What is a Management Representation Letter?
Getting through financial audits can be frustrating for companies, especially when asked to provide management representation letters.
This article will clarify exactly what a management representation letter is, why auditors request them, what should be included, and provide examples to make the process smooth and compliant.
You'll learn the purpose of these letters, see template examples, understand international audit standards, and gain key takeaways to improve financial reporting at your organization.
Introduction to Management Representation Letters
A management representation letter is a formal document signed by a company's senior management that is provided to external auditors. It contains certain written representations that auditors require in order to complete an audit and form an opinion on the company's financial statements.
Defining the Management Representation Letter in Audit Context
The management representation letter serves an important role within the financial statement audit process. Auditors use it as audit evidence to support their assessment of whether the financial statements are free of material misstatement. Specifically, auditors request written confirmation from management regarding the accuracy and completeness of information provided during the audit. This includes representations related to:
- The financial statements and adequacy of disclosures
- Proper recording of transactions and account balances
- Internal controls over financial reporting
- Compliance with laws and regulations
By obtaining these written representations from management, auditors gain additional audit evidence to complete their testing and analysis. The management representation letter also outlines management's responsibilities under the audit engagement.
Essential Components of a Management Representation Letter
A standard management representation letter contains certain key statements that auditors rely upon. These include:
- Financial statement disclosures : Confirmation that management has provided the auditors with all relevant information and access needed to perform the audit.
- Recognition, measurement and disclosure : Assertion that the financial statements comply with the applicable financial reporting framework and standards.
- Non-compliance : Disclosure of any non-compliance with laws and regulations.
- Litigation and claims : Details of any actual, pending or threatened litigation and claims that could impact the financial statements.
The letter will also typically list areas of significant estimates and judgments made by management in preparing the financial statements. For example, allowances for doubtful accounts, asset impairment assessments, and assumptions used in valuation models.
By obtaining written representation on these matters, auditors gain evidence to issue their audit opinion. The management representation letter should be signed by the CEO and CFO or equivalent members of senior management.
Legal and Ethical Implications of Management Representations
Signing a management representation letter has legal and ethical implications. Management must ensure representations made to the auditors are accurate and made in good faith. Intentionally misrepresenting information or omitting relevant details could constitute fraud and result in legal liability.
Auditors also have a duty to assess the reasonableness of management representations and corroborate them with other audit evidence. Relying solely on management representations without further verification could call into question the quality of the audit.
Overall, the management representation letter facilitates open and transparent communication between management and auditors. It serves as a legally binding confirmation of management's fulfillment of its financial reporting responsibilities.
What is the main purpose of a management representation letter?
The main purpose of a management representation letter is to obtain written confirmation from management that they have fulfilled their responsibility for the fair presentation of the financial statements. This letter documents that management has provided the auditors with all relevant information and access needed to conduct the audit.
Some key purposes of the management representation letter include:
Confirming management's responsibility for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework (e.g. GAAP or IFRS).
Affirming that management has provided the auditors with all relevant information and access to records, documentation and personnel that is necessary for the audit.
Disclosing any instances of fraud involving management, employees with significant internal control roles, or those that cause a material misstatement of the financial statements.
Presenting details on matters that impact the financial statements - such as plans or intentions that may affect asset/liability carrying values, information about related parties, contingencies, subsequent events, etc.
Stating that all transactions have been recorded and are reflected in the financial statements. This helps confirm completeness and cut-off assertions.
So in summary, the management representation letter serves as important audit evidence that validates information provided by management to the auditors. It also formally documents management's responsibilities and representations concerning the financial statements.
What is the meaning of management representation?
Management representation refers to written confirmation provided by management of an entity to the auditors regarding the accuracy and completeness of financial statements and adequacy of internal controls.
The management representation letter is a key audit evidence prepared at the completion of the audit process. It contains management's assertions regarding:
- Fair presentation of financial statements
- Completeness of information provided to auditors
- Proper accounting policies used
- Reasonableness of significant estimates made
Essentially, through this letter, management takes responsibility for the fair presentation of the financial statements. They confirm to the auditors that they have fulfilled their financial reporting responsibilities.
The management representation letter covers all periods encompassed by the audit report and is dated the same date as the completion of audit fieldwork. It is addressed to the engagement partner and signed by those with appropriate responsibilities for the financial statements, usually the Chief Executive Officer and Chief Financial Officer.
By obtaining written representations from management, the auditors demonstrate they have obtained sufficient appropriate audit evidence to support their audit opinion. The representations serve as necessary supplementary corroboration of management's oral assertions made during the audit.
In summary, the management representation letter is a written statement from management provided to the auditors as part of the audit evidence. It confirms management's compliance with financial reporting responsibilities to enable auditors to form their audit opinion.
What is an example of a management representation letter?
We are providing this letter in connection with your audit of the cost representation statement of USAID resources managed by (Client Name) under Contract No. XXX “Project Name” for the period MM/DD/YY to MM/DD/YY.
We confirm, to the best of our knowledge and belief, the following representations made to you during your audit:
- We have made available to you all financial records and related data, including service auditor reports.
- There have been no communications from regulatory agencies concerning noncompliance with or deficiencies on financial reporting practices.
- We have no knowledge of any known or suspected fraudulent financial reporting or misappropriation of assets involving management or employees with significant roles in internal control.
- We have disclosed to you the results of our assessment of risk that the cost representation statement may be materially misstated as a result of fraud.
- There are no material transactions that have not been properly recorded in the accounting records.
- We believe the effects of any uncorrected financial statement misstatements aggregated by you are immaterial.
- We have disclosed all liabilities, both actual and contingent.
- There are no violations or possible violations of laws or regulations whose effects should be considered.
We confirm that the representations we have made to you during your audit are complete, truthful, and accurate.
Sincerely, [Signature] [Client Representative Name and Title]
What is the difference between management letter and management representation letter?
The key differences between a management letter and a management representation letter in an audit are:
Focus : The management letter focuses on identifying weaknesses and areas of improvement in the company's financial reporting process and internal controls. Management representation, on the other hand, focuses on providing evidence of management's understanding and support of the audit process.
Purpose : The purpose of a management letter is to communicate deficiencies in internal control and make suggestions for improvements. The purpose of a management representation letter is to confirm certain information that the auditors have requested from management.
Content : A management letter contains comments and recommendations from the auditor about issues encountered during the audit. A management representation letter contains specific statements by management regarding matters such as the fairness of financial statements.
Timing : A management letter is typically issued after the audit report while a management representation letter is obtained during the audit.
In summary, while both letters relate to the audit process, the management letter aims to provide suggestions for improvement while the management representation letter serves as audit evidence regarding management's assertions. The management representation letter supports the audit by confirming the accuracy of the financial statements.
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The purpose and importance of management representation letters.
Management representation letters serve several key purposes in the audit process. Most importantly, they provide additional audit evidence to support the auditor's opinion on the financial statements.
Reinforcing the Auditor's Collection of Audit Evidences
Management representation letters reinforce the audit evidence the auditor has already obtained throughout the audit. As outlined in ISA 500 Audit Evidence, auditors must obtain sufficient appropriate evidence to support their opinion. The letter serves as written representation from management on important assertions related to the financial statements. This includes the completeness and accuracy of information provided to the auditor.
Management's Accountability for Financial Reporting
Additionally, the letter highlights management's responsibilities over financial reporting. Management, not the auditor, is responsible for the preparation and fair presentation of the financial statements. The representation letter formally documents that management has fulfilled these duties, a key assertion needed to issue an audit opinion.
Assurance on Contingent and Off-Balance-Sheet Liabilities
Auditors also rely on management's representations on significant estimates and disclosures. This includes assurance from management that the financial statements appropriately reflect contingent liabilities and off-balance-sheet liabilities in accordance with the applicable financial reporting framework.
In summary, representation letters serve as a final confirmation from management that they have fulfilled their financial reporting responsibilities. The letters provide key audit evidence and accountability to support the auditor's work in accordance with auditing standards.
Drafting a Management Representation Letter: Best Practices
A management representation letter is an important part of the audit process. It documents certain written representations made by management to the auditors regarding the company's financial statements.
Drafting an effective management representation letter requires following several best practices:
Management Representation Letter Template: A Starting Point
When creating a management representation letter, it's best to start with a template. This ensures all relevant topics are covered such as:
- Management's responsibility for the preparation and fair presentation of the financial statements
- Availability of all financial records and related data
- Completeness of information provided regarding transactions and events
- Disclosure of all liabilities, both actual and contingent
- Non-existence of any fraud or illegal acts
Tailor the template to the specific circumstances and transactions of the business. But the template establishes a solid foundation.
