Class Synopsis -09
Prepared by: Abdullah-Al-Mamun, FCA
Management Representations
Management Representations as Assurance Evidence
ISA 580 Management Representations states that an auditor should obtain appropriate
representations from management. Written confirmation of appropriate
representations from management should be obtained before the audit report is
issued.
General Matters
Representations may also be required for general matters; for example, that the
accounting records have been made fully available to the auditors.
There are a number of elements that ISA 580 requires auditors to confirm in writing,
namely that management:
Acknowledges its responsibility for the preparation and fair presentation
of the financial statements in accordance with the applicable financial
reporting framework and has approved the financial statements.
Acknowledges its responsibility for the design and implementation of
internal control.
Believes that the effects of uncorrected misstatements aggregated by the
auditors during the audit are immaterial.
The confirmation with regard to responsibility and approval of the financial
statements is normally done when the auditors receive a signed copy of the financial
statements, which incorporate a relevant statement of responsibilities.
Alternatively, the auditors may obtain such evidence from minutes of directors’
meetings, or by including them in the written representation letter.
Audit Evidence
In addition to representations relating to responsibility for the financial statements, the
auditors may wish to rely on management representations as audit evidence. This will
be appropriate in respect of material matters in relation to which other sufficient,
appropriate audit evidence cannot reasonably be expected to exist.
Management representations cannot be used instead of other (better) evidence
which the auditors expect to exist.
1
If other evidence was expected to be available but, for example, got lost or
destroyed so is not available, the auditors cannot use management
representations as a substitute. They may have to give a qualified audit opinion
instead.
When Management Representations are required
Management representations may be the only audit evidence available when:
The facts are a matter of management intention.
The matter is judgmental or opinion.
When the auditors receive such representations they should:
Seek corroborative audit evidence from sources inside or outside the entity.
Evaluate whether the representations made by management appear
reasonable and are consistent with other audit evidence, including other
representations.
Consider whether the individuals making the representations can be
expected to be well-informed on particular matters.
There may be occasions when the representations received do not agree with other
audit evidence obtained, in which case the auditors should:
Investigate the circumstances of the disagreement by making further
inquiries, to ascertain whether the inquiry has simply been misunderstood.
If further inquiries produce insufficient answers or none at all, carry out
alternative audit procedures to try and confirm the real position.
Consider whether the disagreement casts doubt on other representation
made by management.
Example of a Management Representation Letter
XYZ & Co
Chartered Accountants
Kawran Bazar
Dhaka-1215
24 July 2010
Dear Sir,
Management Representation Letter
This representation letter is provided in connection with your audit of the financial
statements of ABC Company for the year ended December 31, 20Xl for the purpose of
expressing an opinion as to whether the financial statements give a true and fair view of
(or ‘present fairly, in all material respects’) the financial position as of December 31,
20Xl and of the results of its operations and its cash flows for the year then ended in
accordance with (indicate applicable financial reporting framework e.g. IAS and IFRS
adopted in Bangladesh).
2
We acknowledge as directors our responsibilities under the Companies Act 1994
for preparing financial statements that give a true and fair view. All the
accounting records have been made available to you for the purpose of your
audit and all the transactions undertaken by the Company have been properly reflected
and recorded in the accounting records. All other records and related information,
including minutes of all management and shareholders’ meetings, have been
made available to you.
We confirm, to the best of our knowledge and belief, the following representations:
There have been no irregularities involving management or employees who
have a significant role in the accounting and internal control systems or that
could have a material effect on the financial statements, and we have disclosed
to you our assessment of the risk that the financial statements might be
materially misstated as a result of fraud.
The financial statements are free of material misstatements, including
omissions.
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 Company’s assets, except for those that are disclosed in
Note X to the financial statements.
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.
Other than ……. described in Note X to the financial statements, there have been
no events subsequent to period end that require adjustment of or disclosure in
the financial statements or notes thereto.
The ……. claim by PQR 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.
There are no formal or informal compensating balancing arrangements
with any of our cash and investment accounts. Except as disclosed in Note X to
the financial statements, we have no other line of credit arrangements.
……………………………………………………………………
(Senior Executive Officer)
…………………………………………………………………….
(Senior Financial Officer)