At the conclusion of fieldwork, the independent auditor must obtain a management representation letter from the client. The auditor prepares the text of the representation letter, which is then printed on client letterhead and signed by the client.
The three primary purposes for obtaining written representations from management are:
To confirm representations explicitly or implicitly given to the auditor.
To indicate and document the continuing appropriateness of such representations.
To reduce the possibi lity of misunderstanding concerning matters that are the subject of the representations.
In the management representation letter, the client asserts that all material matters have been adequately disclosed to the independent auditor.
Final Piece of Evidential Matter: The representation letter is obtained at the end of the auditor's fieldwork and covers the period up to the date of the auditor's report. It should address all financial statements and periods covered by the report, even if current management was not present during all such periods.
Letter Is Mandatory: The auditor must receive the letter in order to render an unmodified opinion. Management's refusal to furnish a written representation letter generally results in a disclaimer of opinion or in withdrawal from the engagement.
Dated Same Date as Audit Report: The client representation letter should be dated as of the date of the auditor's report.
Signed by CEO and CFO: The members of management with overall responsibility for financial and operating matters who are responsible for and knowledgeable about the items contained in the letter (usually the CEO and CFO) should sign the letter. Other officers and employees also may be asked to sign the letter.
Representations: In the representation letter, management provides information on the financial statements, the completeness of information, recognition, measurement, and disclosure, and subsequent events.
Materiality: Representations may be limited to items that management and the auditor agree are material. Materiality considerations do not apply to items not directly related to financial statement amounts (e.g., all minutes and all financial records should be made available to the auditor).
Doubt About the Reliability of Written Representations: If the auditor concludes that written representations are not reliable due to concerns about the competence, integrity, ethical values, or diligence of management, or because of unresolved inconsistencies between the written representations and other audit evidence, the auditor should consider the possible effect on the audit opinion. When the auditor concludes that there is sufficient doubt about the integrity of management, the auditor should disclaim an opinion or withdraw from the engagement.
Which of the following matters would an auditor most likely include in a management representation letter?
Communications with those charged with governance concerning weaknesses in internal control.
The reasonableness of significant assumptions used in making accounting estimates.
Plans to acquire or merge with other entities in the subsequent year.
Management's acknowledgment of its responsibi lity for the detection of employee fraud.