Lake Foundry is a small company producing aluminium and copper components for local industries. The company uses traditional methods of manufacture and is managed by Mr W Shore and his son Mr A Shore. The ordinary share capital is owned equally by the two men and the company is at present going through a transitional stage, whereby Mr W Shore is retiring from the business and transferring the majority of his shareholding to his son. The company employs 24 persons and has an annual turnover of $650,000.

The accounting records comprise a memorandum (paper based) cash book, nominal ledger, sales and purchase ledgers. At present, sales orders, which are normally received on the telephone, are recorded in a two-part delivery note book only when the order has been produced and is ready for despatch to the customer. When the goods are delivered, one part of the delivery note is given to the customer and the other part remains in the book.

The sales orders are normally for small quantities of goods and because of this, the sales invoice is produced from the delivery note book at the end of each month. Mr A Shore agrees a price for the job with each customer and writes this price on the delivery note. The invoice is produced and posted to the sales ledger by Mrs V Shore, Mr A Shores wife, at the end of each month. Mrs Shore is responsible for the maintenance of all accounting records other than wages, which are produced and prepared by a wages clerk.

You have recently been appointed as auditor of the company for the year ended 31 March and having ascertained and tested the system of internal control, you are about to prepare the management letter.

You are required to prepare a management letter for Lake Foundry.

Candidates should specifically refer to the following areas in the management letter:

(a) The cover letter, setting out the purpose of the letter.

(b) The appendix, incorporating any weaknesses and recommendations for improvements in the internal control system of the company.