Each year, in addition to the opinion on the annual financial statements, the Chair of the Audit Committee receives a management letter on internal control from the statutory auditors.
This management letter sets out the internal control weaknesses or deficiencies identified by the statutory auditors in the course of their audit work. This document is prepared in accordance with ISA 265 (International Standard on Auditing). The management letter includes a number of points considered important for the control of financial processes, validated by the field management, and communicated to both the general management and the Audit Committee.
What should the Chair of the Audit Committee do with this letter?
Review the internal control points described therein and determine whether the weaknesses noted are significant. In many cases, the statutory auditor will indicate that the improvement of such an internal control point will lead to the strengthening of the control of operations. In some cases, the weaknesses may be qualified as “significant”. These are weaknesses that are likely to affect the reliability of the accounts. If corrective measures are not implemented quickly, the auditors may be required to express reservations about the financial statements or not to certify them.
The Chair of the Audit Committee ensures, either directly with the manager concerned, or through the internal auditors, or with the statutory auditors during their next visit, that the internal control weaknesses have been remedied.
It should be remembered that the management letter does not express a full guarantee of the effectiveness of internal control. Indeed, the auditor sets a materiality level for the conduct of his audit work and it is this same materiality level that determines the scope and depth of his analysis of internal control. The auditor tests the effectiveness of internal control in the accounting and financial processes and relies on it if it is deemed reliable.
Once again, the Chair of the Audit Committee considers the statutory auditor as a privileged partner. Through the dialogue that is established on internal control weaknesses, the statutory auditor highlights areas of risk, benchmarks the company to its peers and focuses everyone’s attention on areas for improvement in internal control.
The management letter is truly a vehicle for improving control over operations that must be closely monitored by the Chair of the Audit Committee.