Who Should Sign the Management Representation Letter
Typically the management representation letter should be signed by:
- The CEO or Managing Director
- The CFO or Financial Controller
This demonstrates the company's overall governance has reviewed the representations and attests to their validity and completeness.
In some cases, representation from heads of divisions or departments may also be necessary regarding transactions or activities under their specific purview.
Customizing Representations to Reflect Unique Organizational Circumstances
While a template is useful, each management representation letter must be customized to reflect the distinct transactions and activities of the organization. Specifically call out areas the auditors have highlighted as potential risks or requiring further representations.
For example, if the company underwent a major acquisition, restructuring, or system implementation, representations would be needed to address the associated impacts and risks regarding financial reporting.
The management representation letter is not a mere formality. It serves as an indispensable record of the critical dialogue between management and auditors. Following these best practices helps craft letters that clearly communicate important representations.
Management Representation Letter Samples and Examples
Management representation letters are important documents in the financial audit process. They contain written confirmation from management about the accuracy and completeness of financial statements and disclosures. Reviewing examples can help companies understand what to include in their own letters.
Analyzing a Management Representation Letter Sample
Here is an excerpt from a sample management representation letter:
We acknowledge our responsibility for the fair presentation in the financial statements of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (GAAP). We have provided you with unrestricted access to persons within the Company...
This excerpt demonstrates several key elements:
- Acknowledgment of management's responsibility for financial statements conforming to GAAP
- Confirmation that auditors had full access to people and information
Other standard inclusions are statements around contingent liabilities, litigation matters, plans or intentions that may affect assets or liabilities, and confirmation that appropriate disclosures have been made.
Analyzing examples helps identify customary terms to include.
Management Representation Letter PDF: Accessibility and Format
Management representation letters are often provided to auditors as PDF files. This locked, uneditable format:
- Facilitates easy sharing of the definitive final version
- Allows clear version control with digital signatures
- Enables reliable long-term archival storage
PDF format removes ambiguity around which representation letter version was relied upon.
Real-World Examples: Complex Issues
Consider these excerpts from real-world representation letters:
"The restructuring provision of $20 million represents our best estimate of costs to complete the plant closure based on current plans..."
"We confirm that we have properly recorded and disclosed the acquisition of Company XYZ in the financial statements..."
These excerpts demonstrate how companies transparently address complex real situations like restructurings or major transactions in the representation letter.
Real examples provide assurance that the company has appropriately considered complex accounting matters.
Comparing Management Letters and Management Representation Letters
Management letters and management representation letters serve important but distinct purposes in the audit process.
Management Letter vs Management Representation Letter: Clarifying the Distinction
A management letter communicates deficiencies or recommendations for improvement identified by the auditor during the audit. These may relate to internal controls, processes, or compliance issues that could be made more effective.
In contrast, a management representation letter obtained near the end of an audit contains specific written representations from management about the accuracy and completeness of the financial statements and disclosures. Common representations confirm that:
- Financial statements are fairly presented
- Significant assumptions used by management are reasonable
- All relevant information has been provided to the auditor
- There are no undisclosed side agreements or contingencies
While management letters offer suggestions, representation letters confirm critical facts underlying the audit.
The Role of the Auditor in Relation to Management Representations
Auditors use both tools to fulfill their responsibilities:
Management letters reflect the auditor's duty to communicate control deficiencies to those charged with governance. This allows the entity to take timely remedial action.
Representation letters provide audit evidence as part of the auditor's risk assessment procedures under auditing standards. They represent a form of documentary evidence about management's intents, knowledge and accuracy of the financial statements.
If management were unwilling to sign the representation letter, the auditor would need to reconsider their audit opinion.
Impact on Audit Opinions and Auditor's Reports
The management letter has no direct bearing on the auditor's opinion, unless the issues it raises cast doubt on the fairness of the financial statements.
However, matters raised in the representation letter directly relate to the audit evidence obtained. If management refuses to sign the letter, the auditor would likely issue a qualified opinion or disclaimer of opinion on the financial statements due to the limitation on audit scope and evidence.
In summary, while management letters offer helpful recommendations, representation letters provide the auditor written confirmation of critical information pertinent to the audit itself. Both play key roles in the audit process.
International Standards on Auditing: ISA 580 Management Representations
The International Standards on Auditing (ISA) provide a framework for conducting high quality external audits. ISA 580 specifically focuses on obtaining appropriate written representations from management to support the audit evidence gathered.
Understanding ISA 580 and Its Relevance to Management Representation Letters
ISA 580 outlines the auditor's responsibilities for obtaining written representations from management to confirm certain matters or to support other audit evidence. Some key points:
- Requires auditors to obtain written representations from management that they have fulfilled their financial reporting responsibilities
- Covers areas like recognition, measurement, presentation, and disclosure of information as per the financial reporting framework
- Helps auditors obtain confirmation on matters material to the financial statements, like the completeness of information provided
- Allows for detection of material misstatements due to fraud
By adhering to ISA 580, auditors can ensure management representation letters align with the necessary audit evidence requirements.
Compliance with International Standards on Auditing
It is critical that management representation letters comply with ISA guidelines, including:
- Obtaining representations from appropriate individuals : Those with overall responsibility for financial reporting, such as the CEO and CFO
- Written format : Printed on the organization's letterhead and signed by hand
- Date : No earlier than the date of the audit report
- Wording : Clear acknowledgement of responsibilities, accuracy of information provided, etc.
Strict compliance ensures the representations constitute valid and appropriate audit evidence as per ISA 500.
Case Studies: Adherence to ISA 580 in Practice
Company A - Drafted a management representation letter that was vague, unsigned, and outdated. By not adhering to ISA 580, they had to invest additional time and resources to obtain proper representations.
Company B - Carefully followed ISA 580 requirements. The CFO and CEO signed off on a letter confirming completeness of information and awareness of responsibilities. This aligned smoothly with the audit process.
As exemplified, non-compliance ultimately wastes time and resources. Whereas alignment with ISA 580 standards helps streamline external audits.
Conclusion and Key Takeaways
Management representation letters are important, standard audit evidence that reduce risk. They signify management's representations concerning the financial statements and accountability for internal controls, fraud, and information provided to auditors.
Summarizing the Role of Management Representation Letters in Audits
Management representation letters summarize key information and representations from management to auditors. They serve several key functions:
- Confirm management's responsibility for the preparation and fair presentation of the financial statements
- Disclose any issues or deficiencies in internal controls
- Affirm that all relevant information has been provided to auditors
- Highlight any fraud, illegal acts, or noncompliance with laws and regulations
By obtaining these written representations, auditors reduce engagement risk and confirm their understanding of management's views and positions.
Final Thoughts on Best Practices and Compliance
It is critical that management representation letters adhere to regulations and professional standards. Key best practices include:
- Ensuring the letter is dated as of the date of the auditor's report
- Having the letter signed by those with appropriate responsibilities and authority
- Disclosing all relevant issues completely and accurately
- Following the guidelines and requirements outlined in ISA 580 and other applicable standards
Diligent compliance promotes accuracy, transparency, and accountability.
Encouraging Diligence and Transparency in Financial Reporting
At their core, management representation letters aim to foster diligent, truthful, and transparent financial reporting. By eliciting key written representations from management, auditors promote an environment of responsibility, compliance, and ethical practice. This ultimately supports the accuracy and reliability of financial statements for all stakeholders.
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Understanding the Representation Letter
Written by David T. Schwindt, CPA
What is a Representation Letter? As a Board member or manager of a community management company, you may be asked to sign a representation letter at the conclusion of an audit or a reviewed financial statement engagement. Although the letter is from the Association/management company to the CPA, the CPA will generally draft the letter on behalf of the Association. The letter includes certain assertions about the Association during the period covered by the financial statements. Those assertions include but are not limited to the following:
- The Association/management company has provided the CPA with all requested financial information.
- The Association/management company has disclosed all related party transactions.
- The Association/management company has disclosed all existing and potential litigation.
- The Association/management company has disclosed any knowledge of fraud or financial irregularities.
- The Association takes responsibility for the design and implementation of a system of internal controls. These controls include but are not limited to safeguarding assets, approving transactions and minimizing the risk of someone perpetrating a theft of money or information and not being discovered in a reasonable amount of time. Although the Board is ultimately responsible for this activity, it is common that Boards rely upon the management company to assist in this responsibility.
In some instances, the management company may sign a different representation letter because the responsibilities are slightly different.
Why is the Representation Letter necessary? The American Institute of Certified Public Accounts has determined that those charged with governance (the board of directors and the community management company) should take responsibility for the assertions in the representation letter. CPAs are mandated to obtain the signed representation letter before issuing the final financial statements.
Who should sign the representation letter? Most often, the Board Chair, Board Treasurer and community manager signs the letter.
