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Writing Effective

Management Report
WRITING EFFECTIVE MANAGEMENT LETTER

MODULE OBJECTIVES:

Develop management reports that will help audit


clients management meet their responsibility in
establishing and maintaining adequate internal
control structure

Prepare Effective Management Report

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Communication With Those
Charged With Governance
The objectives of the auditor in financial statements audit include:

Providing those charged with governance with timely


observations arising from the audit that are significant and
relevant to their responsibility to oversee the financial
statements

Promote effective two-way communication between the


auditor and those charged with governance

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Those Charged With Governance and
Management
Charged with Governance - - person(s) or organization(s) with
responsibility for overseeing the strategic direction of the
entity and obligations related to the accountability of the
entity.

Management - - the person(s) with executive responsibility for


the conduct of the entitys operations.

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Communication With Those
Charged With Governance
The auditor shall communicate in writing with those
charged with governance regarding significant findings
from the audit when, in the auditors professional
judgment, oral communication would not be adequate.

Written communications need not include all matters


that arose during the course of the audit.

Ref.: PSA 260, par. 15

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Communication With Those
Charged With Governance

The auditor shall communicate in writing significant


deficiencies in internal control identified during the
audit to those charged with governance on a timely
basis

Ref.: PSA 265, par. 9

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Communication With Those
Charged With Governance
The auditor shall also communicate to management at an
appropriate level of responsibility on a timely basis:

Significant deficiencies in internal control that the auditor has


communicated to those charged with governance

Other deficiencies in internal control identified during the


audit that have not been communicated to management by
other parties and that, in the auditors professional judgment,
are of sufficient importance to merit managements attention

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Significant Deficiency in Internal Control
Exists when a control is designed, implemented or
operated in such a way that it is unable to prevent, or
detect and correct, misstatements in the financial
statements on a timely basis; or

A control necessary to prevent, or detect and correct,


misstatements in the financial statements on a timely
basis is missing

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Communicating Deficiency
in Internal Control
The auditor shall include in the written communication
of significant deficiencies in internal control:

A description of the deficiencies and an explanation of their


potential effects; and

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Communicating Deficiency
in Internal Control

Sufficient information to enable those charged with governance


and management to understand the context of the
communication (i.e., the purpose of the audit was for the
auditor to express an opinion on the financial statements; and
the matters being reported are limited to those deficiencies that
the auditor has identified during the audit and that the auditor
has concluded are of sufficient importance to merit being
reported to those charged with governance)

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What Makes Audit Reports Successful?

Organization
Readability
Persuasiveness
Focused on Readers
Credibility
Materiality

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Organization
All documents must be organized for complete and easy
comprehension

All sections, parts and items should be where readers can


find them easily and in accordance with the firms
prescribed format

Objectives, responses to them, and recommendations


should be easy to find

The document should be presented and written


deductively going from generalities to specifics.
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Readability
All reports, regardless of their length or complexity, should be
easy for readers to follow from beginning to end.

Reports should be free of superfluous details


The whole report should have a forward momentum
Every section should have introduction, transitions,
summaries
Informational paragraphs should have topic sentences
Sentences must be concise and logical

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Readability. . . . contd.
Technical terms should be defined and acronyms should
be used sparingly
Clauses, phrases and modifiers should be used prudently
Words must be used correctly and precisely
Visual aids(i.e., graphs and charts) should assist easy
comprehension

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Persuasiveness
Audit reports, should convince readers that the conclusions
presented are valid and acceptable and persuade them to
act on the recommendations

Reports should present conclusions for readers so that


readers are not left to draw their own conclusions.

Conclusions presented must be drawn logically from the


facts presented.

Recommendations must be clear and specific, easy to


implement and follow, and achievable.
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Basic Considerations in Writing
Effective Management Report
Know the client and understand its business;

Identify the audience and tailor the report;

Obtain client input and keep client informed;

Identify the most effective way to deliver the report

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To write effective, attention-getting opening,
consider the following techniques:
State your audit conclusion directly
Write concretely and descriptively
Use terms your readers understand
Choose the information of greatest interest to your reader
Design your opening to guide the reader

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THOUGHT PATTERN
AUDITORS LOGIC READERS LOGIC
What I did What is your conclusion?

What I found What support do you have?

What my findings Why is this important?


mean
What should we do?

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State Your Audit Conclusion Directly
For example:

Commercial loan documentation is incomplete.


Twenty-five percent of the 100 files reviewed
were missing insurance documents, 18% were
lacking collateral information, and 12% did not
have all required signatures

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Write Concretely and Descriptively
Consider the following clich:

Some weaknesses exist in loan documentation

Loan documentation needs improvement

Account records are not properly controlled

Controls are not adequate over processing

The process is not functioning effectively

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Use Terms Your Readers Understand
Esoteric or excessively technical language will turn
readers away as quickly as cliches described earlier

When you need to use technical or possible unknown


terms in your comments, you must define them for the
reader

For example:

Form 1073 is not completed for all personnel


transfers.

