What is an AU-C §265 letter and why is it issued?

The AU-C §265 letter is a ‘Communication of Significant Deficiencies and/or Material Weaknesses’. Under auditing standards, the auditors are required to communicate in writing any significant deficiencies and/or material weaknesses in the Association’s internal controls.

• Significant Deficiency: a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
• Material Weakness: a deficiency or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.

Examples of what might be included in this letter would be if the auditors proposed material adjustments to the Association’s financial statements; if the Association’s financial statements were maintained on the cash basis of accounting throughout the year; if inadequate segregation of duties existed in the Association’s internal controls; if the Association’s bank accounts were not being reconciled; or if fraud on the part of senior management of the Association was discovered.

Use of this letter is restricted to the Board and management. If the auditors did not note any significant deficiencies or material weaknesses, no letter would be issued.