When does the Representation Letter need to be signed? The letter needs to be signed at the end of the engagement generally after a draft of the financial statements are issued. Schwindt & Co combines the representation letter with the management letter comments and proposed adjusting journal entries for ease of review. When the signed document is received by our office, we are then able to issue the final financial statements.
Should a new Board member or community manager who was not involved with Association management or governance during the period under audit or review be hesitant about signing the representation letter? This is a common question and the answer is simple. No! The first paragraph of the representation states that whoever signs the letter does so based on the best knowledge and belief of the person signing. This means that even though you may be new to the Board or management company, it is perfectly fine to sign the letter because you will only be asserting to issues that you have knowledge. It is very common for Board members/managers to sign a representation letter even though they were not involved during the period being audited or reviewed.
- Representation letters are normal and required before the issuance of audited/reviewed financial statements.
- Board members are only asserting to issues that they are aware of and new board members and managers frequently are required to sign representation letters.
- The Board Chair, Board Treasurer and community manager are generally required to sign the representation letter.
Questions regarding this article may be directed to David T. Schwindt, CPA at Schwindt & Co. (503) 227-1165.
12300 SE Mallard Way, Suite 275 Milwaukie, OR 97222 (503) 227-1165
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What is the management representation letter?
Introduction.
External auditors have the responsibility of writing a form letter which is more formally known as the management representation letter. This management representation letter is supposed to be signed by the senior management of the organization.
The accuracy of the financial statements is crucial when it comes to management representation letter because these are the statements that the audit firm submitted to the auditors for analysis.
The senior management team of the company – most likely the CEO or the CFO- has the responsibility of signing this letter and moving ahead with the process.
As soon as the audit work is completed, the process is then followed by the official signing of the management representation letter. The signing of the letter takes place before the issuance of financial statements along with the auditor’s final opinion on the whole audit process.
So what does a management representation letter comprises? To start with, the letter is supposed to state that all the information submitted is completely accurate and there have been no errors in its collection.
It also states the disclosure of all material information to the auditors involved in the project. Audit evidence is the sole purpose in the organization of such a letter so the auditors have a written record of it.
In some cases, the financial statements of the audit do not represent the financial results, so the letter has the chance to take off some blame from the auditors and shift it to lacking on the part of management. Financial position or the cash flows might also not be represented fairly – in which case, the management representation letter comes to rescue.
For these reasons, the letter is crucial as some broad-ranging statements are included by the auditor. The letter is supposed to highlight all the failings or mishaps on the part of the management that can lead to any inaccuracy or small errors in the financial statements.
Following we will discuss all the possible features that can be included in the management representation letter and how to make a successful letter that accomplishes all the purposes.
First of all, the management letter – by following the applicable accounting framework is supposed to list the financial statements in a professional and properly presented manner.
The letter is also supposed to highlight and give a written record of the fact that the financial records are accessible to the auditors working on a project. Furthermore, the letter is supposed to mention that all the minutes associated with the board of directors are finished and finalized.
It is supposed to mention that the management has taken responsibility for making all letters accessible from the regulatory agencies. The management representation letter is supposed to ensure that there are no unrecorded transactions and that every transaction is completely and accurately recorded.
The letter is also supposed to highlight that any net effect of misstatements that were not corrected would be considered immaterial by the authorities.
The system of all financial controls is entirely taken care of by the management team and it’s the responsibility of the management to ensure it runs smoothly without any errors. Disclosure of all party related transactions is also mentioned in the management representation letter and these transactions must be accurately disclosed.
Disclosure of contingent liabilities is also mandatory and it’s mentioned in the management representation letter. Along with the above-mentioned requirements, the disclosure of any claims or assessments that were not asserted is also mentioned in the letter.
The management representation letter also mentions any contingent liabilities and its disclosure is also necessary to be mentioned in the letter.
The recording of any material transactions is also mentioned in the management representation letter and it’s necessary to mention that all these transactions were properly recorded.
Encumbrances and liens on the assets and its proper disclosure should also be mentioned. The systems which are designed to prevent and detect even the slightest trace of any fraud or mishap are the responsibility of the management and all of this should be mentioned in the management representation letter.
The letter should also mention that in case there is any fraud in the audit – the management would not be entirely responsible for it and its outcome. The financial statements and how they conform to the accounting framework can also be a part of the management representation letter.
In typical situations, auditors do not allow the management to make any suggestions or any possible changes to the content of the management representation letter.
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Management Representation Letter: Format, Content, Signature
Home » Bookkeeping » Management Representation Letter: Format, Content, Signature
As of 2019, the FASB requires publicly traded companies to prepare financial statements following the Generally Accepted Accounting Principles (GAAP). Auditors are required by professional standards to report, in writing, internal control matters that they believe should be brought to the attention of those charged with governance (the board). Generally, if your auditor is going to put an internal control matter in a letter, they have assessed that the matter was the result of a deficiency in internal controls. This is an important part of that audit that the profession does not take lightly.
One common example of a deficiency in internal control that’s severe enough to be considered a material weakness or significant deficiency is when an organization lacks the knowledge and training to prepare its own financial statements, including footnote disclosures. The “SAS 115” letter is usually issued when any significant deficiencies or material weaknesses would have been discussed with management during the audit, but are not required to be communicated in written form. In performing an audit of your Plan’s internal controls and plan financials, your auditors are required to obtain an understanding of the Plan’s operations and internal controls.
A management representation letter is a form letter written by a company’s external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis. The CEO and the most senior accounting person (such as the CFO) are usually required to sign the letter. The letter is signed following the completion of audit fieldwork, and before the financial statements are issued along with the auditor’s opinion. External auditors follow a set of standards different from that of the company or organization hiring them to do the work.
In doing so, they may become aware of matters related to your Plan’s internal control that may be considered deficiencies, significant deficiencies, or material weaknesses. Audits performed by outside parties can be extremely helpful in removing any bias in reviewing the state of a company’s financials. Financial audits seek to identify if there are any material misstatements in the financial statements. An unqualified, or clean, auditor’s opinion provides financial statement users with confidence that the financials are both accurate and complete. External audits, therefore, allow stakeholders to make better, more informed decisions related to the company being audited.
The representation should reaffirm your client’s understanding of all significant terms in the engagement letter. A relevant assertion is a financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated.
The purpose of an internal audit is to ensure compliance with laws and regulations and to help maintain accurate and timely financial reporting and data collection. It also provides a benefit to management by identifying flaws in internal control or financial reporting prior to its review by external auditors.
Depending on materiality and other qualitative factors, the auditors will consider the deficiency to be an “other” matter, significant deficiency, or material weakness. The auditor has discretion on which category the deficiency falls into, but are otherwise required to use the standard wording and definitions in the letter.
It serves to document management’s representations during the audit, reducing misunderstandings of management’s responsibilities for the financial statements. The definition of good internal controls is that they allow errors and other misstatements to be prevented or detected and corrected by (the nonprofit’s) employees in the normal course of performing their duties.
Material weaknesses or significant deficiencies may exist that were not identified during the audit, and auditors are required to disclose this in their written communication. The auditor’s report contains the auditor’s opinion on whether a company’s financial statements comply with accounting standards. The results of the internal audit are used to make managerial changes and improvements to internal controls.
What is a management representation letter?
A management representation letter is a form letter written by a company’s external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis.
A control objective provides a specific target against which to evaluate the effectiveness of controls. Management representation is a letter issued by a client to the auditor in writing as part of audit evidences. The representations letter must cover all periods encompassed by the audit report, and must be dated the same date of audit work completion.
These types of auditors are used when an organization doesn’t have the in-house resources to audit certain parts of their own operations. The assertion of completeness is an assertion that the financial statements are thorough and include every item that should be included in the statement for a given accounting period. The assertion of completeness also states that a company’s entire inventory, even inventory that may be temporarily in the possession of a third party, is included in the total inventory figure appearing on a financial statement. The compilation standards do not require practitioners to obtain a management representation letter, but this does not mean that it’s not a prudent thing to do. Obtaining a representation letter helps to ensure your client understands the services that you have provided, the limitations on the work you have completed, and that they are ultimately responsible for their financial statements.
The biggest difference between an internal and external audit is the concept of independence of the external auditor. When audits are performed by third parties, the resulting auditor’s opinion expressed on items being audited (a company’s financials, internal controls, or a system) can be candid and honest without it affecting daily work relationships within the company. Auditors evaluate each internal control deficiency noted during the audit to determine whether the deficiency, or a combination of deficiencies, is severe enough to be considered a material weakness or significant deficiency. In assessing the deficiency, auditors consider the magnitude of potential misstatements of your financial statements as well as the likelihood that internal controls would not prevent or detect and correct the misstatements.
Representation to Management
- In an audit of financial statements, professional standards require that auditors obtain an understanding of internal controls to the extent necessary to plan the audit.
