Written Representation

Question 1

Monday

Answer 1

Written Representation: A written statement by management to confirm certain matters or to support other audit evidence. It does not include financial statements, assertions, or supporting books and records.

1. Obtain Written Representations from Management:
   
   • Purpose: To confirm that management has fulfilled its responsibilities regarding the financial statements and the audit.
   • Example: Management asserts they have provided all relevant information and access to financial records.
2. Obtain Written Representations to Support Other Audit Evidence:
   
   • Purpose: To support other audit evidence as required by other ISAs.
   • Example: Management confirms the completeness of liabilities or the existence of contingent liabilities.
3. Respond Appropriately to Written Representations:
   
   • Purpose: To take appropriate actions if management provides or refuses to provide the requested written representations.
   • Example: If management refuses to provide written representations, the auditor may need to modify their audit opinion.

• Form: Written representations must be in the form of a letter of representation addressed to the auditor.
• Importance: These representations are an important source of audit evidence.

Imagine ABC Corp. is undergoing an audit. The auditor requests written representations from management. Management provides a letter stating:
- They have provided all relevant financial information.
- There are no unrecorded liabilities.
- They have fulfilled their responsibilities for the financial statements.

These written representations help the auditor gather sufficient and appropriate audit evidence to support their audit opinion.

Written representations are crucial for auditors to confirm management’s responsibilities and support other audit evidence. They help ensure the completeness and accuracy of the financial statements and the overall audit process.

Feel free to ask if you need more details or examples!

• Concept: Written representations from management support other audit evidence when deemed necessary by the auditor.
• Example: During an audit, management makes several representations. These could be unsolicited or in response to auditor inquiries. The auditor records verbal discussions but prefers written confirmation for significant matters to strengthen the audit evidence.

1. Understanding Management’s Intention or Judgment:
   
   • Concept: To comprehend management’s plans or judgments (e.g., future business plans or net realizable value of inventory).
   • Example: Management asserts that inventory will be sold within six months at a certain price. The auditor requests a written representation to confirm this judgment.
2. Completeness of Specific Items:
   
   • Concept: To ensure the completeness of items, such as all liabilities being provided for.
   • Example: Management provides a written representation that all known liabilities have been recorded in the financial statements.

• Concept: Written representations are necessary but not sufficient as standalone audit evidence.
• Example: While management’s written statement about no unrecorded liabilities is important, the auditor still needs to perform additional audit procedures to verify this claim.

• If Contradicted by Other Evidence:
  
  • Concept: Perform audit procedures to resolve contradictions.
  • Example: If management claims there are no liabilities, but the auditor finds evidence of an unrecorded liability, further procedures are necessary to resolve the discrepancy.
• Other Audit Procedures:
  
  • Concept: Reassess and, if needed, revise risk assessments and audit procedures.
  • Example: If the contradiction remains unresolved, the auditor reassesses the risk and performs additional procedures to address the issue.

• Concept: Assess the impact on the reliability of representations if there are concerns about management’s competence, integrity, or ethical values.
• Example: If the auditor suspects management of misrepresentation, they may conclude the audit cannot proceed and consider withdrawing from the engagement if allowed by law or regulation.

• Concept: Certain ISAs mandate specific written representations from management.
• Example: ISA 580 requires management to confirm the fulfillment of their responsibilities regarding the financial statements and the audit.

Suppose XYZ Corp. is audited, and management verbally states there are no unrecorded liabilities. The auditor records this discussion but requests a written representation for stronger evidence. Later, the auditor finds evidence of a $50,000 liability not included in the financial statements. The auditor then:
1. Requests a written representation about all liabilities.
2. Performs additional audit procedures to resolve the discrepancy.
3. Reassesses the risk and considers further actions if the contradiction remains unresolved.

Written representations thus provide necessary but not sufficient audit evidence, and the auditor must perform additional procedures to ensure the reliability of the financial statements.

If you have more questions or need further details, feel free to ask!

Sure! Let’s break it down in a clear, auditor-style manner with practical examples and some simple math.

Management’s Responsibilities:
1. Preparation and Fair Presentation:
- Management is responsible for preparing the financial statements in accordance with the relevant financial reporting framework (e.g., IFRS).
- Example: If a company operates under IFRS, management must ensure that the financial statements are in compliance with those standards.

