Written Representations
The management representation letter is one of the final—and most important—pieces of audit evidence the auditor obtains before issuing the audit report. Written representations are formal statements made by management to confirm matters discussed during the audit and to acknowledge management's responsibilities for the financial statements. They are required by AU-C 580 for nonissuers and AS 2805 for issuers.
Written representations are necessary but not sufficient audit evidence. They complement, but do not replace, other audit procedures. If management's representations contradict other evidence, the auditor must investigate the inconsistency.
Purpose and Nature of Written Representations
Written representations serve two primary purposes:
- Confirming management's responsibility for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework
- