F8 aa (int)session20 j08

SESSION 20 – MANAGEMENT REPRESENTATIONS

OVERVIEW
Objective
¾

To describe the use of management representations as audit evidence.

EVIDENCE
OBTAINED

ACKNOWLEDGMENT
OF MANAGEMENT’S
RESPONSIBILITY
¾
¾
¾

¾

Essential procedure

AS AUDIT
EVIDENCE

¾
¾
¾

Essential procedure
Certain instances

Contradiction

Essential procedure
Certain instances
Contradiction

DOCUMANTATION
¾
¾
¾
¾

Form
Basic elements
Basic principle
Example letter

2001


SESSION 20 – MANAGEMENT REPRESENTATIONS

1

EVIDENCE OBTAINED [ISA 580]

1.1

Essential procedure

¾

Representations from management covering key areas of their responsibilities and audit
evidence must be obtained in writing.

2

ACKNOWLEDGEMENT OF MANAGEMENT’S
RESPONSIBILITY

2.1

Essential procedure

¾

¾

Evidence of the following should be obtained:
‰

management’s responsibility for the design and implementation of internal control
to prevent and detect error;

‰

management’s belief that the aggregated uncorrected misstatements identified by
the auditor are not material (individually and as a whole);

‰

management’s acknowledgement of responsibility for fair presentation of the
financial statements;

‰

management’s approval of the financial statements.

Evidence on these elements can be obtained through:
‰

reviewing relevant minutes of meetings (e.g. of board of directors);

‰

obtaining written representations from relevant individuals or the board as a
whole;

‰

a letter from the auditor outlining their understanding of management’s
representations as acknowledged, confirmed and signed by management; and

‰

the signed/approved copy of financial statements. In some jurisdictions it is a
requirement for management to confirm within the financial statements that they
show a true and fair view.

3

AS AUDIT EVIDENCE
REPRESENTATIONS
DURING COURSE OF
AUDIT

GENERALLY SEEK
CORROBORATIVE
EVIDENCE

2002

REQUIRED IN
SPECIFIC
INSTANCES


SESSION 20 – MANAGEMENT REPRESENTATIONS

3.1
¾

Essential procedure
During the audit, management will make many representations to the auditor. Where
such representations are material to the financial statements, the auditor should:
‰
‰
‰

seek corroborative evidence (implies expectation that it should be available);

evaluate reasonableness/consistency against other evidence available;
consider whether individuals making representations can be expected to be
adequately informed on the particular matters.

¾

Where representations are material to the financial statements and other sufficient
appropriate audit evidence does not or cannot reasonably be expected to exist, such
representations should be obtained in writing from management. Confirming oral
representations in writing reduces the risk of misunderstanding.

¾

Note that management representations are not a substitute for evidence that should be
expected to be available.

3.2

Specific instances

¾

In specific circumstances, management representations may be the only audit evidence
which can reasonably be expected to be available (e.g. management’s intention to settle
a legal claim out of court).

¾

In areas of the audit that are susceptible to understatement (eg liabilities, income,
disclosures) management representations are taken stating that they are not aware of

any understatement or non-disclosures. Whilst such matters will be audited, there will
always be a residual risk because of the nature of understatement.

Illustration 2
“…We have made available to you all books of account and supporting
documentation and all minutes of meetings of shareholders and the board of
directors (namely those held on [dates])”.
“The company has satisfactory title to all assets and there are no liens or
encumbrances on the company’s assets, except for those that are disclosed in
Note X to the financial statements.
“Other than . . . described in Note X to the financial statements, there have
been no events subsequent to period end which require adjustment of or
disclosure in the financial statements or notes thereto.
“The . . . claim by XYZ Company has been settled for the total sum of $X
which has been properly accrued in the financial statements. No other claims
in connection with litigation have been or are expected to be received.”

2003


SESSION 20 – MANAGEMENT REPRESENTATIONS

3.3
¾

Contradiction
If a management representation is contradicted by other audit evidence, the matter
should be investigated (and the reliability of other representations reconsidered if
necessary). As per the guidance in ISA 500, such inconsistency creates doubt and must
be resolved.

3.4

Exam tips

¾

In a question calling for audit work/procedures/tests etc it may be appropriate to refer
to “obtaining management representation”. BUT be specific, for example, “Ask the
directors to provide a written representation that they are not aware of any legal claims
against the company other than those disclosed in the financial statements”.

¾

Do not throw in “obtain management representation” for good measure. To suggest it
as either a substitute for “better” evidence or as an unnecessary extra item of evidence is
not good practice.

4

DOCUMENTATION

4.1

Form

¾

As representations from management will initially be oral, it is essential that those to be
relied upon as audit evidence must be documented, eg:

‰
‰
‰
‰

¾

A specific representation letter from management.
Letter from auditors acknowledged by management.
Minutes of board meetings.
Schedule of uncorrected errors to support management’s representation that they
are not material.

Whilst an audit working paper summarising representations made by management
recorded may be considered appropriate, they need to be acknowledged by
management – hence the form of a letter signed by management.