2. Providing Information and Access:
   
   • Management must provide all necessary information and grant access to relevant data for the audit.
   • Example: If the auditor requests information about inventory levels, management should provide accurate inventory records.
3. Recording All Transactions:
   
   • All financial transactions must be recorded and reflected in the financial statements.
   • Example: If a company sells goods worth $10,000, this transaction must be recorded in the accounting records.

1. Disclaim an Opinion (ISA 705):
   
   • If management doesn’t provide written representations, the auditor may disclaim an opinion due to doubts about management’s integrity.

1. Drafted by Auditor:
   
   • Usually, the auditor drafts the letter since they know the areas requiring written representations.
2. Addressed to Auditor:
   
   • The letter is addressed to the auditor.
   • Example: “To: XYZ Auditors”
3. Dated Near Audit Report Date:
   
   • The letter should be dated as close as practicable to the audit report date.

Let’s say a company’s financial year ends on December 31, 2024, and the audit report is issued on January 31, 2025. The letter of representation might look like this:

[Company’s Letterhead]

January 30, 2025

To: XYZ Auditors

Representation Letter

Dear XYZ Auditors,

We confirm, to the best of our knowledge and belief, the following representations made to you during your audit of the financial statements for the year ended December 31, 2024:

1. We have fulfilled our responsibilities for the preparation and fair presentation of the financial statements in accordance with IFRS.
2. We have provided you with all relevant information and access to complete the audit.
3. All transactions have been accurately recorded and reflected in the financial statements.

Yours sincerely,

John Doe
Chief Financial Officer
ABC Company

Let’s illustrate with a simple financial transaction:

Transaction:
- A company sells goods worth $10,000 on credit.

Entries to be recorded:
1. Sales Revenue:
- Debit Accounts Receivable: $10,000
- Credit Sales Revenue: $10,000

In the financial statements:
- Income Statement:
- Sales Revenue: $10,000

• Balance Sheet:
  
  • Accounts Receivable: $10,000

Written Representation:
- Management would represent that all sales transactions, like the $10,000 sale, have been recorded and reflected in the financial statements.

I hope this clarifies things! Feel free to ask if you need further details.

Absolutely, when management refuses to provide requested written representations, the auditor must undertake specific actions to address the situation:

1. Discuss the Matter with Management:
   
   • The auditor should engage in a discussion with management to understand the reasons behind their refusal. It’s crucial to determine if there are any valid reasons for not providing the representations and to try to resolve any misunderstandings.
2. Re-evaluate the Integrity of Management:
   
   • The auditor needs to re-assess the integrity of management. This refusal could indicate potential issues with management’s honesty and trustworthiness. The auditor should consider how this impacts the reliability of other representations and audit evidence obtained during the audit.
3. Take Appropriate Action:
   
   • The auditor must consider the impact of this refusal on the audit report. Depending on the situation, the auditor might need to:
     
     • Modify the Audit Opinion: If the refusal significantly impacts the auditor’s ability to obtain sufficient appropriate audit evidence, the auditor may need to modify their opinion (e.g., qualified opinion or disclaimer of opinion) in accordance with ISA 705.
     • Document the Issue: The auditor should thoroughly document the refusal, the discussions with management, and the conclusions reached about the impact on the audit.

Imagine you’re auditing a company, XYZ Ltd, and you request a written representation about the valuation of their inventory. Management refuses, saying they believe the documentation is sufficient and no additional representations are needed.

1. Discuss with Management:
   
   • You have a conversation with the CFO and CEO to understand their reasons. They explain that they have confidence in their existing documentation and feel it’s redundant to provide additional written representations.
2. Re-evaluate Integrity:
   
   • You start to question the integrity of the management team. Could their refusal indicate potential issues with how they value their inventory? This doubt could affect how you view other evidence provided by management.
3. Take Appropriate Action:
   
   • You consider modifying your audit opinion. If you can’t obtain sufficient evidence regarding the inventory valuation due to the refusal, you might decide to issue a qualified opinion or a disclaimer of opinion in your audit report.

In your audit documentation, you note the refusal, your discussions with management, and how this issue affects your overall audit opinion.

This process ensures that you handle the situation professionally and maintain the integrity and reliability of your audit report. Let me know if you need any more examples or details!