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1) Why does an auditor require a written representation from the client entity?
Is it because the auditor is unable to find substantial and appropriate evidence on his own??
For example, he is unable to ascertain that no other regulatory breaches have occurred, so he requests the management to provide him with a written representation, right?2) In every question related to contingent liabilities, the auditor inspects post-year-end cash book and bank statements to inspect if any payments have been made in respect of the claim.
Is the auditor looking for this because it is possible that the company just thought (e.g. in Encore co. question), “Hey, let’s not give a disclosure or a provision, keep this matter quiet and silently pay the damages after the year end.” The auditor wants to confirm that there should be a disclosure if the amount is material, and there must be a provision if the outflow of cash is probable.
3) Why does the auditor always want to know if there have been other instances of regulatory breaches, or if more people could claim damages, if more customers have been affected? He is trying to test for completeness of the provision made, right?
1) There are 3 types of representation – “essential” representations required by ISA 580 – other representations required by other ISAs (your e.g. is a requirement of ISA 250) and other “specific” instances. I recommend that you read s.2 in Chapter 20 of AA in the Study Hub – it is only a page and I think very clear on the distinctions. There is also a comprehensive exhibit in s.4.1 which gives examples.
3) Exactly that – completeness is the most difficult of assertions because something is incomplete if its omitted – the auditor can’t be expected to “look for a needle in a haystack” – so there comes a point when the auditor has to say to management “you confirm to me to the best of your knowledge that what you have recorded in the FS/disclosed to me is complete” – after all, if management/TCWG don’t know, who else would?
2) The auditor does not presume management to be dishonest, but rather that financial reporting can be complext and things that are a matter for dislosure (such as contingent liabilities) which are not recorded in the accounting records until they “crystallise” (at a later date) can easily be overlooked/omitted without intent.
I mentioned the importance of after-date payments in this post https://opentuition.com/topic/pacific-co in the context of payables – but the same principle applies to provisions (actual and contingent).
Also – you could have a provision (an accounting estimate) made in the FS at the reporting date (e.g. for a claim for damages) – but before the FS are issued the claim is settled – this would be an adjusting event.
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