Audit Expectation Gap: Deficiencies In A Company’s Internal Control

The purposes of a company audit

The main responsibility of an auditor is to express an opinion on whether the financial statements are materially correct or show ‘a true and fair view’. The work carried out by the auditors provides the evidence to support this opinion.

There are a number of other responsibilities an auditor must conclude on:

  1. Whether proper books of account have been kept.
  2. Whether the directors report is consistent with the rest of the financial statements.
  3. For a company limited by shares, whether an EGM is required to discuss the future of the company as the net assets have fallen to below half the called up share capital.

Deficiencies in a company’s internal controls

The responsibility for maintaining internal controls lays with the management of the company. During the audit process the auditor will document and gain an understanding of these internal controls, and will then test them accordingly to ensure they are being operated as they are designed to operate.

During the course of the understanding and testing of the company’s internal controls, the auditor comes across any weakness or deficiencies, these should be communicated to company management. This is done towards the completion of the audit through the ‘management letter’ or communication to those charged with corporate governance’. This is a letter outlining the observations, implications and recommendations of the auditors with regard to any weaknesses they may have found.

It is good practice for the auditor and management to discuss any deficiencies found in order for better internal control to be achieved going forward. Management should look at this letter as recommendations to help them run their business rather than a personal criticism of their performance.

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