Lecture 11 Flashcards
What are Written representations?
The auditor obtains written representations from management concerning its (the management’s) responsibilities and to support
other audit evidence where necessary
- Written representations are written statements by
management provided to the auditor to confirm
certain matters or to support other audit evidence
- Written representations from management should
generally be restricted to matters that cannot be verified
by other audit procedures, but if other evidence exists it
should be corroborated.
Any written representations should be compared with
other evidence and their sufficiency assessed.
The written representations are dated as near as
possible, but not after, the date of the auditor’s report on
the financial statements.
Management’s responsibilities
The auditor shall request management to provide written
representations that management has:
Fulfilled its responsibility for the preparation and presentation of the
Financial statements (“FS”) as set out in the terms of the audit
engagement and whether the FS are prepared and presented in
accordance with the applicable financial reporting framework;
Has provided auditor with all relevant information; and
All transactions have been recorded and are reflected in the FS
Key Audit Matters (KAMs)
(KAMs) are specific issues that, in the auditor’s professional judgment, were the most significant in the audit of a company’s financial statements for the reporting period. These matters are disclosed in the auditor’s report to provide transparency into the audit process. KAMs are selected from the matters communicated to those charged with governance (e.g., the board or audit committee) and reflect areas of higher risk, complexity, or significant management judgment.
KAMs typically arise due to the following reasons:
- High Risk of Material Misstatement: Areas in the financial statements prone to material misstatements due to estimation uncertainty, judgment, or complexity, such as:
Revenue recognition policies.
Valuation of financial instruments.
Provisions for legal contingencies. - Significant Management Judgment:
Matters that involve subjective or complex judgments by management, such as:
Impairment of assets.
Goodwill valuation. - Complexity of Transactions:
Transactions that are intricate or unusual, such as mergers, acquisitions, or lease accounting under IFRS 16. - Audit Challenges:
Areas where the audit required significant effort, specialized expertise, or unique procedures to address complexities. - Impact of Changes:
Changes in accounting standards or policies, regulatory environment, or business operations can result in new areas of focus during the audit.
Why Key Audit Matters Are of Interest to Users
Provide Insights into the Audit Process
KAMs shed light on how auditors approached areas of complexity or significant risk, enhancing the transparency of the audit process.
2. Highlight Key Areas of Financial Statement Risk
By identifying KAMs, auditors help users understand which parts of the financial statements required the most attention, making it easier to focus on these areas.
3. Assist in Decision-Making
Investors, lenders, and regulators can use the information in KAMs to assess risks associated with a company’s financial health, operations, and future prospects.
4. Enhance Understanding of Judgments and Estimates
KAMs explain the significant judgments and estimates made by management, helping users evaluate the reliability of the financial statements
Illustrative Example of User Interests
Investors and Shareholders:
Interested in areas like revenue recognition, goodwill, and impairments, which impact profitability and share valuation.
KAMs help them understand risks to financial performance and areas where future adjustments may arise.
Lenders and Creditors:
Focused on provisions, liabilities, and asset valuations that affect repayment capacity.
KAMs highlight areas where uncertainty or risk may impact the company’s ability to meet obligations
Why should an Auditor not sign their report until they have received a signed letter of representation from management confirming they have fulfilled their responsibilities. Describe
the three mandatory representations that are required in respect of managements responsibilities and the two reasons why other written representations are obtained
An auditor should not sign the audit report until they receive a signed letter of representation from management because the letter serves as formal confirmation that management has fulfilled its responsibilities in relation to the preparation and presentation of the financial statements. This confirmation helps the auditor mitigate risk by:
Ensuring Accountability:
It provides written acknowledgment from management that they are responsible for the accuracy and completeness of the financial statements.
Supporting Audit Evidence:
While not a substitute for other audit evidence, the representation letter complements the evidence obtained and provides assurance about areas where evidence may be less objective (e.g., management’s intentions or judgments).
Legal Safeguard:
The letter provides legal protection to the auditor by documenting management’s assertions, reducing liability in cases of future disputes or litigation
Three Mandatory Representations Required in Respect of Management’s Responsibilities:
ISA 580, Written Representations, specifies that the auditor must obtain representations from management in three key areas:
- Preparation of Financial Statements:
Management confirms their responsibility for preparing the financial statements in accordance with the applicable financial reporting framework (e.g., IFRS, GAAP). - Internal Controls:
Management asserts that they have designed and implemented internal controls to ensure the financial statements are free from material misstatement, whether due to fraud or error. - Completeness of Information Provided:
Management represents that they have provided the auditor with all relevant information and access to records, documents, and other materials required for the audit.
Two Reasons Why Other Written Representations Are Obtained
In addition to mandatory representations, auditors may obtain other written representations to address specific matters. These are typically sought to:
- Address Subjective or Judgmental Areas:
Representations are obtained for areas where audit evidence relies on management’s intentions or judgments, such as:
Plans to dispose of assets or liabilities.
Assumptions underpinning significant accounting estimates (e.g., goodwill impairment, provisions). - Confirm Areas with Limited Evidence:
When objective evidence is unavailable or insufficient, written representations provide additional assurance. Examples include:
Confirmation of compliance with laws and regulations.
Representations regarding related-party transactions or contingencies.
Challenges with audit reporting
Balancing Transparency and Confidentiality:
Auditors must disclose enough information in the audit report to ensure transparency without breaching confidentiality or including overly technical details that may confuse stakeholders
Communicating Complex Issues Clearly:
Financial reporting and auditing involve complex judgments and technical details. Translating these into a concise and understandable report for non-expert users is difficult
Regulatory and Standards Compliance:
Auditors must adhere to evolving standards and regulations, such as the requirements of ISA 701 (Key Audit Matters) or laws like the Sarbanes-Oxley Act
