Letter of Weakness: What Does It Mean and What Are Its Effects
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Companies hire external auditors from reputable?audit firms?to examine their financial processes. This is often a requirement from funding sources. Alongside the audited financial information, the auditors also provide a "letter of weakness." This letter, given by the company's official auditor, outlines all the issues they discovered with the company's internal controls while conducting the audit.
Why do Auditors create a "Letter of Weakness"?
Auditors norms want them to write to the management if they find any problems with how a company controls things internally during an audit. Auditors' letter of weakness is like a report card that talks about the problems in how things are controlled inside the company.
Before they start the audit, auditors need to know clearly about these internal controls, but they don't have to check them in every audit. To understand them better, auditors often do something like a step-by-step walk to see how things are done. They look at the company's processes and see how they control things. Then they follow these steps to make sure everything is working okay.
After this, they write a letter to the company's bosses, and the Board of Directors, and tell them about the problems they found. They also give some ideas on how to fix these problems and make the control system better and safer.
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How does the Auditor find weaknesses in Internal Control?
While auditing, the auditor creates a list of issues or weaknesses in how the company controls things. This list is important to catch and fix important errors in the financial statements before it's too late.
How to prevent future "Letter of Weakness" from Statutory Auditors?
Ensure that you follow all current internal control procedures and correct all deficiencies identified by the auditor to avoid receiving a letter of weakness. The auditors report a flaw in the internal control only if it exists. Otherwise, a letter is not required.
To know more about "Letter of Weakness" check out here.