ACCA AA Syllabus E. Review And Reporting - Management Representations - Notes ^{1 / 1}

The ISAs require the auditor to obtain management representations on certain specific issues

Written representations should be obtained for:

1. Management fulfilment of responsibilities (used an applicable FR framework, given the auditor ALL relevant info; ALL transactions recorded)

2. Supporting other evidence if deemed needed by the auditor

So when would a written representation commonly be needed to support other evidence?

This is basically when other forms of evidence just aren’t available e.g.

• Plans and intentions (which may affect the FS)

• Values with high judgement (Provisions)

• Any directors judgements (asset values)

• Compliance with laws and regulations

• When the auditor is unable to obtain sufficient appropriate evidence to confirm a balance because the evidence does not exist

• Usually an accounting estimate or matter of judgement

The form of the representations will be one of:

1. Signed Letter on client headed paper

2. Letter from auditors signed and returned

3. Minutes of meeting where issues agreed signed by both parties

What goes into the letter?

Management confirm...

1. No material management or employee irregularities

2. All books & documents have been made available to the auditors

3. Related parties' disclosures are complete

4. FS are free from material misstatements including omissions

5. No non-compliance with regulations

6. No plans to abandon any product lines causing obsolete inventory

7. No further post reporting period events needing disclosure

The whole idea of getting a management letter is to ensure evidence is sufficient

In some ways - the idea is that if management are going to lie to us - then better they lie to us in writing! This saves us a little in auditor negligence cases

But always remember management representations ONLY are never sufficient - always back up with other evidence

4 Steps

1. Auditor lists the areas we need representations on

2. Auditor prepares the representation & sends it to management

3. Management review & sign

4. Auditor files it in the working papers

Management representations are not independent evidence and therefore will not be 100% reliable.

The auditor must make a judgement as to whether the management are competent and of sufficient integrity so as to place reliance on their representations.

The auditor may also consider whether conditions are such that management may feel under pressure and thus more susceptible to concealing the truth.

Potential Problems

1. Management Integrity Issues

   One extreme is to resign but at least modify the audit opinion to explain the reliability issue of their representation

2. Representations inconsistent with other evidence

   Modify the report and explain the inconsistency

3. Representations not reliable

   Possibly a disclaimer of opinion here

4. Representation not provided

   Discuss with management and reassess integrity of other evidence and consider modifying report