When written representations are misstated

Written representations are put in a letter for the board to sign – the letter should not have misstatements. If they did, that would be grounds for management to refuse to sign (!), so the letter would have to be corrected.

Imagine that the financial statements include $200k provision for a legal claim. And during the audit management says that this is what they are going to offer to settle a matter ‘out-of-court’. Assuming this to be material, management may be asked to confirm this intention in the letter. But if other audit evidence (eg a letter from a legal advisor or an invoice for legal fees) showed that the claim was to be contested, the auditor would have to consider whether $200k is likely to be appropriate in the changed circumstances, and whether management’s integrity should be called into question. If unresolved and the auditor has insufficient evidence to support the provision, the opinion would be qualified.

If management refused ‘point blank’ to sign a letter, the auditor would have to remind management of its responsibilities, which were acknowledged in the engagement letter, to provide written representation. In this (extreme) circumstance, if unresolved, the opinion would have to be disclaimed. Also, the auditor would most likely not offer themselves for reappointment since management’s acknowledgement of its responsibilities is a ‘precondition for an audit’.