What are the factors to be considered by an auditor when he receives management representations relating to some material items?
Matters to be considered by an auditor when he receives management representations relating to some material items are:
(a) Seek corroborative evidence
(b) Evaluate reasonableness of representations
(c) Consider whether the representations have been made by a knowledgeable person.
What purposes a management representation letter serves?
Management representation letter serves following two purposes:
(a) Provides a formal acknowledgment regarding management responsibility as regards financial statements.
(b) Serves as evidence where other sufficient appropriate audit evidences cannot reasonably be expected to exist.
Management representations are normally obtained by the auditor in the form of a letter. What are the other ways of its documentation?
Other ways of is documentation of representation are:
1. Letter form auditor outlining the auditor’s understanding of management representations, duly acknowledged and confirmed by management.
2. Relevant minutes of meeting of the board of directors or a signed copy of the financial statements.
Because of the nature of the fraud and the difficulties encountered by the auditors in detecting material misstatements in the financial statements on account of fraud, the management has to play a significant role in assisting the auditors in the performance of appropriate audit procedures. Make a list of representations that the auditor should obtain from the management in this regard?
Representation from management as regards misstatements in financial statements include:
1. We are responsible for preparation of financial statements in accordance with IFRS;
2. We take responsibility for designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatements whether due to fraud or error.
3. There have been no irregularities involving management or employees who have a significant role in internal control or that have material effect on the financial statements.
4. We have made available to you all the books of accounts and supporting documents.
5. We confirm the completeness of information regarding related parties.
6. The company has satisfactory title to all assets.
7. There are no unrecorded liabilities.
8. Expenditure was incurred for the purpose of business.
9. Expenditure incurred, business conducted and investments made
were for the purpose of business.
your firm has been appointed as the auditors of Star Limited, a well established consumer goods manufacturing company. During the audit you were provided with various oral representation during meetings and discussions. While finalizing the audit you requested the management to provide such representations in writing. The management has however informed you that they are not accustomed to providing any representations to the external auditor in writing.
The management is of the view that it has provided full access to whatever records, documents and evidences were available with it without any exception and that now it is the auditor’s responsibility to correlate the same with the oral representations.
The management has further informed that the only signed documents which it will be providing to you would be the singed copy of the financial statements and the certified true copy of the resolution of the BOD approving the financial statements and other significant matters, in line with the requirements of the corporate law.
You are required to explain the following:
(a) Is there any relevance of oral representations for the External Auditors?
(b) What are the situations in which written representation from the management is mandatory?
(c) What course of action would you like to take in the above circumstances?
(a) Relevance of oral representation
The quality and reliability of evidence is lower than written representations.
(b) Following types of representations should mandatory be in writing:
(i) Management responsibilities for preparation and presentation of financial statements.
(ii) Management has provided the auditor with all relevant information and unrestricted access to records.
(iii) Completeness of accounting records.
(iv) Accounting policies are appropriate.
(v) Going concern validity.
(vi) All liabilities have been recorded.
(vii) All contingent liabilities have been disclosed.
(viii) The entity has satisfactory title to all assets.
(ix) Instances of non compliance with laws and regulations.
(x) Disclosure of related patties .
(xi) Adjustment / disclosure of subsequent events.
(xii) Management’s responsibility regarding internal controls.
(xiii) Results of the assessment of risk that the financial statements may be materially misstated due to fraud.
(xiv) Allegations of fraud, suspected frauds.
(c) If the management refuses to provide written representation, the auditor will issue a qualified report or disclaimer.
As part of the audit process, the management provides written representation to confirm certain matters in connection with the audit.
(a) State the matters that you will consider as an auditor while assessing the reliability of representations made by the management.
(b) Describe the course of action available to an auditor if the management refuses to provide representation on a particular issue.
(a) Matters that will be considered as an Auditor while assessing the reliability of representation made by the management:
When the representations relate to matters material to the financial statements:
(i) Whether the representations appear reasonable and consistent with other audit evidence obtained.
(ii) Whether the individuals making them can be expected to be well informed on such matters.
(iii) Integrity of those making the representations.
(iv) Accuracy of representations made in the past.
(v) Corroborate audit evidence from sources inside or outside the
(b) Auditor’s course of action if management refuse to provide you with a management representation on a particular issue:
If management does not provide one or more of the requested written representations, the auditor shall:
(i) Evaluate whether sufficient appropriate audit evidence can be obtained from other sources:
(ii) If sufficient appropriate audit evidence cannot be obtained from other sources than this will constitute a scope limitation and the auditor should express a qualified opinion or disclaimer of opinion.
(iii) Re-valuate the integrity of management and evaluate the effect that this may have on the reliability of representations (oral or written) and audit evidence in general; and
(iv) iv) Consider possible implications that the refusal may have on the auditor’s report.
(v) Re-assess the continuation of engagement with the audit client.