- written confirmation from management to the auditor about the fairness of various financial statement elements.
- Auditors use this understanding of internal controls to assess the risk of material misstatement of the financial statements and to design appropriate audit procedures to minimize that risk.
The idea behind a management representation letter is to take away some of the legal burdens of delivering wrong financial statements from the auditor to the company. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. Internal auditors are employed by the company or organization for whom they are performing an audit, and the resulting audit report is given directly to management and the board of directors. Consultant auditors, while not employed internally, use the standards of the company they are auditing as opposed to a separate set of standards.
If the auditors detect an unexpected material misstatement during your audit, it could indicate that your internal controls are not functioning properly. Conversely, lack of an actual misstatement doesn’t necessarily mean that your internal controls are working.
The determination of whether an assertion is a relevant assertion is based on inherent risk, without regard to the effect of controls. Financial statements and related disclosures refers to a company’s financial statements and notes to the financial statements as presented in accordance with generally accepted accounting principles (“GAAP”). References to financial statements and related disclosures do not extend to the preparation of management’s discussion and analysis or other similar financial information presented outside a company’s GAAP-basis financial statements and notes.
External audits can include a review of both financial statements and a company’s internal controls. When a company’s financial statements are audited, the principal element an auditor reviews is the reliability of the financial statement assertions. In the United States, the Financial Accounting Standards Board (FASB) establishes the accounting standards that companies must follow when preparing their financial statements.
In an audit of financial statements, professional standards require that auditors obtain an understanding of internal controls to the extent necessary to plan the audit. Auditors use this understanding of internal controls to assess the risk of material misstatement of the financial statements and to design appropriate audit procedures to minimize that risk. written confirmation from management to the auditor about the fairness of various financial statement elements. The purpose of the letter is to emphasize that the financial statements are management’s representations, and thus management has the primary responsibility for their accuracy.
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This letter is useful for setting the expectations of both parties to the arrangement. Almost all companies receive a yearly audit of their financial statements, such as the income statement, balance sheet, and cash flow statement. Lenders often require the results of an external audit annually as part of their debt covenants. For some companies, audits are a legal requirement due to the compelling incentives to intentionally misstate financial information in an attempt to commit fraud.
Management representation letter
As long as there’s a reasonable possibility for material misstatement of account balances or financial statement disclosures, your internal controls are considered to be deficient. An auditor typically will not issue an opinion on a company’s financial statements without first receiving a signed management representation letter. An audit engagement is an arrangement that an auditor has with a client to perform an audit of the client’s accounting records and financial statements. The term usually applies to the contractual arrangement between the two parties, rather than the full set of auditing tasks that the auditor will perform. To create an engagement, the two parties meet to discuss the services needed by the client.
As a result of the Sarbanes-Oxley Act (SOX) of 2002, publicly traded companies must also receive an evaluation of the effectiveness of their internal controls. As noted above, an internal control letter is usually the result of a deficiency in internal controls discovered during the audit, most commonly from a material audit adjustment. The letter includes required language regarding the severity of the deficiency.
Real Business Owners,
The parties then agree on the services to be provided, along with a price and the period during which the audit will be conducted. This information is stated in an engagement letter, which is prepared by the auditor and sent to the client. If the client agrees with the terms of the letter, a person authorized to do so signs the letter and returns a copy to the auditor. By doing so, the parties indicate that an audit engagement has been initiated.
Also, the letter provides supplementary audit evidence of an internal nature by giving formal management replies to auditor questions regarding matters that did not come to the auditor’s attention in performing audit procedures. Some auditors request written representations of all financial statement items. All auditors require representations regarding receivables, inventories, plant and equipment, liabilities, and subsequent events. The letter is required at the completion of the audit fieldwork and prior to issuance of the financial statements with the auditor’s opinion.
Auditors spend a lot of time assessing how material audit adjustments and immaterial adjustments that have the potential to be material will be communicated in the internal control letter. The Representation Letter is issued with the draft audit and is required by auditing standards to finalize the audit. The Representation Letter is a letter from the Association to our firm confirming responsibilities of the board and management for the financial statements, as well as confirming information provided to us during the audit. The President or Treasurer and Management need to sign the Representation Letter and return it back to our office within 60 days from the date the draft audit was issued. Representation Letters received after the 60-day mark may result in additional auditing procedures in order to finalize the audit and comply with auditing standards at an additional expense to the Association.
What is a Representation Letter?
A representation letter is a written statement provided by a company’s management to its auditors as part of the audit process. The representation letter confirms that the information provided to the auditors is complete, accurate, and fairly presented in accordance with the applicable financial reporting framework. The letter also confirms that the management has disclosed to the auditors all relevant information that may be necessary for the auditors to properly understand the company’s financial position, results of operations, and cash flows. The representation letter helps to ensure that the auditors have all the necessary information to conduct an audit in accordance with professional standards.
Why is a Representation Letter Required?
The purpose of the representation letter is to provide the auditor with assurance that the financial statements accurately reflect the company’s financial position and performance. The letter also helps the auditor to identify any potential areas of concern or risk that may need to be addressed during the audit process.
Contents of a Representation Letter
A representation letter typically includes the following:
- A statement that the financial statements being audited are complete and accurate
- A statement that the financial statements are in accordance with generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS)
- A statement that the company’s management team is responsible for the preparation and fair presentation of the financial statements
- A statement that the company’s management team has made all necessary disclosures in the financial statements
- A statement that the company’s management team has disclosed all material transactions and events that have occurred during the period being audited
- A statement that the company’s management team has disclosed all material off-balance sheet transactions, arrangements, and obligations
- A statement that the company’s management team has disclosed all material changes in accounting principles that have occurred during the period being audited
- A statement that the company’s management team has disclosed all material related-party transactions that have occurred during the period being audited
- A statement that the company’s management team has disclosed all material contingencies and commitments that have occurred during the period being audited
The representation letter may also include other representations, such as a representation that the company has complied with all relevant laws and regulations, and that there are no pending legal proceedings that could have a material impact on the financial statements.
Importance of the Representation Letter
The representation letter is an important part of the audit process, as it provides the auditor with assurance that the financial statements are accurate and complete. This helps the auditor to form an opinion on the financial statements and to issue an audit report stating whether the financial statements are presented fairly, in all material respects.
Without a representation letter, the auditor may not be able to complete the audit, as they may not have sufficient evidence to form an opinion on the financial statements. This could lead to delays or other issues in the audit process, and may impact the company’s ability to obtain financing or meet other regulatory requirements.
In summary, a representation letter is a written statement signed by the company’s management that confirms the accuracy and completeness of the financial statements. It is an important part of the audit process, as it helps the auditor to form an opinion on the financial statements and to issue an audit report.
Amy is a Certified Public Accountant (CPA), having worked in the accounting industry for 14 years. She is a seasoned finance executive having held various positions both in public accounting and most recently as the Chief Financial Officer of a large manufacturing company based out of Michigan.
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- Management Representation Letter
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It is common sense to keep tabs on the leadership of an organization, especially when it comes to financial matters. Never trust a greedy manager. There are several tools to do that, and one of them is a management representation letter.
A management representation letter is a specialized letter written by a company’s external auditors and then signed by the senior company management. The date of the document cannot be later than the date at which the audit finishes. The letter verifies that the information provided is accurate and disclosed to the auditors.
If for some reason it’s found that some elements of the audited financial statements are not accurate then auditors should conduct further investigations. As you can imagine, to say there’s a lot of pressure to get it right the first time is an understatement.
The requisites of a management representation letter
- All risks, uncertainties, liens, encumbrances, unrecorded and recorded transactions, legal violations, contingent liabilities, and unasserted claims or assessments have been adequately recorded and disclosed.
- All financial records have been made available to the auditors.
- All board and shareholder meeting minutes have been made available to the auditor.
- Management is responsible for systems designed to detect and prevent fraud and has no knowledge of fraud within the company.
- Management does not intend to make changes that will impact the value of company assets or liabilities.
- Management is responsible for the proper presentation of the financial statements by the applicable accounting framework and the team acknowledges its responsibility for the system of financial controls.
- Management has made available all letters from regulatory agencies regarding financial reporting noncompliance.
A difference of representation
It is important not to confuse a management letter with a management representation letter. They both contain essential information about accounting and the management issues of the company, but they differ in their intention.
The idea behind a management representation letter is to take away some of the legal burdens of delivering wrong financial statements from the auditor to the company. It’s basically a get out of jail card for the auditor.
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03 Apr What are Management Representation Letters?
In the world of assurance engagements, a management representation letter is a formal document that represents management’s agreement with the financial statements that are being audited or reviewed. This letter is a critical part of the assurance engagement process and is required by the auditor or reviewer as evidence that management acknowledges and accepts responsibility for the financial statements.
