There are other acceptable layouts which you may have seen in practice; columnar formats with the headings ‘weakness’, ‘implication’ and ‘recommendation’ are common. Again it is not necessary to learn this example, as the points would not be appropriate for all enterprises. Note however the type pf points made.


The Directors

Jaribu Ltd.



15th May 20x8

Dear Sirs

Jaribu Ltd.

Audit for the year ended 31 December 20x7

In accordance with our normal practice, we are writing toe you with regard to matters arising out of our audit for the year ended 31 December 20x7 which we consider should be brought to your attention.

Our responsibilities as auditors are governed by the (IASs/ national laws) and principally require us to report on the accounts laid before the company in general meeting.

This report has been prepared for the sole use of the directors of Upper plc. None of its contents may be disclosed to third parties without our written consent. Swift and Co assumes no liability to nay other persons.

The matters detailed in this report reflect matters coning to our attention during the course of our audit. They are not intended to be a comprehensive statement of all weaknesses that may exist or of all improvements that could be made. We set out below those matters which we consider to be of fundamental importance. Other matters of lesser significance, but which nevertheless require your attention, are dealt with in note form in the attached appendix.

  1. Management reporting

A fundamental requirement to allow proper control over your business is the regular and timely preparation of accurate management accounts. Preferably those should be prepared monthly, compared with budgets and submitted for formal consideration and adoption by the full board of directors. At the moment no such system exists.

  1. Internal control – accounting system

  1. The company exercises no control over the input, processing or output of information processed by the computer bureau. Reliance is placed on the computer bureau to ensure complete processing of accounting information. In our opinion the directors should ensure that the company effects proper control over the completeness and accuracy of information processed.

  2. There are other areas covering aspects of inventory, non-curent assets and receivables where control is lacking or inadequate which are dealt with in the appendix attached.

  3. Our audit work was made considerably more difficult by the absence of care in filing supporting documentation which was therefore difficult to trace. The proper maintenance of records is not only a requirement of the (national laws/IASs but is also necessary for the efficient running of your business.

  1. Preparation of accounts

The quality of the draft financial statements submitted to us for audit was poor.

  1. The financial statements were produced late without proper support. When support was provided in some cases it failed to agree with the amounts stated in the draft financial statements.

  2. A number of items required to be disclosed under the (IAS/national laws) was omitted. Extensive discussions were necessary with you to ascertain the information to be disclosed in respect of director’s interests and capital expenditure.

To reduce the time spent on the audit, and this the cost to you, all supporting documentation should agree with the financial statements and statutory disclosure information would be assembled prior to our examination.

We would be pleased to discuss these points with you at your convenience.

Yours faithfully

Swift & Co


Jaribu Ltd. – year ended 31 December 20x7

  1. computer processing


Lack of control exercised over computer processing.


The completeness, accuracy and validity of the accounting records may be undermined.


  1. Authorization of input especially journals not arising from books of prime entry.

  2. Batch controls using registers over all input in terms of value and number of documents/transactions processed.

  3. Use of hash totals

  4. Management control over master file amendments

  5. Reconciliation to control accounts

  6. Clear audit trial for the correction and resubmission of nay rejected

  7. All financial information processed at one location

  8. A back up system should be available if the bureau is unable to process the input.

  1. Payroll


No evidence of approval


Unauthorized changes may occur


Management should evidence their approval of the payroll, changes in rates of pay and the employment of new staff.

  1. Inventory


    • Lack of physical and financial control over times of inventory

    • Cut off errors were discovered for widgets dispatched prior to the year end but un invoiced

    • Overhead allocation in valuation of widgets lacked support


    • Inventory could be misappropriated

    • The year end inventory figure could be misstated


  1. A simple system of perpetual inventory should be implemented at each location. This should be used to check for the dispatch and receipt of inventory and would provide good overall control to enable a comparison of:

    • Expected use to actual by comparison with orders, and

    • Book inventory to actual after regular inventory checks

  1. Improvements should be made to the system of control to facilitate a review of the dispatches at the year end to ensure that a proper cutoff is achieved.

  2. The valuation of widgets depends on the estimated throughout during the year. It is important that the number of widgets produced is properly recorded and that consideration is given to normal production levels to allow compliance with accounting standards.

  1. Non-current assets


    • Lack of physical control

    • Lack of clear capitalization policy

    • Assets will nil net book vale subject to depreciation charge.


  • Portable assets could be misappropriated.

  • Items could be incorrectly capitalized

  • The depreciation figures in the accounts could be overstated.


  1. A register should be introduced to record all assets at cost together with associated depreciation

  2. In previous years capital additions, notably the improvements to the leasehold premises, have been written off. Also, assets scrapped have not been written off. The effect of these cancel out and therefore we have not proposed an adjustment to opening figures. A capitalization should be laid down and adhered to.

  3. A register would enable the identification of fully depreciated assets and allow them to be excluded from the deprecation calculations.

  1. Purchases of payments


    • Lack of proper allocation of costs

    • Lack of supporting documents

    • Lack of control over cheque books

    • Unauthorized charges

    • Poor control over unrecorded liabilities


  • Purchases in the accounts may be misstated

  • Payables may be understated if unrecorded liabilities are not controlled


  1. All charges incurred should be allocated to the relevant cost centre to promote accountability of these centers.

  2. Proper supporting documents for all payments must be retained and property filed for easy retrieval.

  3. Control over payments would be improved if only one cheque book was in sue at any one time.

  4. Documents supporting charges should be authorized by an appropriate level of management

  5. A purchases journal should be introduced. Payments should be marked off. This would provide control over unpaid invoices and a means for regular control account reconciliation.