What Should Your Auditor Be Communicating to You and Your Not-for-Profit Organization Part 3 of 3

One final item that should be communicated at the end of your not-for-profit organization’s annual audit by your auditor are the matters related to an entity’s internal control over financial reporting identified in an audit of financial statements.

The Communication of Internal Control Related Matters Identified in an Audit (SAS 115) letter documents the deficiencies identified during the audit that are considered significant deficiencies or material weaknesses within the organizations internal controls.  A deficiency in internal control exists when the design or operation of an internal control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis.  These deficiencies should be communicated, in writing, to management and those charged with governance as a part the closing meeting for the audit.

The organization’s management may wish to prepare a written response to the auditor's communication regarding significant deficiencies or material weaknesses identified during the audit. Such management communications may include a description of corrective actions taken by the organization, the organization's plans to implement new controls, or a statement indicating that management believes the cost of correcting a significant deficiency or material weakness would exceed the benefits of doing so.

Communication of Internal Control Related Matters Identified in an Audit allows the organization’s board of directors and management to better understand their organization’s internal control weaknesses so management is aware of the risks of each and determine how to address them.  It is important for the organization’s board of directors and management to remember that their auditor is their independent source of information and can help them with guidance of any internal control weaknesses identified.

As a conclusion to this blog series, although your auditor should be communicating with you, you should also be communicating with your auditor.  If there is something you don’t understand in the audit financial statements or one of the communication letters you receive, be sure to bring it to the auditor’s attention.  Effective two-way communication is always the best form of communication.