A management representation letter is typically issued by senior management, such as the CEO or CFO, and is addressed to the CPA firm performing the audit or review. It contains a series of statements that confirm certain facts and assurances about the company’s financial information, including the completeness and accuracy of financial records, disclosures of relevant information, and adherence to accounting principles.
The letter serves several purposes, including:
- Confirming the accuracy of financial information : The management representation letter is used to confirm that the financial statements are accurate and complete. This helps provide assurance to stakeholders that the financial statements are reliable.
- Demonstrating management’s responsibility : By signing the letter, management acknowledges its responsibility for the accuracy and completeness of the financial statements. This helps to provide accountability and transparency to stakeholders.
- Providing evidence for auditors and reviewer s: The management representation letter provides evidence to the CPA firm that management has taken responsibility for the financial statements, which helps to support the audit opinion or review conclusion.
- Reducing the risk of misstatements : The letter helps to reduce the risk of misstatements by requiring management to review the financial statements and provide assurance that they are accurate and complete.
Overall, the management representation letter is a critical part of the assurance engagement process, as it helps to provide assurance that the financial statements are accurate and complete, and that management takes responsibility for them. Without this letter, CPA firms would not have the necessary evidence to support their opinions and conclusions, which could lead to a lack of confidence in the financial statements and potential legal and financial consequences for the company. In fact, CPA firms are not permitted to complete their engagement and issue an audit or review engagement report until management provides a signed management representation letter.
If you require an audit or review and would like to speak to someone about these processes, please contact us to set up a free consultation.
Danny Sandhu
Cpa, manager.
Bio coming soon.
Shehzel Saif
Cpa, tax manager.
As Clearline’s Tax Manager, Shehzel focuses on tax planning, corporate reorganizations and succession and estate planning. She’s passionate about continuous learning and staying up to date on tax legislation changes and helping clients with succession. In addition to her CPA designation, Shehzel also has a Bachelor of Business Administration and has completed the CPA In-Depth Taxation Program. Outside of work, she enjoys spending time with family and friends, traveling and trying out new recipes.
Ameeta Randhawa
As Clearline’s HR Manager, Ameeta supports our firm’s greatest resource—our staff. With a Bachelor of Business Administration in Human Resources and over 7 years of HR experience in various industries, she ensures all employees have a positive experience at Clearline. Ameeta’s focuses include recruitment, performance management, employee relations, program and policy development, and employee engagement. Outside of work, she enjoys traveling and spending time with friends and family.
CPA, CA, Senior Manager
Michael is a Senior Manager in Private Enterprise, carrying out reviews, compilations, and tax services for small- to medium-sized businesses. With a Bachelor of Commerce specializing in finance and a Diploma in Accounting, backed by over a decade of accounting experience, Michael is a trusted advisor who helps clients’ businesses succeed. Outside of the office, Michael enjoys spending time with family, trying out different restaurants in the city, and building and collecting mechanical keyboards.
CPA, CGA, Manager
Victor K. Yoshida
Victor was born and raised in Vancouver and obtained his Bachelor of Commerce from the University of British Columbia. He articled with Deloitte & Touche and received his CA designation in 1984. Victor was accepted to the firm’s tax group and went on to complete the Canadian Institute of Chartered Accountants In-Depth Tax course.
Victor specializes in Canadian income tax issues for professional and owner-managed businesses. He has extensive experience with business succession, estate planning, wealth preservation issues, corporate reorganizations, as well as mergers and acquisitions.
Victor was a member of the education committee of the Institute of Chartered Accountants of British Columbia and has held executive positions with various amateur sport organizations.
In his free time, Victor enjoys training for marathons, travelling, and spending time with his family.
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What is a Representation Letter?
An auditor’s responsibility is to gather audit evidence regarding a subject matter. This evidence comes from several audit procedures. Based on this evidence, the auditor must conclude whether the subject matter meets specific criteria. In the case of external audits , it includes examining a client’s financial statements to establish whether they are free from material misstatements.
In some cases, however, auditors may not have the option to apply some substantive audit procedures . However, that does not imply the auditor must not consider those areas. It also does not infer that auditors must provide a negative opinion regarding those areas. In these cases, auditors can also obtain a representation letter from the client’s management.
A representation letter is a form of written representation obtain from a client. Written representations are audit evidence that auditors collect. Similarly, they are necessary information that auditors may require related to a specific audit assignment. These are similar to audit inquiries but in a written form. The international auditing standard that deals with written representations are ISA 580 Written Representations.
It is a written statement written by auditors. This statement attests to the accuracy of the financial statements given to the auditors for analysis. Auditors present this letter to the client’s management, who signs the letter constructing a form of audit evidence. While this evidence is necessary, it may not represent sufficient appropriate audit evidence.
Once presented to the management, a senior official will sign the representation letter. Usually, a client’s CEO, CFO, or other higher senior accounting personnel sign the letter. This process must take place before auditors present an audit report regarding the client’s financial statements. The content of the representation letter may vary from one firm to another. However, there are some similar elements or contents that are present in every representation letter.
What are the Contents of the Representation Letter?
A typical representation letter will include various areas to cover the auditors’ liability towards the audit assignment. It will also include areas to ensure the management is aware of its responsibility to prepare accurate financial statements. According to accountingtool.com , representation letters will cover the following areas.
1. The management is responsible for the proper presentation and accurate preparation of the financial statements. It will also include a reference to the applicable accounting framework for this purpose. 2. The auditors have received all the financial records related to the audit. 3. The board of directors meeting minutes are complete. 4. There are no unrecorded transactions. 5. The management has disclosed all related party transactions. 6. The management has provided all letters from regulatory agencies regarding financial reporting noncompliance if required. 7. The net effect of all uncorrected misstatements is immaterial. 8. The financial statements conform to the applicable accounting standards. 9. The management doesn’t have any knowledge of fraud within the company. 10. The financial statements account for all material transactions. 11. The management is responsible for systems designed to detect and prevent fraud. 12. The client has disclosed all liens and other encumbrances on its assets. 13. The management has disclosed all contingent liabilities. 14. The management acknowledges its responsibility for the system of financial controls. 15. The client has disclosed all unasserted claims or assessments.
Overall, the representation letter will consist of all the management’s responsibilities for the financial statements and the audit. This letter will decrease the auditors’ responsibility if there is a future dispute. Similarly, it places responsibility on the management for areas where it must ensure proper accounting and controls. Auditors will not allow the management to make changes to the representation letter before signing.
What Happens If Auditors Cannot Obtain Reliable Representation Letters?
In some cases, auditors cannot obtain a reliable representation letter from the management. These may occur when the auditor has concerns about the competence, integrity, or diligence of the management. In these cases, the standards require auditors to determine the effect that such issues may have on the reliability of the representation letters.
When auditors obtain representation letters that are inconsistent with other audit evidence, they must perform procedures to resolve any discrepancies. If they cannot do so, they will need to reconsider the prior assessment of the client’s management. The auditors must also determine the effects such circumstances will have on the reliability of the representation letter or the audit assignment.
If auditors conclude that the representation letter is not reliable, they must take appropriate actions. These may include establishing the possible effect on the opinion in the auditor’s report. The same cases will apply when the management refuses to provide a representation letter. The auditor must discuss it with the management before taking any actions.
Representation letters are a form of written representation and constitute an essential part of audits. These letters attest to the accuracy of the financial statements presented by the client’s management. There are several areas which representation letters cover. If auditors cannot obtain reliable representation letters, they will need to evaluate the situation and take appropriate actions.
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Demystifying ISA 580: Management Representation Letters in Auditing
- CA Rahul Sharma
- | CA, CS, CMA - Articles
- Download PDF
- 13 Sep 2023
- 2,175 Views
Introduction: The Basics of Audit – Management Representation Letter (ISA 580)
In the intricate world of auditing, there exists a pivotal document known as the Management Representation Letter, guided by ISA 580. This document plays a central role in audits, acting as a conduit for communication between management and auditors. In this comprehensive exploration, we delve deep into the intricacies of the Management Representation Letter, covering all 19 key points outlined in the standard, from its purpose to the actions auditors must take in the face of challenges.
Detailed Analysis:
1. Understanding the Management Representation Letter
A Management Representation Letter, as stipulated by ISA 580, constitutes a formal statement presented by the management of the audited entity to the auditors. It can be furnished either spontaneously or in response to specific audit inquiries. These representations encompass a wide spectrum of subjects, ranging from general responsibilities related to the preparation of financial statements to specific assertions concerning items within the financial statements.
2. The Role of Management Representation as Audit Evidence
While Management Representation Letters hold undeniable importance, they cannot serve as a complete replacement for other audit evidence that auditors anticipate will be available. For select matters where no alternative evidence exists, such as determining whether investments are held as short-term or long-term, Management Representation can indeed function as sufficient and appropriate audit evidence.
