Written Representations

1 Introduction

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The final letter to be discussed is the management representation or letter of representation, which is addressed to the auditor. In accordance with ISA 580 Written Representations, the auditor must obtain written representations from management (and, where appropriate, TCWG) that:

• It acknowledges its responsibility for the preparation of the financial statements in accordance with the applicable financial reporting framework;
  

• It has provided the auditor with all relevant information; and
  

• All transactions have been recorded and are reflected in the financial statements.
  

Examples of other representations that are typically required by other ISAs are listed in the ‘Examples’ section below.

In particular, letters of representation are important where it could be difficult for the auditors to make sure that certain problems do not exist, or that management does not have certain intentions or plans. If you don’t know about a liability it can be difficult to discover. It can also be difficult to discover management plans if they have not been discussed at board meetings and recorded in the board minutes.

Management representations cannot substitute for other audit evidence or performing audit procedures in accordance with ISAs.

Written representation alone cannot provide sufficient appropriate audit evidence for an assertion. If, for example, an assertion depends on management's intention (e.g. to settle a claim 'out-of-court'), the auditor must consider:

• the reasons for management's intention
  

• management's ability to pursue its intention
  

• management's past history in carrying out intentions
  

• other information (or lack thereof) which might contradict management's intention.

2 Examples

Here are some examples of subject-matter specific representations that might be found in a typical letter of representation:

• Any knowledge or suspicion of fraud has been disclosed to the auditor.
  

• All known actual or possible litigation and claims has been disclosed to the auditor and accounted for/disclosed in accordance with financial reporting requirements.
  

• All events occurring subsequent to the date of the financial statements have been adjusted or disclosed as required.
  

• Plans for future actions relating to management’s going concern assessment and the feasibility of these plans.
  

You should appreciate the necessity of these representations to obtain sufficient appropriate evidence about the assertion of completeness, in particular.

3 Potential problems

If written representations are inconsistent with other audit evidence or management refuses to provide one or more representations and the matter remains unresolved, the auditor should reassess:

• Management’s competence, integrity, ethical values, etc
  

• The reliability of all representations (oral or written) as audit evidence.
  

The auditor should disclaim an opinion on the financial statements if he concludes that the required written representations concerning management’s responsibilities are not reliable or not provided by management.