How should I approach discussing a material weakness in my Audit findings?
As I’m wrapping up my Audit, I’ve identified an issue: the trial balance provided to us did not reflect a prior year adjustment related to our leasing standard, which impacted fixed assets. It only accounted for this year’s adjustments. The adjustment entry was made in the previous year, and I have documentation to support that.
Given that this results in a $1.5 million adjustment to the trial balance, I’m looking for ways to argue against classifying this as a material weakness. Since the adjustment was recorded in a prior locked year, there’s limited action I can take now. I’m quite concerned about this classification—do you have any suggestions on how I might persuade them to consider this differently?
One response
When discussing a potential material weakness, it’s essential to focus on clarity, transparency, and the context of the situation. Here’s a possible framework to help you frame your discussion:
Acknowledge the Issue: Start by acknowledging the discrepancy identified in the trial balance and provide a concise summary of the situation. For example, you might say, “During our Audit, we identified that the trial balance sent earlier did not reflect a prior year adjustment related to the leasing standard that affected fixed assets.”
Provide Context: Clarify that the adjustment was made in the prior year and explain why it was not captured in the current trial balance. You can mention that the prior year was locked and, therefore, unable to be adjusted. This provides context and helps emphasize that you acted within the constraints of the Accounting policies in place.
Highlight the Correctness of the Adjustment: Emphasize that the adjustment itself is valid and that the Accounting treatment followed proper standards. If you have documentation supporting the prior year adjustment, be sure to reference this to show the due diligence applied.
Discuss Materiality and Impact: While you recognize the impact of the $1.5 million adjustment, focus on the overall financial statements’ integrity and any compensating controls that were in place. Discuss how this adjustment does not materially misrepresent the financial status of the organization as a whole.
Provide Assurance: Offer assurances that this oversight will be addressed moving forward. For instance, you could propose improvements in the review processes to prevent similar issues from arising in the future.
Invite Discussion: Finally, encourage dialogue by inviting feedback or further questions. This demonstrates your willingness to engage constructively and collaboratively.
Here’s a potential response encapsulating these points:
“Thank you for bringing up the material weakness regarding the trial balance adjustment. I want to acknowledge that we identified a significant discrepancy where the trial balance did not incorporate a prior year adjustment related to the leasing standard and fixed assets.
This adjustment, amounting to $1.5 million, was processed in the prior year, which is now locked, making it impossible for us to amend the current trial balance. Importantly, the adjustment was properly documented, and our treatment aligns with the Accounting standards.
While I understand the concern with the magnitude of this adjustment, I would argue that it does not materially misrepresent our overall financial position, as the adjustment has already been accounted for in previous reporting. We will, however, take this opportunity to enhance our internal review processes to prevent recurrence.
I’m open to discussing this further and hearing any feedback you might have.”
This approach demonstrates accountability while making a case for why this finding should not be viewed as a material weakness.