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a. Describe the principal purpose of a management letter. b. Your audit firm has acted for many years as auditors of Western Fishing Products Ltd. In the course of your audit

      

a. Describe the principal purpose of a management letter.
b. Your audit firm has acted for many years as auditors of Western Fishing Products Ltd. In the course of your audit, you have come across the following matters, which you believe should be brought to the attention of the directors through a management letter.

• The company banks all its cheques and cash once a week; usually on a Friday afternoon.
• Unbanked cash is held in a petty cash box which is kept in the drawer of a desk in the general office. Only the financial controller and the general manager have access to the keys for the drawer and petty cash box.
• Suppliers statements once received are passed on to the purchases ledger clerk for checking against creditors account and subsequent filing. No further controls are implemented after the filing.
• The company’s stock taking instructions require that pre-numbered stock sheets be issued by and returned to the financial controller. During the stock take attendance you noted that the stock sheets in use were not pre-numbered as required.

Required.
Draft a management letter to the managing director highlighting the above weakness, their implications and suitable recommendations to overcome them.

  

Answers


Peter
a) Principal purposes of a management letter.

• To enable the auditor to give his comments on the accounting records, systems and controls.
• To enable the auditor to bring to attention of management areas of weakness that might lead to material errors.
• In some audit engagements there is a requirement to make a report to directors. These include local authorities, stock exchange firms, housing associations and financial service sector.
• To enable the director to communicate matters they have an impact on future audits.
• To enable the management to put matters that may have otherwise led to audit report qualification.
• To enable the auditor to point out areas where management could be more efficient or more effective or where economies of scale could be made or resources used more effectively.



b)
23rd April 2000

Mary Muthoni
Managing Director
Western Fishing Products Ltd
KANGEMA.

Dear Madam

Internal Control
During our audit we examined the accounting records of your company and the system of internal control over those records established in your company. This system was designed to ensure accurate and reliable records to safeguard the company’s assets. We have set out below the principal weaknesses in the system in which we found together with our recommendation for improvement.

Banking of cheques and cash
The company banks all its cheques and cash once a week. Unbanked cash and cheques are held in the petty cash box and only the financial controller and general manager have access to the drawer and petty cash box. If cash and cheques are banked only once a week there is a greater likelihood that cash can be lost or be stolen. If cash is banked everyday then little or no cash will be put in the petty cash box. The financial controller and general manager may collude and end up misappropriating cash.

Suppliers
Statements from suppliers are passed on to the purchases ledger clerk for checking against creditors account and then filed. This can lead to errors and frauds as the clerk is not very competent to carry out all the necessary checks for the creditors.

The clerk should be accompanied by someone else and check the invoices from suppliers and check them against the suppliers statements. Rubber stamps should be extended for invoices already checked.

Stocktaking
The stock sheets were not prenumbered.
This means that all the stocks may not be accounted for. Frauds could be perpetrated by having stock sheets which are not bona fide being used in the organisation by stock managers.

We recommend that:

• Stock sheets be prenumbered.
• Rubber stamps be extended on checked invoices.
• A reconciliation between invoices and suppliers statement be done.
• More rigorous control be kept over the key to the petty cash holding.

Please tell us in due course what action you have taken on these matters.

Yours faithfully,
A MWENDWA KINYUA AND CO.


Musyoxx answered the question on March 14, 2018 at 16:23


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