Nordtek, A/S, a manufacturer of fine skiing equipment based in Skien, Norway, has retained the firm of Berzins, Dybtsyna and Kaarboe (BDK) as their auditors. BDK have found significant deficiencies in internal control which they are required to report to Nortek’s audit committee.

During the audit BDK discovered that Nordtek does not have manuals of policies and procedures for monitoring and reporting on internal controls. The board has no code of business ethics. New employees undergo minimal background checks and knowledge testing. The company has no employee training programme.

Eight of the ten members of the board of directors are not independent of the company and none of the audit committee members are independent (non-executive) directors.

There are no board committees for executive remuneration, government relations and investment review.

Management does not have a budgeting process. They have no internal audit department. Employees never switch tasks. The internal controls have never been tested for effectiveness. Nordtek’s inventory storerooms were unlocked and there were no checks on those who entered or left the premises.

Required:

Write a written communication to the Audit Committee explaining the deficiencies based on the requirements for such a report described in ISA 265.