Ken Smith, the partner in charge of the audit of Houghton Enterprises, identified the following significant deficiencies during the audit of the December 31, 2007, financial statements:
1. Controls for granting credit to new customers were not adequate. In particular, the credit department did not adequately check the creditworthiness 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?