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ANNEX H

Illustrative Management LetterThe term management letter describes the written communication to an MFIs managementidentifying significant internal control deficiencies, offering constructive recommendations, andnoting other matters arising during the audit that the external auditor wants to bring to theattention of the MFIs management and audit committee.

A number of potential control weaknesses may be identified in a management letter; someare listed in box H.1. Following the box is an illustrative management letter.

The auditor should normally solicit and consider management comments on a draft of themanagement letter before preparing the letter in final form for presentation to the auditcommittee.

Audit committeeAspire MFI

Address

In planning and performing our audit of the financial statements of the Aspire MicrofinanceInstitution for the year ended 31 ecem!er 1""# $on %hich %e have issued our report dated March1&' 1""()' %e considered its internal control structure in order to determine our auditingprocedures for the purpose of e*pressing an opinion on the financial statements' not to provideassurance on the internal control structure+ ,uch consideration %ould not necessarily disclose allmatters in the internal control structure that might !e material %ea-nesses under standardsesta!lished !y .the country/s professional !ody0+

A material %ea-ness is a condition in %hich the design or operation of the specific internal control

structure elements does not reduce to a relatively lo% level the ris- that errors or irregularities inamounts that %ould !e material relative to the financial statements !eing audited may occur andnot !e detected %ithin a timely period !y employees in the normal course of performing theirassigned functions+ e noted no matters involving the internal control structure and its operationsthat %e consider to !e material %ea-nesses as defined a!ove+

e did note other matters related to the internal control structure' and certain other issues+ 2urcomments are presented in the attached report+

his report is intended solely for the information and use of the audit committee' management' andothers %ithin the organi4ation+

e %ill !e pleased to discuss these comments %ith you and' if desired' to assist you inimplementing any of these suggestions+

$signature)5artnerX67 Audit 8o+


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Attachment

Aspire Microfinance Institution

Report to management for the year ended 31 December 1997

8ontents

Internal audit function

Loans

Loan loss provisions

Cash

Capital

Various policies

Internal audit functionLA89 2F F:N8 I2N,As Aspire continues to gro% !oth in terms of ne% !ranches and dis!ursed loans' it may provedifficult for personnel in the head office to effectively supervise operations as %ell as perform theiro%n duties+

It %as noted that there is no internal monitoring of Aspire/s adherence to policies andprocedures+

Recommendation ; Management should consider esta!lishing an internal audit function+ his ne%lycreated function %ould not only provide management and the audit committee %ith a degree ofassurance' it could also help %ith the annual e*ternal audit' there!y saving money+

LoansL2AN , A :,


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: N


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!a ital8 A E 2


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@2X H+15otential control %ea-nesses that may !e addressed in a management letter

!ash No segregation of duties

elays in preparing and revie%ing !an- reconciliations Lac- of physical security over cash on hand Inade=uate processes surrounding teller cash counts Fla%s in reconciling inter!an- and clearing accounts

Investments No segregation of duties Lac- of appropriate authori4ation of purchases and sales Noncompliance %ith !oard decisions on investments or investment policy Improper calculation of gains or losses on sales Lac- of physical security over investments

Loans No segregation of duties Inade=uate chec-s and !alances in loan approval process

Lac- of adherence to MFI policies and procedures A!sence of' or noncompliance %ith' policies for immediate follo%?up on delin=uent loans Improper loan file documentation Loan trac-ing system fails to flag loans that are refinanced' rescheduled' or paid off %ith something

other than cash E*cessive refinancing or rescheduling of loans Inaccuracy or untimely availa!ility of loan trac-ing system information Material discrepancies !et%een accounting and loan trac-ing systems E*istence of related party Dinsider loans

$@o* continues on ne*t page+)


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@2X H+1 $continued)Potential control wea nesses that may be addressed in a management letter

A!sence of internal audit function' including an operational audit unit $see sections 3+B and &+B+( ofvolume 1)

A!sence of unannounced visits to !ranches and clients !y managers or internal auditorsLoan loss rovisions

None*istent or inaccurate aging schedules :nreasona!le aging standards ro%th is mas-ing delin=uency pro!lems Lac- of adherence to la%s and regulations :nverifia!le capital ade=uacy

#ayables and accruals No segregation of duties No proper cutoff Incorrect management assumptions used in the determination of accruals No prenum!ering of chec-s No matching of !ills of lading %ith invoices and purchase orders

$ebt No segregation of duties No monitoring of covenants Improper calculation of premiums or discounts on de!t No recording of donor loans and improper recording to capital No !oard approval Improper calculation of interest e*penses

%avings and de osits No segregation of duties 5ass!oo- entries not verified !y internal audit No monitoring of compulsory savings

!a ital No segregation of restricted and unrestricted funds No !oard authori4ation of capital transactions Noncompliance %ith donor agreements Noncompliance %ith capital ade=uacy re=uirements and other la%s and regulations

Revenues and ex enses Activity recorded in the %rong period Interest income recorded incorrectly Interest charged to !ranches not eliminated in consolidation onor grant revenue incorrectly recogni4ed %hen received over time Improper accounting of fi*ed assets 5urchases recorded to e*penses ,alary rates incorrect 5ossi!le e*istence of Dphantom employees Multiple family mem!ers on payroll

Management information systems ,ystem incapa!le of handling volume of transactions Faulty programming' resulting in distorted financial reporting ea-ness in access control or other security features No disaster recovery plan No offsite storage of !ac-up dis-s or tapes

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