4.2

Basic elements

¾

Addressee – the auditor

¾

Specified information

¾

Appropriately dated – ordinarily the same date as the auditor’s report

¾

Signed – ordinarily by the senior executive officer and senior finance officer. However,
the auditor may wish other directors to sign. It is also important for the auditor to
ensure that the letter has been discussed by the directors, eg minuted, as they all have
collective responsibility for the financial statements.

4.3

Refusal to provide

Refusal to provide a representation necessary for audit purposes is a scope limitation and
the audit opinion should be qualified or disclaimed (as appropriate).

2004


SESSION 20 – MANAGEMENT REPRESENTATIONS

¾

Before qualification, the auditor would normally discuss with management (and the
audit committee) the reasons for refusing to sign the representation letter.

¾

Consideration would be given to see if the matters the management disagree with could

be redrafted within the representation letter. In doing so, it is critical to ensure that
sufficient and appropriate audit evidence is still fully obtained. This may include
revisiting the audit area concerned.

¾

Management’s attention would be drawn to the engagement letter where it was stated
that a representation letter would be required to be signed.

¾

In initially refusing to sign the representation letter, but then subsequently doing so, the
auditor may need to consider the integrity of management.

4.4

Example letter
(Entity Letterhead)

(To Auditor) (Date)
This representation letter is provided in connection with your audit of the financial
statements of ABC Company for the year ended December 31, 20X1 for the purpose of
expressing an opinion as to whether the financial statements give a true and fair view of
(present fairly, in all material respects) the financial position of ABC Company as of
December 31, 20X1 and of the results of its operations and its cash flows for the year then
ended in accordance with (indicate applicable financial reporting framework).
We acknowledge our responsibility for the design and implementation of internal control to
prevent and detect error and fraud and our responsibility for the fair presentation of the
financial statements in accordance with International Financial Reporting Standards (IFRS).
We confirm, to the best of our knowledge and belief, the following representations:

(NOTE: example representations. Specific representations depend on circumstances)

¾

There have been no irregularities or fraud involving management or employees who
have a significant role in internal control or that could have a material effect on the
financial statements.

¾

We have no knowledge of any allegations of fraud, or suspected fraud, affecting the
entity’s financial statements.

¾

We have disclosed to you the results of our continuous assessment of the risk that the
financial statements may be materially misstated as a result of fraud.

¾

We have made available to you all books of account and supporting documentation
and all minutes of meetings of shareholders and the board of directors (namely those
held on March 15, 20X1 and September 30, 20X1, respectively).

¾

We confirm the completeness of the information provided regarding the identification
of related parties and their transactions, and that we are not aware of any further
related party or related party transactions other than those already disclosed to you.

2005


SESSION 20 – MANAGEMENT REPRESENTATIONS

¾

The financial statements are free of material misstatements, including omissions.

¾

The Company has complied with all aspects of contractual agreements that could have
a material effect on the financial statements in the event of non-compliance. There has
been no non-compliance with requirements of relevant law or regulatory authorities
that could have a material effect on the financial statements in the event of noncompliance.

¾

The following have been properly recorded and, when appropriate, adequately
disclosed in the financial statements:
(a)
(b)
(c)
(d)

The identity of, and balances and transactions with, related parties.
Losses arising from sale and purchase commitments.
Agreements and options to buy back assets previously sold.
Assets pledged as collateral.

¾

We have no plans or intentions that may materially alter the carrying value or
classification of assets and liabilities reflected in the financial statements.

¾

We have no plans to abandon lines of product or other plans or intentions that will
result in any excess or obsolete inventory, and no inventory is stated at an amount in
excess of net realizable value.

¾

The Company has satisfactory title to all assets and there are no liens or encumbrances
on the company’s assets, except for those that are disclosed in Note X to the financial
statements.

¾

We have recorded or disclosed, as appropriate, all liabilities, both actual and
contingent, and have disclosed in Note X to the financial statements all guarantees that
we have given to third parties.

¾

Other than . . . described in Note X to the financial statements, there have been no
events subsequent to period end which require adjustment of or disclosure in the
financial statements or Notes thereto.

¾

The . . . claim by XYZ Company has been settled for the total sum of XXX which has
been properly accrued in the financial statements. No other claims in connection with
litigation have been or are expected to be received.

¾

We have properly recorded or disclosed in the financial statements the capital stock
repurchase options and agreements, and capital stock reserved for options, warrants,
conversions and other requirements.

(Signed and dated by the Senior Executive Officer)
(Signed and dated by the Senior Financial Officer)

2006


SESSION 20 – MANAGEMENT REPRESENTATIONS

FOCUS
You should now be able to:

¾

explain the purpose of and procedure for obtaining management representations;

¾

discuss the quality and reliability of management representations as audit evidence;

¾

discuss the circumstances where management representations are necessary and the
matters on which representations are commonly obtained.

2007


SESSION 20 – MANAGEMENT REPRESENTATIONS

2008