Ken Smith, the partner in charge of the audit of Houghton Enterprises, identified the following significant deficiencies during the audit of the December 31, 2015, financial statements:
1. Controls for granting credit to new customers were not adequate. In particular, the credit department did not adequately check the credit-worthiness of customers with an outside credit agency.
2. There were inadequate physical safeguards over the company’s inventory. No safeguards prevented employees from stealing high-value inventory parts.
Required:
a. Draft the required communications to the management of Houghton Enterprises, assuming that both items are significant deficiencies.
b. Assume that Smith determined that the second item was a material weakness. How would the required communication change?
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