Written representations Flashcards
(4 cards)
Which of the following matters most likely would be included in a management representation letter?
A. An assessment of the risk factors concerning the misappropriation of assets.
B. An evaluation of the litigation that has been filed against the entity.
C. A confirmation that the entity has complied with contractual agreements.
D. A statement that all material internal control weaknesses have been corrected.
C. A confirmation that the entity has complied with contractual agreements.
During an audit, management provides verbal and written information in response to auditor questions. The auditor is required to obtain written representations (eg, management representations) reaffirming that the auditor had access to needed and accurate information. Management also affirms that the financial statements are prepared according to the applicable financial reporting framework. These representations are part of the evidence supporting the auditor’s opinion.
The client firm may have contractual obligations that should be disclosed during the audit. In this situation, the management representation letter should confirm disclosure of and compliance with all contract terms. Even with this confirmation, the auditor will still perform procedures to test such compliance.
(Choice A) Audit procedures will include an assessment of risk of misappropriated assets instead of relying on management assessment.
(Choice B) Management may advise the auditor of pending litigation, but it is the auditor’s responsibility to evaluate the effect of that litigation on the financial statements.
(Choice D) Instead of relying on management’s statement that all material control weaknesses have been corrected, the auditor must test internal controls to determine needed audit procedures.
Things to remember:
The management representation letter confirms needed, accurate information was provided to the auditor. Because contracts could exist without auditor knowledge, this letter must confirm disclosure of and compliance with all contractual obligations. It is not a substitute for appropriate audit procedures to assess or evaluate information and controls affecting the financial statements.
An auditor of a nonissuer should request that management provide written representations regarding uncorrected misstatements in the financial statements that state
A. The individual and cumulative differences between the auditor’s point estimates and the recorded amounts for uncorrected misstatements.
B. Management’s acceptance of responsibility for the auditor’s opinion, if modified due to the uncorrected misstatements.
C. Whether management believes that the effects of uncorrected misstatements are immaterial, individually and in the aggregate, to the financial statements as a whole.
D. Management’s rationale for not correcting misstatements noted during the course of the audit.
C. Whether management believes that the effects of uncorrected misstatements are immaterial, individually and in the aggregate, to the financial statements as a whole.
Written representations are contained in a letter from client management to the auditor. This letter provides audit evidence and confirms information that management provided to the auditor. The letter should be signed by the client’s CEO and CFO or those charged with governance.
The representation letter has several standard topics that include the following:
Management acknowledges responsibility for the financial statements (F/S) and the design, implementation, and maintenance of internal control to prevent and detect fraud.
All financial records that exist have been made available to the auditor.
In some audit situations, other topics must be included in the representation letter. For example, should the audit disclose uncorrected misstatements, the representation letter must address whether management believes the effects of these misstatements are immaterial, individually and in the aggregate, to the F/S as a whole. However, there is no requirement that management provide rationale for leaving these misstatements uncorrected (Choice D).
(Choice A) The management representation letter should include a summary of uncorrected misstatements, but there is no requirement for this summary to reflect the difference between recorded and audit amounts.
(Choice B) Written representations must acknowledge management’s responsibility for the F/S, not for the auditor’s opinion regarding the F/S.
Things to remember:
Management representation letters provide audit evidence and confirm information provided to the auditor. Should the audit reveal uncorrected misstatements, this letter must also confirm that management believes these misstatements are immaterial, individually and in the aggregate.
Which of the following statements is correct regarding a management representation letter?
A. A representation letter can be used in place of specific, previously identified audit procedures.
B. A representation letter encompasses a different set of assertions than those inherent in the financial statements.
C. The date of the representation letter should typically be the same as the audit report.
D. The representations made apply until the date of a client’s financial statements.
C. The date of the representation letter should typically be the same as the audit report.
During an audit, management provides verbal and written information in response to auditor questions. The auditor is required to obtain written representations (eg, management representations) reaffirming that the information provided is accurate and confirming that the auditor had access to needed information. Management also affirms that the financial statements are prepared according to the applicable financial reporting framework. These representations are part of the evidence supporting the auditor’s opinion.
The auditor must consider the need for any material financial statement adjustments or disclosures due to events occurring through the date of the audit report. Therefore, the representations should carry the same date as the report. Failure to receive a management representation letter is considered a scope limitation and is also noncompliant with GAAS.
(Choice A) Management representations do not replace planned audit procedures.
(Choice B) The representation letter affirms the same set of assertions (not different assertions) inherent in the financial statements.
(Choice D) Because the audit report opines on the financial statements, the report date is after the date of the client’s financial statements. The representation letter should address any events between the financial statement date and the audit report date that may require adjustment to or disclosure in the audited financial statements.
Things to remember:
The auditor must consider the need for any adjustments or disclosures associated with events occurring through the date of the audit report. Therefore, management representations should carry the same date as the audit report.
For which of the following matters should an auditor obtain written management representations regarding the financial statements?
A. Management’s cost-benefit justifications for not correcting internal control weaknesses.
B. Management’s knowledge of future plans that may affect the price of the entity’s stock.
C. Management’s rationale for not correcting identified misstatements.
D. Management’s acknowledgment of its responsibility for employees’ violations of laws.
C. Management’s rationale for not correcting identified misstatements.
A management representation letter is required to corroborate verbal responses to important auditor inquiries made during the audit and to emphasize management’s responsibility for the F/S. While the content of the letter will depend on what occurred during the audit, there are some topics that must be included.
The representation letter is part of the required audit documentation. Along with audit procedures, it provides support for the audit opinion.
When management does not correct identified F/S errors, the representation letter must address the rationale for this decision (eg, management believes the uncorrected misstatements are immaterial to the F/S). A summary of identified misstatements should be included in this written representation or attached to it.
(Choice A) Management is not required to provide justification in the representation letter for uncorrected I/C weaknesses. However, material I/C weaknesses must be highlighted in issuer and nonissuerintegrated audit reports, regardless of cost implications.
(Choice B) The representation letter covers information related to the audited F/S period(s), not management’s knowledge of the future (eg, changes in the entity’s stock price).
(Choice D) The representation letter must communicate management’s knowledge of any legal noncompliance (eg, employees’ violations of laws) that impacts the F/S.
Things to remember:
A management representation letter is required to corroborate verbal responses to important auditor inquiries made during the audit and to emphasize management’s responsibility for the F/S. When management does not correct identified F/S errors, the representation letter must address the rationale for this decision (eg, the uncorrected misstatements are immaterial to the F/S)