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Choose the Information of Greatest
Interest to Your Reader
Varying your opening sentences to suit both the occasion
and the reader will make your reports more interesting and
more persuasive.

Your opening sentence may begin with:


Condition
Criteria
Cause
Effects of the situation
Recommendation

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Elements of Reportable Audit Findings

Criteria - What the operation is supposed to accomplish.

Condition - What the operation is actually accomplishing.

Cause - Why the deviation from the criteria occurred.

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Elements of Reportable Audit Findings

Effect - What is happening or could happen because


conditions do not meet criteria.

Conclusions - What needs to be corrected.

Recommendation - How correction must be made.

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Starting with Condition or Result
Advantages:
Describing the condition in the first sentence draws your
reader into the narrative.

Disadvantages:
Some auditors find this approach too blunt. If the condition presents a
problem, this opening line will almost always be written in a negative
tone.

Appropriate Uses:
Starting with the conclusion is the most versa-tile form of organization. It
is the approach most readers expect and prefer.

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Starting with Criteria
Advantages:
Describing the criteria in the first sentence overcomes the drawback of
beginning with the statement of a problem by using objective, factual
language.

Disadvantages:
There is seldom much exciting material in a policy or regulation, so this
opening may seem uninteresting. Some readers may think that the
writer is telling them what they already know.

Appropriate Use:
When your review is strictly to encourage compliance or when
regulations are extremely important, this approach is effective.

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Starting with Cause
Advantages:
Describing the cause of the problem in the first sentence may point
the way to a solution. It focuses on the underlying problem, not the
symptoms.

Disadvantage:
If you have not carefully analyzed the situation, your identification of
cause may be perceived as judgmental or as a conclusion without facts
to support it.

Appropriate Use:
Begin with the cause when you have identified a fundamental
procedural weakness.
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Starting with Effect
Advantages:
Describing the effect in the first sentence creates the strongest tone.
It shows the business significance of the situation, and grabs the
attention of senior management.

Disadvantages:
While the writer using this technique may impress senior
management, he or she will not win friends among line managers.
Used inappropriately, this technique can exaggerate the significance of
a finding.

Appropriate Use:
Significant findings can be presented effectively using this format.
The tone highlights its importance.
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Starting with Recommendation
Advantages:
Describing the recommendation and its benefits in the first sentence uses
positive language and will soften the tone of the opening. It makes your
report more action-oriented, focusing on possible solution rather than
existing problems.

Disadvantage:
Readers may interpret the report as telling management what should be
done. The recommendation and benefit can be put together in one
sentence.

Appropriate Use:
Stressing recommendations and benefits can contribute to a
more positive, constructive tone in your reporting.
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Choosing Your Strategic Opening
Soften the Use a
Decision Issue tone Stronger
Tone
How significant is the issue? Minor Major

What is managements likely Accepting Resistant


reaction?

Whose attention do you want to Line Senior


get? Managers Managers

How would you describe the Sensitive Tough


readers you want to influence?

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Getting Results from Your Audit Report
You can strengthen your reports potential to get results
by taking the following steps:

Describe and quantify the problem

Show the effect from managements point of view

Overcome objections

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Examples of Management Reports Items

Material deficiencies in the design or operation of


internal control
Previous years suggestions
Accounting and reporting matters
Efficiency of internal control
Other matters arising during the audit
Other services consistent with our role as auditors

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Basic Elements of Reportable Items
the nature of the item
the implications for the clients business
the suggested corrective action
the benefits of such action to the client
managements response to our suggestions
an agreed plan of action, if applicable, for
implementation

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Basic Characteristics of Comments
on Internal Control

Constructive
Positive
Pro-active
Timely

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Documentation of Management Report Points

Identify the deficiency of the specific internal


control element;
Identify documents examined;
Obtain names of employees interviewed;
Determine the cause and effect of the audit
finding;
State recommendations and benefits that can be
derived from such recommendation

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Major Parts of Management Report
Cover and title page
Transmittal letter
Table of Contents
Body of the Report
- Observation and implications
- Recommendation(s)
- Benefit
- Management response
Appendices (if any)

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Documentation for Orally Communicated
Management Report

Date(s) of meeting(s).
Management and audit committee members in attendance.
The specific matters brought to the clients attention.
Whether any matters were categorized as reportable
conditions or material weaknesses.
The clients responses.

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WRITING EFFECTIVE MANAGEMENT REPORT
MODULE OBJECTIVES:

Develop management reports that will help audit


clients management meet their responsibility in
establishing and maintaining adequate internal
control structure

Prepare Effective Management Report

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