SampleIllustrationCommunicationofInternalControlRelatedMatters(AUC265):

SignificantDeficienciesandMaterialWeaknesses1

LETTERHEADOFINDEPENDENTAUDITOR

TotheGoverningBoard
CityofDogwood,NorthCarolina

Inplanningandperformingourauditofthefinancialstatementsofthegovernmentalactivities,
thebusinesstypeactivities,theaggregatediscretelycomponentunits,eachmajorfund,andthe
aggregateremainingfund2informationofCityofDogwoodasofandfortheyearendedJune30,
20XX,inaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica,
weconsideredCityofDogwoodsinternalcontroloverfinancialreporting(internalcontrol)asa
basis for designing our auditing procedures for the purpose of expressing our opinions on the
financialstatements,butnotforthepurposeofexpressinganopinionontheeffectivenessofthe
CityofDogwoodsinternalcontrol.Accordingly,wedonotexpressanopinionontheeffectiveness
oftheCityofDogwoodsinternalcontrol.

Our consideration of internal control was for the limited purpose described in the preceding
paragraph and was not designed to identify all deficiencies in internal control that might be
significantdeficienciesormaterialweaknessesand,therefore,therecanbenoassurancethatall
such deficiencies have been identified. However, as we discussed below, we identified certain
deficienciesininternalcontrolthatweconsidertobematerialweaknessesandotherdeficiencies
thatweconsidertobesignificantdeficiencies.

Adeficiencyininternalcontrolexistswhenthedesignoroperationofacontroldoesnotallow
management or employees, in the normal course of performing their assigned functions, to
prevent, or detect and correct misstatements on a timely basis. A material weakness is a
deficiency or combination of deficiencies in internal control, such that there is a reasonable
possibilitythatamaterialmisstatementoftheentitysfinancialstatementswillnotbeprevented,
or detected and corrected on a timely basis. Weconsider the following deficiencies in Cityof
Dogwoodsinternalcontroltobematerialweaknesses:3

Wenotedthatthefinanceofficeralsohasbeenappointedasthetaxcollector.PerNorthCarolina
GeneralStatute105349(e),apersoncannotactasthefinanceofficerandtaxcollectorofaunit
unlesspermissionisgrantedfromtheStaffoftheLocalGovernmentCommission. TheCityof
Dogwoods governing board did not seek permission from the Staff of the Local Government
Commission before making this appointment. The Board will submit this for approval
immediatelyandmakeotherarrangementsifapprovalisnotgranted.4

Asignificantauditadjustmentisaproposedcorrectiontothefinancialstatementsthat,inour
judgment,maynothavebeendetectedexceptthroughourauditingprocedures.Severalleaseshad
beenclassifiedasoperatingleases,howeverbasedonFASBStatementNo.13theseleasesare
determinedtobecapital leasesandthereforeassets. Beginning assetshavebeenadjustedby

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$220,500toreflectthecapitalleases.Theexistenceofsuchmaterialadjustmentsindicatesthat
theCityofDogwoodssystemofcontrolsdidnotdetectandpreventsucherrors. Management
shouldexaminetheadjustmentsrequiredasaresultofourauditandassessthecostbenefitof
improvingtheinternal controlsystem toprevent theadjustmentsinthefuture. Management
should address inherent limitations in the internal control system and modify their oversight
function accordingly. Management will review the adjustments provided by the auditors to
preventadjustmentsinthefuture.4

Asignificantdeficiencyisadeficiency,oracombinationofdeficiencies,ininternalcontrolthatis
lessseverethanamaterialweakness,yetimportantenoughtomeritattentionbythosecharged
withgovernance.WeconsiderthefollowingdeficiencyinCityofDogwoodsinternalcontroltobe
significantdeficiency:3,5

Due to the limited number of personnel in the City of Dogwoods office, there are inherent
limitations to segregation of duties among City of Dogwoods personnel. Presently, a single
individualprepareschecks,reconcilesbankaccounts,performsallpayrolldutiesandmaintains
thegeneralledger.Alternativecontrolsshouldbeusedtocompensateforanylackofsegregation
of duties. The City of Dogwoods governing board should provide some of these controls.
Management is aware of the deficiency, but costbenefit analysis indicates that hiring more
personneltomitigatethisissueisnotfeasible.Managementwillrequestspecificbardmembers
becomemoreinvolvedbyprovidingadditionaloversight.4

CityofDogwoodswrittenresponsetothesignificantdeficienciesindentifiedinourauditwasnot
subjected to the auditing procedures applied in the audit of the financial statements and,
accordingly,wenoexpressnoopiniononit.6

Thiscommunicationisintendedsolelyfortheinformationanduseofmanagement,thegoverning
board,federalandStateawardingagencies,andpassthroughagencies,andisnotintendedtobe
andshouldnotbeusedbyanyoneotherthanthesespecifiedparties.7

[Signature]
[Date]

Reissued6/2014 2
1
Thislettermaybeusedtocommunicatesignificantdeficienciesandmaterialweaknessesidentifiedduring
theaudit.

2
Thissentenceshouldbemodifiedtoincludeonlythoseitemswhichrelatetothegovernmentalunit.Refer
toreportsintheauditopinionssectionforexplanationofopinionunits.

3
Materialweaknessesandsignificantdeficienciesthatpreviouslywerecommunicatedandhavenotyet
beenremediatedshouldberepeatedinthecurrentyearscommunication.

4
Thisfindingisonlyforillustrativepurposes.Auditorsshouldusetheirprofessionaljudgmentto
determinewhethersimilardeficienciesdiscoveredintheirauditengagementareatalevelofsignificant
deficienciesormaterialweaknesses.Iftheauditordeterminesthatthedeficiencyisatalevelofsignificant
ormaterialweakness,theauditorshouldwordthefindingtodescribetheirspecificdeficiency.
5

Thecommunicationmaynotstatethattheauditorsnotednosignificantdeficiencies.

6
Managementmayprepareawrittenresponsetotheauditorscommunication,forexample,describingthe
correctiveactiontaken,planstoimplementnewcontrols,orastatementthatmanagementdoesnotbelieve
thecostofcorrectingasignificantdeficiencyormaterialweaknesswouldexceedthebenefitsofdoingso.If
managements response is included in the samedocument containing the auditors communication, the
auditorshoulddisclaimanopinionontheinformationbyaddingthisparagraph.

7
Thissentencerestrictstheuseoftheletter.Itshouldbemodifiedtoincludethoseinchargedof
governanceandorganizationsthatapplicable.Thoughrestrictedinuse,lettersissuedinconnectionwith
anauditofagovernmentalunitmaybeamatterofpublicrecord.