Management makes many representations to the auditor both oral and written in response to specific inquiries or through the financial statements during audit. Such representations from management are part of the audit evidence the independent auditor obtains.
Types of Representations
a) Written representations
The auditor obtains written representations from management to complement other auditing procedures. In many cases, the auditor applies auditing procedures specifically designed to obtain audit evidence concerning matters that also are the subject of written representations
Purpose of a letter of representation
To obtain written audit evidence on matters that are material to the financial statements when other sufficient appropriate audit evidence cannot reasonably be expected to exist
Although cannot substitute evidence, it may be the only evidence available.
Ensures that directors acknowledge their collective responsibility for the presentation and approval of the financial statements since it is signed those with knowledge of the matters concerned, on behalf of management.
The letter also seeks to confirm oral representations made management during the course of the audit and also provide corroborative audit evidence.
Auditors therefore obtain written representations from management on material matters where other sufficient appropriate audit evidence cannot reasonably be expected to exist.
Form and contents of the letter of representation
The letter of representation is usually drafted the auditor and addressed to the auditor. The letter should be dated as near as practicable (but not after) the date of the audit report. It may include the following statements.
The written representation letter relates to the audit of the client company.
The management of the entity have fulfilled their responsibilities for the preparation of the procurement records, and the procurement records give a true and fair view and are free from material misstatement.
The assumptions made management to make procurement estimates and reach fair values are reasonable.
Related party relationships and transactions have been disclosed.
All events after the reporting period have been either adjusted or disclosed.
The effect of any uncorrected misstatements (a list of which should be attached to the letter) is immaterial.
The auditors have been provided with all relevant material, including the books of account, and unrestricted access to individuals within the entity.
All transactions have been recorded and are included in the procurement records
b) Oral representations
Auditors ask many questions to the officials and employees of client company throughout the audit. The questions may cover a range of topics from the location of records and document, reasons for unusual account procedures and probability of collecting overdue accounts receivable. In making inquiries, the auditor should consider the knowledge, objectivity, experience, responsibility and qualifications of individuals being questioned and use carefully structured questions to address relevant issues. Client replies should be carefully evaluated as appropriate and followed up with additional questions. Generally, oral client representations are not sufficient themselves but they may be useful in disclosing situations that require investigation or in corroborating other forms of evidence.
Refuses to provide a letter of representation.
Management maybe unwilling to sign letters of representations. In situations where the management declines to sign letters of representations, the auditor should inform management that he will himself prepare a statement in writing setting out his understanding of any representations that may have been made in the course of the audit and then sends this statement to management with a request for confirmation that the auditor’s understanding of the representation is correct. Discussions should be held to clarify the matters in doubt if management disagrees with the auditor’s statement of representation, and if necessary a revised statement prepared and agreed. Should management fail to reply the auditor should follow the matter up to try to ensure that his understanding of the position as set out in his statement is correct.
In rare circumstances the auditor may be completely unable to obtain written representations, which he requires because of refusal management to co- operate, or because management properly declines to give representations required on the grounds of its own uncertainty regarding that particular issue.
In such circumstances the auditor may have to conclude that he has not received all the information and explanations required and consequently may need to consider qualifying his audit report on the grounds of limitation in the scope of the audit.