Ken Smith, the partner in charge of the audit of Houghton Enterprises, identified the following significant deficiencies during the audit of December 31, 2018, 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?