3. Key ISA 580 Requirements
Revised ISA 580 introduces two significant stipulations:
- 3.1. In the event that a representation made by management contradicts other audit evidence, auditors are obligated to investigate the circumstances thoroughly and, if necessary, reassess the reliability of other representations provided by management.
- 3.2. If, during the course of the audit, management refuses to furnish a representation that auditors deem essential, this constitutes a scope limitation. Consequently, auditors are required to express a qualified opinion or a disclaimer of opinion.
4. Additional Vital Elements of Management Representation
- 4.1. The Management Representation Letter must be addressed directly to the auditor.
- 4.2. Its date should coincide with the date of the auditor’s report or precede it.
- 4.3. It should bear the signature of a member of management who bears primary responsibility for the preparation of financial statements and possesses pertinent knowledge in this regard.
5. Various Forms of Written Representation
Management Representation can assume various formats, including:
- 5.1. A straightforward representation provided by management.
- 5.2. A letter authored by auditors delineating their understanding of management’s representation, an acknowledgment of which is sought and obtained from management.
- 5.3. A duly authenticated copy of pertinent meetings involving the board of directors or analogous bodies.
6. The Effective Date of ISA 580
ISA 580 is effective for audits of financial statements for periods beginning on or after 1st April, 2009.
7. The Objectives of the Auditor
The objectives of the auditor, as per ISA 580, encompass:
- 7.1. Obtaining written representations from management and, where appropriate, those charged with governance, confirming their belief in fulfilling their responsibility for preparing the financial statements and ensuring the completeness of information provided to the auditor.
- 7.2. Supporting other audit evidence relevant to the financial statements or specific assertions in the financial statements through written representations, as determined necessary by the auditor or required by other SAs.
- 7.3. Responding appropriately to written representations provided by management and, where appropriate, those charged with governance, or if management or, where appropriate, those charged with governance do not provide the written representations requested by the auditor.
8. Definition of Written Representations
For purposes of the SAs, “Written representations” is defined as a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. Written representations, in this context, do not include financial statements, the assertions therein, or supporting books and records.
9. References to “Management” in the Standard
For purposes of this SA, references to “management” should be read as “management and, where appropriate, those charged with governance.” In the case of a fair presentation framework, management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework; or the preparation of financial statements that give a true and fair view in accordance with the applicable financial reporting framework.
10. Management from Whom Written Representations Requested
The auditor shall request written representations from management with appropriate responsibilities for the financial statements and knowledge of the matters concerned.
11. Written Representations about Management’s Responsibilities for the Preparation of the Financial Statements
The auditor shall request management to provide a written representation that it has fulfilled its responsibility for the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation, as set out in the terms of the audit engagement.
12. Written Representations about Information Provided and Completeness of Transactions
The auditor shall request management to provide a written representation that:
- 12.1. It has provided the auditor with all relevant information and access as agreed in the terms of the audit engagement.
- 12.2. All transactions have been recorded and are reflected in the financial statements.
13. Description of Management’s Responsibilities in the Written Representations
Management’s responsibilities shall be described in the written representations required by paragraphs 9 and 10 in the manner in which these responsibilities are described in the terms of the audit engagement.
14. Other Written Representations
Other SAs may require the auditor to request written representations. If, in addition to such required representations, the auditor determines that it is necessary to obtain one or more written representations to support other audit evidence relevant to the financial statements or one or more specific assertions in the financial statements, the auditor shall request such other written representations.
15. Date of and Period(s) Covered by Written Representations
The date of the written representations shall be as near as practicable to, but not after, the date of the auditor’s report on the financial statements. The written representations shall be for all financial statements and period(s) referred to in the auditor’s report.
16. Form of Written Representations
The written representations shall be in the form of a representation letter addressed to the auditor. If law or regulation requires management to make written public statements about its responsibilities, and the auditor determines that such statements provide some or all of the representations required by paragraphs 9 or 10, the relevant matters covered by such statements need not be included in the representation letter.
17. Doubt as to the Reliability of Written Representations and Requested Written Representations Not Provided
- 17.1. If the auditor has concerns about the competence, integrity, ethical values, or diligence of management, or about its commitment to or enforcement of these, the auditor shall determine the effect that such concerns may have on the reliability of representations (oral or written) and audit evidence in general.
- 17.2. In particular, if written representations are inconsistent with other audit evidence, the auditor shall perform audit procedures to attempt to resolve the matter. If the matter remains unresolved, the auditor shall reconsider the assessment of the competence, integrity, ethical values, or diligence of management, or of its commitment to or enforcement of these, and shall determine the effect that this may have on the reliability of representations (oral or written) and audit evidence in general.
18. Requested Written Representations Not Provided
If management does not provide one or more of the requested written representations, the auditor shall:
- 18.1. Discuss the matter with management.
- 18.2. Re-evaluate the integrity of management and evaluate the effect that this may have on the reliability of representations (oral or written) and audit evidence in general.
- 18.3. Take appropriate actions, including determining the possible effect on the opinion in the auditor’s report in accordance with SA 705, having regard to the requirement in paragraph 19 of this SA.
19. Written Representations about Management’s Responsibilities
The auditor shall disclaim an opinion on the financial statements in accordance with SA 705 if:
- 19.1. The auditor concludes that there is sufficient doubt about the integrity of management such that the written representations required by paragraphs 9 and 10 are not reliable; or
- 19.2. Management does not provide the written representations required by paragraphs 9 and 10.
Conclusion: Unlocking the Significance of ISA 580
In conclusion, ISA 580, which revolves around the Management Representation Letter, is a comprehensive framework that ensures transparency, accountability, and reliability in the audit process. By covering all 19 points detailed in the standard, auditors can effectively navigate the complexities of this critical document. Understanding the nuances of ISA 580 empowers auditors to fulfill their duties with precision, integrity, and professionalism, ultimately enhancing the quality of financial reporting and instilling confidence in stakeholders.
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What Is a Representation Letter?
The Letter of Representations is a letter written from the Association to its accountant representing that the financial statements for the time period covered by the engagement are the responsibility of "management". In a community association, management include "those charged with governance" (the board of directors) and the professional manager. (See further discussion under “Who,” below.) Management confirms to the best of their knowledge various facts, including the following:
- That all financial records have been made available.
- That there have been no irregularities involving management, employees, etc.
- That all related party transactions have been disclosed
- That no events have occurred after the end of the fiscal year about which the CPA should know.
Each accountant may put different representations into their letters. Some of these representations may deal with insurance, legal matters, reserves and taxes. Discuss those items that are unclear with the CPA. Ask for explanations of unfamiliar terms or phrases.
It is important to note that the representation is “to the best of our knowledge”. As long as the person signing the letter does not know of any conflicting facts, they can sign the letter of representations.
A letter of representations cannot be signed earlier than the date of the audit report. Thus, most CPAs, including our firm, issue the letter along with a draft copy of the audit report. The Board should review the audit report and the report of internal controls, as well as any other documentation that is provided. Once the Board is assured that the audit is materially complete and accurate, they sign the Letter of Representations. This is the notification to the CPA that the final audit report is ready to be issued.
Why is the letter issued? The technical answer is that the letter is a requirement of the American Institute of Certified Public Accountants, the governing body for CPAs. Thus all CPAs should be requiring this letter for all audit engagements.
From a practical standpoint, this letter assures the CPA that management has given the accountant all pertinent information. The financial statements belong to the Association, not to the CPA, so it is important that management take responsibility for the amounts contained within the final audit or review report.
If a CPA cannot obtain a signed representation letter in an audit, the auditor will be required to change the report to a “qualified report” (as compared with an “unqualified” or “clean” opinion), if limited representations can be obtained or will need too “disclaim” an opinion or “withdraw” from an engagement if no representations can be obtained.
Who should sign the representation letter? Guidance states that “the letter should be signed by those members of management with overall responsibility for financial and operating matters whom the auditor believes are responsible for and knowledgeable about, directly or through others in the organization, the matters covered by the representations”. In community associations, as discussed above, this term may involve board members as well as professional management. Thus, it is up to the CPA to determine who should sign the letter. We interpret the term “management” to include “those charged with governance”. Most professionals in this industry agree that this includes the Board of Directors.
In our firm, we ask for the president and treasurer of the association, as well as the community association manager - if there is one - to sign the report. Board members should not be hesitant to sign the representation letter if they have complied with the terms of the letter - to the best of their ability. It does not matter if a board member has been in office only a few months. The current Board is responsible for the report that is going out to the membership; thus, it is the current Board that is being asked to sign “to the best of their knowledge”. Guidance supports this determination with the statement – “If current management was not present during all periods covered by the auditor’s report, the auditor should nevertheless obtain written representations from current management on all such periods”.
