How Does Audit Management Letter Help to Improve Your Business?
During an annual external audit process, the focus of the business owners normally falls on the annual report and the accounts. The audit report is crucial as it contains the auditor’s true and fair opinion on the financial statement of the company. However, the external audit comes with another crucial document, which most companies often tend to overlook- the audit management letter.
The management letter issued by the external auditors in Dubai, UAE is so vital to the business that the recommendations it contains can be used to make the business more profitable and less risky. Audit firms in Dubai suggest the entrepreneurs give due importance to the insights provided by the auditors in the management letter that sheds light on the deficiencies in the internal controls in the organization.
What is an Audit Management Letter?
The International standards of auditing require the external auditors should communicate in writing with the top management or those in charge of governance at the organization. This communication is made through the audit management letter in which the auditor writes to the senior leadership about the material weaknesses or significant deficiencies in the internal controls and suggestions to improve those weaknesses. The audit management letter also includes (amongst other things) information about the audit approach and scope, details of any adjustments to the figures that the auditor identified during the audit, information about the financial risks highlighted during the process, and any likely changes to the audit opinion.
What is Required in an Audit Management Letter?
External auditors in Dubai assess each of the internal control deficiencies that they have identified during the audit. The purpose of this assessment is to determine whether these deficiencies or a combination of these deficiencies are big enough to be classified as material weakness or significant deficiency. The auditors consider the severity of the potential misstatements in the financial statements and also whether the internal controls can detect, prevent, or correct the misstatements.
There are plenty of instances when the deficiency in the internal controls becomes significant enough to be categorized as a material weakness or significant deficiency. A common example of such a situation is when the company is bereft of the knowledge and training to make its own financial statements. Professional standards require that the auditors should communicate to the senior leadership about valuable insights about significant deficiencies or material weaknesses through the management letter. To improve the internal control deficiencies in the organization, the businesses are recommended to consult with the best audit firms in Dubai.
What About Other Deficiencies?
If the auditor identifies other forms of deficiencies in the internal controls that are not deemed as significant he can opt not to include them in the management letter. Sometimes, the auditors orally communicate such less severe deficiencies if it deserves the attention of the senior leadership. The auditors need not repeat such deficiencies again even if the management has not corrected them.
However, there are some internal control deficiencies that may grow into significant deficiencies if the senior leadership fails to correct them. A common example of such deficiencies is the failure to consistently maintain proper supporting documents for expenses. Auditors in Dubai may report such deficiencies in internal controls in the management letter to force the management to constantly monitor and correct it.
How to Take Advantage of These Insights into the Business?
Businesses should give serious attention to the recommendations contained in the audit management letter to add more strength to their internal controls, However, the way the companies view the management letter differ in varying degrees. Some businesses are willing to look into the recommendations with an open mind but others take offence. Such organizations view the comments on the letter as nothing but negative remarks on an otherwise clean audit report. However, those who accept the remarks and turn the insights into actions reap the benefits of the audit management letter.
The companies can improve businesses by strengthening the internal controls in the following ways:
- Implement efficient monitoring controls
- Conduct risk assessments round the year
- Impart adequate training to employees
- Establish effective communication with all stakeholders
- Reinstate a strong internal audit function
- Establish formal policies within the company
Detecting the deficiencies early and implementing effective internal controls in the organization is not an easy task for businesses. That is the reason why most businesses take the assistance of a third party to improve their internal controls. Outsourcing the accounting and audit functions to the best audit firms in Dubai helps the businesses improve their organization by establishing remedial measures for material weaknesses and significant deficiencies.
How Does Choosing the Best Audit Firms in Dubai Create a Difference?
External auditors are professionals who see the entrepreneurs at their best and worst. Auditors in Dubai come with the experience of working in different industries and entrepreneurs can use their valuable knowledge to the benefit of the company. The businesses should take advantage of the auditor’s industry knowledge, objectivity, and other qualities such as professional scepticism, business acumen, etc. to improve the deficiencies of the organization. An auditor’s qualities are best reflected in the remarks he makes in the audit management letter.
However, ignoring the critical insights contained in the management letter would only have a negative impact on the organization. The businesses should consider the remarks with an open mind and establish remedial actions to improve the internal controls. The businesses in such situations seek the assistance of experienced audit firms in Dubai such as Jitendra Chartered Accountants (JCA). JCA’s highly qualified Chartered Accountants ensure that the company’s financial statements comply with local and international regulations and provide recommendations to improve the internal controls within the firm.