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OVERVIEW
Objective
EVIDENCE
OBTAINED
ACKNOWLEDGMENT
OF MANAGEMENTS
RESPONSIBILITY
Essential procedure
AS AUDIT
EVIDENCE
Essential procedure
Certain instances
Contradiction
Essential procedure
Certain instances
Contradiction
DOCUMANTATION
Form
Basic elements
Basic principle
Example letter
2001
1.1
Essential procedure
Representations from management covering key areas of their responsibilities and audit
evidence must be obtained in writing.
ACKNOWLEDGEMENT OF MANAGEMENTS
RESPONSIBILITY
2.1
Essential procedure
AS AUDIT EVIDENCE
REPRESENTATIONS
DURING COURSE OF
AUDIT
GENERALLY SEEK
CORROBORATIVE
EVIDENCE
2002
REQUIRED IN
SPECIFIC
INSTANCES
3.1
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:
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.
Note that management representations are not a substitute for evidence that should be
expected to be available.
3.2
Specific instances
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 companys 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
3.3
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
DOCUMENTATION
4.1
Form
4.2
Basic elements
Specified information
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
Before qualification, the auditor would normally discuss with management (and the
audit committee) the reasons for refusing to sign the representation letter.
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.
Managements attention would be drawn to the engagement letter where it was stated
that a representation letter would be required to be signed.
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)
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.
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).
2005
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.
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.
We have no plans or intentions that may materially alter the carrying value or
classification of assets and liabilities reflected in the financial statements.
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.
The Company has satisfactory title to all assets and there are no liens or encumbrances
on the companys 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 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.
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.
2006
FOCUS
You should now be able to:
discuss the circumstances where management representations are necessary and the
matters on which representations are commonly obtained.
2007
2008