In conclusion , the AICPA in its brochure, The Representation Letter in an Audit - An Important Communication Between Management and the Independent Audito r, states the following:
“…as management, you are asked to acknowledge that you - rather than the auditor - have primary responsibility for the financial statements and that to the best of your knowledge these statements are correct. The letter does not change or add to your to your fundamental responsibilities, nor does it relieve the auditor of any of his or her responsibilities. It simply clarifies the traditional roles that management and the auditor perform.”
In summary – the Letter of Representations
- Required by auditing and accounting standards
- It simply clarifies that to the best of your knowledge that these statements are correct.
- Must be signed by those who govern and manage the Association
- Is the notification to the CPA that the final report is ready to be issued
Accounting and Finance
Representation letter in auditing
Representation letter is used by auditor to get confirmation from audit client that they have been fair in providing all the relevant information/explanation to the auditor and they understand their responsibility.
The auditor issues a representation letter, and management or audit client needs to sign it. The content of the management representation letter is prepared by the auditor and signed by the higher management of the audit client.
Mainly, the following content is included in the letter.
- Confirmation of the information provided during the overall audit process.
Explanation
Auditors need to obtain multiple documents/supports from the audit client to issue an audit report. So, by issuing a representation letter, they seek confirmation from management/audit clients that the information provided to the auditors is genuine and does not include inaccurate/false information. Further, they have provided all the material financial/operational information to the auditor that is relevant to the audit.
So, representation letter’s content is designed to improve the auditor’s confidence to issue clean audit report.
It should be noted that through this letter, auditors get a confirmation for the facts related to technical/grey areas of the business activities/audit-related activities. For instance, they found some technical aspects in applying the reporting standard where management has claimed deferral due to their business sector. In this case, the auditor can include the following paragraph to get confirmation from management in their letter.
The application of the accounting standard XYZ is deferred for the next reporting period. The deferral is made under paragraph XYZ of the regulations. Kindly confirm this is in order.
The last words of the paragraph are home of sigh for the auditors. That’s because these words get confirmation from the higher management of the audit client.
- Confirmation of the responsibilities of the management.
Explanation
Auditors seek written confirmation from management about their responsibilities. For instance, this letter states that the financial statement’s preparation is the management’s responsibility. In other words, auditors are not responsible for preparing financial statement. However, they issue reasonable assurance reports.
So, a management letter is a type of insurance for the auditor as it transfers some of the responsibilities from the shoulder of the auditor to the management/audit clients.
There are so many questions that might come to your mind about a representation letter. For instance, at what time representation letter is prepared, what’s the importance of this letter, who is responsible for preparing this letter, which accounting standard requires the preparation of this letter, and what does it look like? Let’s explore related details for the same.
Also read, Steps to perform External audit .
At what time representation letter is prepared?
The management letter is prepared at the end when the audit is finalized. All the issues, from audit planning to report, are written in one place in the letter to ensure the auditor and management of the company are in one place.
What’s the importance of a management representation letter?
The management letter helps the auditor gain confidence on the audit’s overall issues. For instance, there might be some grey areas in auditing. So, they write all of these areas in one place in the management letter and get confirmation from the higher management of the audit client.
Who is responsible for issuing a written representation letter?
The auditors prepare this letter as this letter is for their relief, and they are in a better position to document all the technical/grey areas. However, once finalized, the letter is dispatched to the audit client’s higher management for review and signature.
It’s important to note that auditors do not sign an audit report if management has not given back a management/representation letter after the higher management’s signatures, (like the CEO and CFO of the company). Sometimes, this letter is also called a letter for representation. For higher management, we also use a term called those charged with governance.
Which auditing standard requires a representation letter?
ISA 580 provides guidance related to representation letter . In the scope section, this ISA states that the auditor is responsible for obtaining this letter from the company’s management. However, the signature can also be obtained from those charged with governance.
Auditors prepare a representation letter, and there are two main components. The first component is about the responsibility of the management and auditor. And the second component is about getting confirmation for the audit’s technical/operational/strategic aspects. As per ISA 580, the auditor is responsible for preparing written representation letter, and it’s signed by management/those charged with governance of the audit client. Further, it’s usually signed at the audit completion stage. However, if management does not sign the letter, the auditor needs to disclaim the audit.
Frequently asked questions
Can auditors use written representation as audit evidence?
The representation letter is not direct audit evidence. And it’s not sufficient and appropriate. However, it increases auditors’ confidence about specific audit matters as higher management has confirmed facts are in order.
Can auditors sign audit reports without getting a representation letter from management?
No, they are required to disclaim the audit if management does not sign a representation letter.
What if management does not sign a written representation letter?
As per ISA 580, the auditor is responsible for getting written representation from management. However, if management is not ready to sign the letter, auditors need to disclaim the audit.
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Understanding an Audit Letter of Representation (LOR)
This article addresses the what, when, why, and who’s related to letters of representation for audits, specifically SOC audits.
What is a Letter of Representation?
A letter of representation (a.k.a., representation letter, rep. letter, LOR) in audit services is a form letter from the American Institute of Certified Public Accountants typically prepared by the external auditors on behalf of a company’s management that is signed by a member of executive leadership. By signing the letter of representation, the executive attests to the external auditor that all of the information submitted is accurate, and that all material information has been disclosed to the auditors. For a financial audit, that material would be the financial statements and internal controls over financial reports. In the context of a SOC 1 or SOC 2 examination, company representation letters allow the management of the company to not only confirm that all material information has been disclosed to the service auditors, but also to take responsibility for the presentation and accuracy of the assertion and description in the report and to confirm that the controls were designed and operating effectively during the period of the assessment.
As you can imagine, a letter of representation is an important piece of evidence in any audit. Management’s representations and attestations in the letter provide some assurance that the information provided during the examination is reliable to use in audit procedures and to base its opinion. Management’s attestation in the representation letters also shifts blame to management in the case that a control failure is missed during an audit or inaccuracies because information was not made available or disclosed to the service auditor.
When is a Letter of Representation Prepared?
As it is a form letter, a letter of representation may be prepared at any point during a SOC 1 or SOC 2 examination. However, paragraph .54 of AT-C section 205 (SSAE 18) specifies that a representation letter must be dated as of the date of the service auditor’s report. The letter may be signed any time from the date of the report and the report is issued. However, because it is an important piece of evidence supporting an audit opinion, the letter of representation should be signed before the report is issued ( AICPA’s SOC 1 Guide 4.189).
Why is the Letter of Representation Important?
As noted earlier, the simple answer is that the letter of representation is required by the American Institute of Certified Public Accountants, the governing body for attestation services. If management refuses to provide the requested representations, the service auditor would consider it “a limitation on the scope of the examination sufficient to preclude an unmodified opinion and may be sufficient to cause the practitioner to withdraw from the engagement” (Paragraph .A64 of AT-C section 205 ). Similar actions would be taken should the service auditor conclude that there is sufficient doubt about the competence, integrity, ethical values, or diligence of those providing the written representations; or the service auditor concludes that the written representations are otherwise not reliable and is unable to resolve the concerns through additional procedures. From a practical standpoint, because management’s written representations are an important consideration when forming the service auditor’s opinion, the service auditor would not ordinarily be able to issue the report until the service auditor had received the representation letter.
Who is Responsible for the Letter of Representation?
The AICPA’s guidance requires, when the engagement covers a modified or extended period, that the auditor obtain management’s written representation in the form of a representation letter addressed to the auditor. The AICPA requires that the service auditor request the written representations from management.
What are the Contents of a Letter of Representation in Auditing?
Paragraph .38 of AT-C section 320 (SSAE 18) states that “the service auditor to request from management written representations required by paragraph .50 of AT-C section 205 as well as those required by paragraph .36 of AT-C section 320 .” The auditor and management may add additional representations to the letter. The written representations required by paragraph .50 of AT-C section 205 are identified in items a-i and the written representations required by paragraph .36 of AT-C section 320 in items j-k.
The following summarizes the minimal representations to be included in the letter:
A. Include the management’s assertion about the description, controls, control objectives (SOC 1), and trust services criteria (SOC 2) based on the criteria.
B. A statement that all relevant matters are reflected in the description or evaluation of the related controls or assertion.
C. A statement that all known matters contradicting the control objectives, trust services criteria, or assertion and any communications from regulatory agencies or others affecting the control objectives, trust services criteria, or assertion have been disclosed to the practitioner, including any communications between the end of the period addressed and the written assertion and the date of the service auditor’s report.
D. Acknowledge responsibility for:
- the description in the report and the assertion:
- selecting the applicable criteria; and
- determining that the applicable criteria is appropriate.
