What is the difference between engagement letter, management representation letter and management letter (letter of weakness) in audit?

 


The engagement letter, the management’s representation letter and the management letter (letter of weakness or report to management) are commonly used by auditors in the audit process but each of these documents has its own purpose.

The engagement letter is written terms of an engagement in the form of a letter. The auditor agrees the terms of the engagement with management or those charged with governance, and these are recorded in an audit engagement letter or other suitable form of written agreement. This has to be done before the audit engagement begins so as to avoid misunderstandings regarding the audit.

 The management’s  representations are written statements by management provided to the auditor to confirm certain matters (for example, that management 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) or to support other audit evidence. They do not include financial statements, assertions or supporting books and records.

 The management letter (letter of weakness, report to management) can be sent by external auditors after both the interim and final audits. Many external auditors produce a management letter as a by-product of an external audit. In this document they set out deficiencies in internal control, the implications of those deficiencies for the business and suggested recommendations to mitigate them. Also, through the management letter are communicated significant findings discovered in audit related to accounting policies, accounting estimates and financial statement disclosures.

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