MANAGEMENT REPRESENTATIONS

OVERVIEW

Objective

To describe the use of management representations as audit evidence.

EVIDENCE
OBTAINED
Essential procedure

ACKNOWLEDGMENT OF AS AUDIT
MANAGEMENT'S EVIDENCE
RESPONSIBILITY
Essential Essential procedure
procedure Certain instances
How evidence Contradiction
obtained WRITTEN
CONFIRMATION

Form
Basic elements
Basic principle

 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 1801

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1 EVIDENCE OBTAINED

1.1 Essential procedure

Appropriate representations should be obtained from management.

2 ACKNOWLEDGEMENT OF MANAGEMENT’S RESPONSIBILITY

2.1 Essential procedure

Evidence of the following should be obtained:

management’s acknowledgement of responsibility for fair presentation of the

financial statements;

management’s approval of the financial statements.

2.2 How evidence obtained

Relevant minutes of meetings (eg of board of directors).

Written representations.

Signed copy of financial statements.

Illustration

“We acknowledge our responsibility for the fair presentation of the financial statements
in accordance with (indicate relevant financial reporting framework).…

…We have made available to you all books of account and supporting documentation
and all minutes of meetings of shareholders and the board of directors (namely those
held on [dates]).”

 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 1802

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3 AS AUDIT EVIDENCE

3.1 Essential procedure

Written management representations should be obtained on matters material to the

financial statements when other sufficient appropriate audit evidence cannot
reasonably be expected to exist.

Confirming oral representations in writing reduces the risk of misunderstanding.

REPRESENTATIONS
DURING COURSE
OF AUDIT

SEEK
CORROBORATIVE CERTAIN
EVIDENCE INSTANCES

Seek corroborative evidence (implies expectation that it should be available),

evaluate reasonableness/consistency.

Consider whether individuals making representations can be expected to be

adequately informed on the particular matters.

Not a substitute for other evidence expected to be available.

3.3 Certain instances

Management representations may be the only audit evidence which can

reasonably be expected to be available (eg management’s intention to settle a
legal claim out of court).

Illustrations

“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.

“Other than . . . described in Note X to the financial statements, there have been no
events subsequent to period end which require adjustment of or disclosure in the
financial statements or notes thereto.

“The . . . claim by XYZ Company has been settled for the total sum of $X which has
been properly accrued in the financial statements. No other claims in connection with
litigation have been or are expected to be received.”

 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 1803

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Exam tip

In a question calling for audit work/procedures/tests etc it may be appropriate

to refer to “obtaining management representation”.

Be specific, eg “Ask the directors to provide a written representation that they

are not aware of any legal claims against the company other than those
disclosed in the financial statements”.

Do not throw in “obtain management representation” for good measure. To

suggest it as either a substitute for “better” evidence or as an unnecessary
extra item of evidence is not good practice.

3.3 Contradiction

If a management representation is contradicted by other audit evidence, the matter

should be investigated (and the reliability of other representations reconsidered if
necessary).

As per the guidance in ISA 500, such inconsistency creates doubt and must
be resolved.

4 DOCUMENTATION

4.1 Form

An audit working paper summarising oral discussions.

Representation letter from management.
Letter from auditors acknowledged by management.
Minutes of board meetings.

4.2 Basic elements

Addressee – the auditor

Specified information

Appropriately dated – ordinarily the same date as the auditor’s report

Signed – ordinarily by the senior executive officer and senior finance officer.

4.3 Basic principle

Refusal to provide a representation necessary for audit purposes is a scope limitation

and the audit opinion should be qualified or disclaimed (as appropriate).

 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 1804

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FOCUS

You should now be able to:

comment on the relevance, reliability and sufficiency of management

representations as audit evidence;

describe the circumstances in which obtaining management representations is

necessary and the matters on which representations are commonly obtained;

suggest appropriate representations.

 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 1805

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 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 1806