Written Representations

Definition

A written representation is a (written) statement by management provided to the auditor to confirm certain matters or to support other audit evidence (ISA 580 Written Representations).

Purpose

The purpose of obtaining this form of evidence is twofold:

• to obtain representations that management, and those charged with governance, have fulfilled their responsibility for the preparation of the financial statements, including;
  • preparing the financial statements in accordance with an applicable financial reporting framework;
  • providing the auditor with all relevant information and access to records;
  • recording all transactions and reflecting them in the financial statements.
• to support other audit evidence relevant to the financial statements if determined necessary by the auditor or required by ISA's.

The latter point may be relevant where the auditor deems that other, more reliable forms of evidence are not available to them. Examples include:

• plans or intentions that may affect the carrying value of assets or liabilities;
• confirmation of values where there is a significant degree of estimation or judgement involved, e.g. provisions and contingent liabilities;
• formal confirmation of the directors' judgement on contentious issues, e.g. the value of assets where there is a risk of impairment; and
• aspects of laws and regulations that may affect the financial statements, including compliance.

How are written representations obtained?

As the audit progresses, the audit team will assemble a list of those items about which it is appropriate to seek management representations. During completion the auditors will write to the client confirming the issues about which they are seeking representations. The client must formally document, and sign, a response and send it to the auditor.

The representations themselves may take any of the following forms:

• A letter from the client to the auditors responding to the necessary points. (It is common for the auditor to draft the letter for the client, who simply reproduces it on their own letter-headed paper, approves it and signs it).
• A letter from the auditors to management setting out the necessary points, which management signs in acknowledgement and returns to the auditors.
• Minutes of a meeting where representations were made orally, which can be signed by management.

Quality and reliability

Unfortunately, written representations are internal sources of evidence, and are therefore subject to bias, and tend to focus on contentious areas of the financial statements. They are therefore potentially unreliable forms of audit evidence. ISA 580 also clearly states that written representations should only be sought to support other audit evidence. They do not, on their own, constitute sufficient evidence.

It is clear that the quality of written representations is somewhat dubious. However, there are instances where no other, better quality forms of evidence are available to the auditor, particularly where disclosures in the financial statements are restricted to matters of management judgement. Before they can be used the auditor must consider their reliability in terms of:

• inconsistencies with other forms of evidence; and
• concerns about the competence, integrity, ethical values or diligence of management;

With inconsistency the auditor will be required to reconsider their initial risk assessment and, perhaps, perform further procedures. If the latter is true (about competence, integrity etc) then the audit must consider whether the engagement can be conducted effectively. If they conclude that it cannot then they should withdraw, where permitted by laws and regulations. If they are not permitted to withdraw they should consider the impact on the audit report. It is likely that this would lead to them disclaiming their opinion.

The last point is also relevant if management refuses to provide written representations.

Additional matters requiring written representation

In addition to the matters identified in the passages above, the following issues may also be documented in a written representation:

• directors have assessed the risk of fraud and consider it to be low;
• directors are not aware of any actual, or suspected, instances of fraud;
• all related parties have been identified and transactions with them disclosed in the financial statements;
• directors consider the aggregate of all uncorrected misstatements to be immaterial;
• the directors have considered all subsequent events in preparing the financial statements; and
• the directors have considered all possible events, matters and contingencies in performing their going concern review.

Rating :	Ratings & Comments  (Click the stars to rate the page)

Tags:	written representations