a) „„The concept of evidence is fundamental to auditing. Discuss „management representation‟ as audit evidence.
b) The concept of „materiality‟ is not always related to financial implications. State your views
The management representation as audit evidence:
During the course of an audit, management makes many representations to the auditor, either unsolicited or in response to some specific enquiries.
The auditor also should obtain representation from management, where considered appropriate and necessary.
The management representation is taken to corroborate audit evidence, but representations management cannot be a substitute for other audit evidences that the auditor could reasonably expect to be reasonably available.
In certain cases, where knowledge of facts is confined to management, a representation management may be the only audit evidence, which can reasonably be expected to be available.
If a management representation is contradicted an available other audit evidence, the auditor should examine the circumstances and, when necessary, reconsider the reliability of other representations made management.
The concept of „materiality‟ also depends on:
Regulatory or law considerations. For example, the appointment of directors is not according to law; the remuneration paid to them is a material item even if the financial implication is low.
Materiality is also decided as to the degree of relevance in relation to the overall accounts or in relation to the group to which it relates or in relation to the classes of transactions to which it pertains.
Improper description, for example, of accounting policy in the notes, is a material misstatement that may affect economic decisions.
Even insignificant items in terms of quantity may be material in special circumstances. For example, it is not the quantum of deviation but presence of the deviation itself may be material factor to determine the correct functioning of logic in a system (computer) driven accounting areas.
An item whose impact in present is insignificant but whose effect in future may be significant may be a material item.