In a management representation letter, the management of a company confirms the accuracy and completeness of the company’s financial statements for audit purposes.
As addressed in AU-C Section 580, Written Representations, the auditor has the responsibility to obtain written representations from management and, when appropriate, those charged with governance.
The written representations contemplated within AU-C 580 are deemed necessary as an integral part of fulfilling communication requirements in each financial statement audit. To that end, while the representations do not supplant – but rather complement – other audit procedures, the representations do constitute audit evidence.
In complying with the AU-C 580 requirements, the overall auditor objectives are to:
- Obtain written representations from management and, when appropriate, those charged with governance that their managerial and governance responsibilities associated with preparing the financial statements provide a fair presentation and complete information to the auditor
- Support other audit evidence relevant to the financial statements or specific assertions within the financial statements through written representations if deemed necessary by the auditor or if required in other sections of the clarified auditing technical literature
- Respond appropriately to written assertions provided by management and, when appropriate, those charged with governance or, where applicable, respond appropriately when written representations requested by the auditor are not provided
Pursuant to the AU-C 580 provisions, auditors are required to request written representations from management with appropriate responsibilities for the financial statements and knowledge of the matters concerned. Among the written representations that should be included in the representation letter are those related to the following management responsibilities:
- To prepare and fairly present the financial statements in accordance with the applicable financial reporting framework
- To design, implement and maintain internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error
- To provide all relevant information and access to the auditor, as agreed upon in the terms of the audit engagement (i.e., in the engagement letter)
- To record and reflect all transactions in the financial statements
- To design, implement and maintain internal controls to prevent and detect fraud
- To conduct risk assessments related to the financial statements being materially misstated as a result of fraud
- To report knowledge of fraud or suspected fraud
- To disclose allegations of fraud or suspected fraud
- To reveal noncompliance with laws and regulations
- To report uncorrected misstatements
- To divulge litigation and claims
- To provide estimates
- To reveal related-party transactions
- To report subsequent events
- To disclose additional matters in which auditors believe it is necessary to obtain representations to support other audit evidence relevant to the financial statements or to one or more specific assertions in the financial statements
The date of the written representations should be as of the audit report date, and the representations should be for all financial statements and periods covered by the audit report. The written representations should be in the form of a representation letter addressed to the auditor.
Because written representations are necessary audit evidence, auditors are precluded from having their reports dated in advance of the effective date of the management representations included in the representation letter.
In circumstances in which auditors question the integrity of management in a manner so that written representations provided by management related to the preparation and fair presentation of the financial statements and the information provided and completeness of transactions, the only options available would be to disclaim an opinion on the financial statements or to withdraw from the audit engagement.
In circumstances in which management does not provide one or more of the requested written representations, auditors should:
- Discuss the matter with management;
- Re-evaluate the integrity of management and evaluate the effect this issue may have on the reliability of representations and audit evidence in general; and
- Take appropriate actions, including determining the possible effect on the audit opinion or the possible need to withdraw from the audit engagement.
Refusal by management to provide the written representations requested by auditors constitutes a limitation on the scope of the audit. This refusal almost always is sufficient to preclude auditors from issuing unmodified opinions. In certain situations, auditors might need to disclaim an opinion on the financial statements or withdraw from the audit engagement when withdrawal from the engagement is possible under applicable laws or regulations. – Bob Durak, CPA, CGMA, Director of AICPA Center for Plain English Accounting