Management Letters: Why Clients Don’t Understand Them.
One of the most common questions we hear from new clients is:
“Our previous auditor issued a management letter, but we don’t really understand what it means.”
Often the next sentence is:
“They said they were required to include at least five findings.”
That question alone tells us something important has gone wrong — not with the client, but with how management letters are being used and explained.
This blog explains:
what management letters are actually for
what the auditing standards do (and don’t) require
why trivial issues often appear as “findings”
and how committees should read and respond to them sensibly
Start With the Objective: ASA 200
Australian Auditing Standard ASA 200 sets the foundation for every audit.
Its objective is simple:
To obtain reasonable assurance that the financial report as a whole is free from material misstatement.
Not perfect.
Not error-free.
Not every cent reconciled forever.
Reasonable assurance means:
auditors focus on what matters to users of the financial statements
professional judgement is applied
immaterial issues are not meant to drive conclusions
This context matters when reading anything an auditor communicates — including management letters.
Where Management Letters Fit: ASA 260
Management letters sit under ASA 260 – Communication with Those Charged with Governance.
They are not audit opinions.
They are not compliance notices.
They are not report cards.
They are a communication tool.
ASA 260 Paragraph 15 – Planning Stage
Auditors must agree on how they will communicate with those charged with governance.
This includes:
timing
form
and the nature of matters expected to be communicated
Importantly, this is about relevance, not volume.
ASA 260 Paragraph 16 – Final Communications
At the end of the audit, the auditor must communicate significant matters arising from the audit.
The word “significant” is used deliberately — and this is where confusion often begins.
What Does “Significant” Actually Mean?
ASA 260 does not define “significant” as “everything we noticed.”
The application and explanatory material gives examples, not a checklist. Because the standard doesn’t give a strict definition, it’s useful to fall back on the ordinary meaning of the word.
The Collins dictionary definition of significant is: A significant fact, event, or thing is one that is important or shows something.
examples:
Time would appear to be the significant factor in this whole drama.
...a very significant piece of legislation.
I think it was significant that he never knew his own father.
A significant action or gesture is intended to have a special meaning.
Source: Collins Dictionary. (n.d.). Significant. In Collins English Dictionary. https://www.collinsdictionary.com/dictionary/english/significant
That matters. Because not everything worth mentioning is sufficiently important.
Examples From Real Life (That Shouldn’t Cause Panic)
Example 1: The $2.21 Bank Interest Issue
A client once received a management letter noting: “Bank interest of $2.21 was not recorded due to a bank feed timing difference.”
Context:
total income exceeded $4 million
the bank balance was correct
no fraud risk
no control breakdown
This is not significant in the ordinary sense of the word.
It does not:
change any decision a user would make
indicate a systemic issue
undermine the financial statements as a whole
Yet it appeared as a “finding”.
Example 2: Missing Receipt for a Cup of Coffee
Another management letter suggested a statutory declaration because:
a coffee receipt was missing
the amount was under $5
This is a documentation preference, not a governance failure.
ASA 200 explicitly recognises that:
audits are not designed to test every transaction
materiality applies to both size and nature
Suggesting statutory declarations for trivial items often increases fear — not audit quality.
Example 3: Property Valuations “Every Three Years”
Some new clients were told: “Land and buildings should be revalued every three years.”
That is not what Australian Accounting Standards say.
Under the fair value model:
entities must assess each reporting period whether there has been a material change
if there has been, the entire class of assets must be revalued
timing is driven by conditions, not calendars
When written advice conflicts with standards, committees understandably lose confidence — and often assume they are at fault.
They are not.
What ASA 260 Is Really Trying to Achieve
The objective of ASA 260 is not to:
overwhelm volunteer committees
pad files with minor observations
create defensive paper trails
Its objective is to:
improve the quality of communication
help those charged with governance understand matters that actually matter
support better financial reporting and oversight
The application material even gives examples of appropriate matters, such as:
significant deficiencies in internal control
major judgement areas
matters that required difficult auditor judgement
disagreements with management that were resolved
None of those look like coffee receipts.
How Committees Should Read Management Letters
When you receive a management letter, ask three simple questions:
Does this affect decisions a reasonable user would make?
Does this point to a real system or control weakness?
Is this actually required by the standards — or just habit?
If the answer is “no” to all three, the issue may be worth noting — but not worrying about.
Final Thought
If you’ve ever read a management letter and thought:
“This feels disconnected from reality.”
You’re probably right.
Understanding the standards helps separate noise from meaning — and that’s exactly what good audit communication is meant to do.
