The role of management`s representations in the audit process

 

Written representation is a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. The written representations shall be in the form of a representation letter addressed to the auditor.

Auditors use written representations for following purposes:

·   To obtain written representations from management that they believe that they have fulfilled their responsibility for the preparation of the financial statements and for the completeness of the information provided to the auditor.

·     To support other audit evidence relevant to the financial statements if determined by the auditor.

·  To respond appropriately to written representations or if management does not provide written representations requested by the auditor.

The written representations are dated as near as practicable to, but not after, the date of the auditor’s report on the financial statements.

Written representations about management’s responsibilities

The auditor shall request management to provide written representations on the following matters:

(a) That management has fulfilled its responsibility for the preparation and presentation of the financial statements as set out in the terms of the audit engagement and whether the financial statements are prepared and presented in accordance with the applicable financial reporting framework

(b) That management has provided the auditor with all relevant information agreed in the terms of the audit engagement and that all transactions have been recorded and are reflected in the financial statements.

 Audit evidence obtained during the audit that management has fulfilled the responsibilities related to preparation of the financial statements and information provided and completeness of transactions is not sufficient without obtaining confirmation from management that it believes that it has fulfilled those responsibilities. This is because the auditor could not conclude that management has provided the auditor with all relevant information agreed in the terms of the audit engagement without asking it whether, and receiving confirmation that, such information has been provided.

Also written representations about management’s responsibilities is particularly appropriate when:

• Those who signed the terms of the audit engagement on behalf of the entity no longer have the relevant responsibilities.

• The terms of the audit engagement were prepared in a previous year.

• There is any indication that management misunderstands those responsibilities; or

• Changes in circumstances make it appropriate to do so.

 Other written representations (apart from the written representations about management’s responsibilities)

In addition to the written representation about management’s responsibilities the auditor may consider it necessary to request other written representations about the financial statements

They may include representations about the following:

(a)    Whether the selection and application of accounting policies are appropriate; and

(b)   Whether matters such as the following, where relevant under the applicable financial reporting framework, have been recognized, measured, presented or disclosed in accordance with that framework:

·     Plans or intentions that may affect the carrying value or classification of assets and liabilities.

·        Liabilities, both actual and contingent.

·       Title to, or control over, assets, the liens or encumbrances on assets, and assets pledged as collateral; and 

·   Aspects of laws, regulations and contractual agreements that may affect financial statements, including non-compliance.

(c) All information in relation to allegations of fraud or suspected fraud communicated by employees, former employees, analysts, regulators or others has been disclosed by management.

(d) The effects of uncorrected misstatements are immaterial, both individually and in aggregate to the financial statements as a whole.

(e) All instances of non-compliance or suspected non-compliance with laws or regulations have been disclosed by management.

 (f) Significant assumptions used in making accounting estimates are reasonable.

 (g) The identity of the entity’s related parties and all the related party relationships and transactions have been disclosed to the auditor.

 (h) All subsequent events requiring adjustment or disclosure have been adjusted or disclosed.

 (i) All deficiencies in internal control that management is aware of have been communicated to the auditor.

  (j) Representations about specific assertions in the financial statements to support an understanding that the auditor has obtained from other audit evidence of management’s judgment.

Auditor`s actions if there are doubts about the reliability of written representations from management or requested written representations are not provided.

If management does not provide one or more of the requested written representations, the auditor shall:

·        Discuss the matter with management.

·   Re-evaluate the integrity of management and evaluate the effect this may have on the reliability of representations and audit evidence in general.

·       Take appropriate actions, including determining the impact on the auditor's report.

The auditor shall disclaim an opinion on the financial statements if there is sufficient doubt about the integrity of management such that the written representations are not reliable, or management does not provide the written representations about management’s responsibilities relating to the preparation of the financial statements and information provided and completeness of transactions