E. A statement that any events after to the period (or point in time) related to the description, control objectives, or trust services criteria being reported on, which would have a material effect on the control objectives, trust services criteria, or assertion, have been disclosed to the auditor.
F. A statement that the individual signing and the company have provided the service auditor with all relevant information and access.
G. When applicable, a statement that the individual signing believes the effects of uncorrected misstatements are immaterial, when considered individually and in aggregate, to the control objectives or trust services criteria.
H. When applicable, a statement that significant assumptions used to make any material estimates are reasonable.
I. A statement that the individual signing and the company have disclosed the following to the service auditor:
- Any and all deficiencies in internal control relevant to the engagement of which the responsible party is aware;
- Knowledge of any actual, suspected, or alleged fraud or violation of laws or regulations affecting the control objectives or trust services criteria; and
- Other matters as the service auditor deems appropriate.
J. A statement that any instances of noncompliance with laws and regulations or uncorrected misstatements attributable to the service organization that may affect one or more user entities have been disclosed to the service auditor.
K. A statement that any knowledge of actual, suspected, or alleged fraud by the management or employees of the service organization that could adversely affect the fairness of the presentation of management’s description of the service organization’s system or the completeness or achievement of the control objectives stated in the description have been disclosed to the service auditor.
An audit letter of representation is a form letter prepared by a company’s service auditor and signed by a member of senior management. In the letter, management attests to the accuracy and completeness of the information provided to the service auditors for their analysis. The letter must be dated as of the date of the report and signed on or after that date. The service auditor must obtain a signed representation letter that includes, at a minimum, the required representations specified by the AICPA in order to opine an audit.
Isaac Clarke is a partner at Linford & Co., LLP. He began his career with Ernst & Young in 2003 where he developed his audit expertise over a number of years. Isaac specializes in and has conducted numerous SOC 1 and SOC 2 examinations for a variety of companies—from startups to Fortune 100 companies. Isaac enjoys helping his clients understand and simplify their compliance activities. He is attentive to his clients’ needs and works meticulously to ensure that each examination and report meets professional standards.
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A formal written record of representations made by the management of an organization to the auditors. The letter is prepared by the auditor and signed by management on a date as near as possible to the date of the auditors’ report and after all audit work has been completed, including the review of events occurring after the balance sheet date, for example. The information referred to in the letter is material to the financial statements for which the auditor is unable to obtain independent corroborative evidence. These matters might include any future legal claims and adjusting events.
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Management Representations
The compilation standards do not require practitioners to obtain a management representation letter, but this does not mean that it’s not a prudent thing to do. Obtaining a representation letter helps to ensure your client understands the services that you have provided, the limitations on the work you have completed, and that they are ultimately responsible for their financial statements. The representation should reaffirm your client’s understanding of all significant terms in the engagement letter.
Illustrative Guidance – Management Representations Listed here are some basic representations you could consider using in a compilation management representation letter: Management has reviewed and approved the financial statements as well as all journal entries; The practitioner has explained that the financial statements might not be suitable for use by other persons; Management has provided the practitioner with all of the accounting records and financial information necessary to compile the financial statements; and Management is not aware of any matter that has occurred or is pending that would cause the financial statements to be false or misleading.
Practice Management Tip Consider tailoring specific representations for the engagement to mitigate identified risks. Two examples of representation points that might apply to most compilation engagements are: Management confirms that it has not included any personal or other inappropriate expenditure in the company’s financial statements; and Management has disclosed all foreign assets, investments, and transactions to you. Be sure to get the appropriately authorized individual to sign the representation letter before you issue the Notice to Reader.
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A management representation letter is a form letter written by a company's external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis. The CEO and the most senior accounting person (such as the CFO) are usually ...
A management representation letter is a formal document issued by senior management of an organization confirming the accuracy and completeness of financial information presented in the financial statements. It is a critical document that helps auditors or other parties to obtain reasonable assurance that the financial statements are reliable.
The management representation letter is a key audit evidence prepared at the completion of the audit process. It contains management's assertions regarding: Fair presentation of financial statements. Completeness of information provided to auditors. Proper accounting policies used.
Obtaining Written Representations. .05 Written representations from management should be obtained for all financial statements and periods covered by the auditor's report. 2 For example, if comparative financial statements are reported on, the written representations obtained at the completion of the most recent audit should address all periods ...
Management representation is a letter issued by a client to the auditor in writing as part of audit evidences. The representations letter covers all periods encompassed by the audit report, and is dated the same date of audit work completion. It is used to let the client's management declare in writing that everything is MRL and is sufficient ...
The letter needs to be signed at the end of the engagement generally after a draft of the financial statements are issued. Schwindt & Co combines the representation letter with the management letter comments and proposed adjusting journal entries for ease of review. When the signed document is received by our office, we are then able to issue ...
Reliance on Management Representations.02 During an audit, management makes many representations to the au-ditor, both oral and written, in response to specific inquiries or through the fi-nancial statements. Such representations from management are part of the audit evidence the independent auditor obtains, but they are not a substitute
The signing of the letter takes place before the issuance of financial statements along with the auditor's final opinion on the whole audit process. Definition. So what does a management representation letter comprises? To start with, the letter is supposed to state that all the information submitted is completely accurate and there have been ...
A management representation letter is a form letter written by a company's external auditors, which is signed by senior company management. ... The compilation standards do not require practitioners to obtain a management representation letter, but this does not mean that it's not a prudent thing to do. Obtaining a representation letter ...
Unsupported representations by management do not normally constitute sufficient audit evidence. The only situations where corroborative evidence may not be available are those where the subject of the representations are management judgment or intentions. Whatever their function in the body of evidence collected by an auditor to support the audit
A representation letter is a written statement provided by a company's management to its auditors as part of the audit process. The representation letter confirms that the information provided to the auditors is complete, accurate, and fairly presented in accordance with the applicable financial reporting framework.
Definition. A management representation letter is a specialized letter written by a company's external auditors and then signed by the senior company management. The date of the document cannot be later than the date at which the audit finishes. The letter verifies that the information provided is accurate and disclosed to the auditors.
In the world of assurance engagements, a management representation letter is a formal document that represents management's agreement with the financial statements that are being audited or reviewed. This letter is a critical part of the assurance engagement process and is required by the auditor or reviewer as evidence that management ...
A representation letter is a form of written representation obtain from a client. Written representations are audit evidence that auditors collect. Similarly, they are necessary information that auditors may require related to a specific audit assignment. These are similar to audit inquiries but in a written form.
In conclusion, ISA 580, which revolves around the Management Representation Letter, is a comprehensive framework that ensures transparency, accountability, and reliability in the audit process. By covering all 19 points detailed in the standard, auditors can effectively navigate the complexities of this critical document.
The Letter of Representations is a letter written from the Association to its accountant representing that the financial statements for the time period covered by the engagement are the responsibility of "management". In a community association, management include "those charged with governance" (the board of directors) and the professional ...
A "rep" letter is the audit teams' formal evidence that management understands their responsibilities and that management has performed all of their responsibilities. Management should provide the auditor with a representation letter in writing that outlines the following characteristics: A) Managements acceptance for its responsibility ...
The auditor issues a representation letter, and management or audit client needs to sign it. The content of the management representation letter is prepared by the auditor and signed by the higher management of the audit client. Mainly, the following content is included in the letter. Confirmation of the information provided during the overall ...
A letter of representation (a.k.a., representation letter, rep. letter, LOR) in audit services is a form letter from the American Institute of Certified Public Accountants typically prepared by the external auditors on behalf of a company's management that is signed by a member of executive leadership. By signing the letter of representation ...
A formal written record of representations made by the management of an organization to the auditors. The letter is prepared by the auditor and signed by management on a date as near as possible to the date of the auditors' report and after all audit work has been completed, including the review of events occurring after the balance sheet date, for example.
representations made to you during your audit. FINANCIAL STATEMENTS 1. We have fulfilled our responsibilities, as set out in the terms of the audit engagement letter dated DATE OF ENGAGEMENT LETTER. 2. The financial statements referred to above are fairly presented in conformity U.S. GAAP. 3.
Obtaining a representation letter helps to ensure your client understands the services that you have provided, the limitations on the work you have completed, and that they are ultimately responsible for their financial statements. The representation should reaffirm your client's understanding of all significant terms in the engagement letter.
Scope of this ISA. 1. This International Standard on Auditing (ISA) deals with the auditor's responsibility to obtain written representations from management and, where appropriate, those charged with governance in an audit of financial statements. 2.
This International Women's Day, 8 March 2024, join the United Nations in celebrating under the theme Invest in women: Accelerate progress. The world is facing many crises, ranging from geopolitical conflicts to soaring poverty levels and the escalating impacts of climate change. These challenges ...