controls from your auditor. What is this and what does it mean to your organization?
One of the fallouts of Sarbanes-Oxley is the requirement of publicly traded companies to maintain adequate internal control systems. And, privately held companies must follow suit. The AICPA, which is the organization that sets auditing standards for private companies, requires auditors to issue a report on the internal controls for all closely held businesses, not-for-profit organizations and governments they audit.
Every organization has a system of internal controls. The complexity of this system is determined by the size of your organization. It includes all of your transaction cycles (i.e., revenue, purchasing and payroll) and your financial reporting process. Any of these cycles could result in a deficiency that your auditor is looking for.
Your internal control system is assessed during your audit. Any problems discovered are then evaluated to determine if a deficiency, a significant deficiency or a material weakness exists. A control deficiency 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 misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects your ability to initiate, authorize, record, process or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential, will not be prevented or detected by the entity’s internal control. A material weakness is a significant deficiency, or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity’s internal control.
All auditors are required to report significant deficiencies and material weaknesses in writing to you. If you have a deficiency, we aim to tell you about it verbally. If it’s put in writing, we always provide suggestions to fix the deficiency.
The Letter on Internal Control aims to help you improve current operations. If you need further explanation on anything contained in a letter issued by us, please contact your Rea advisor.
This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 3/5/2008.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.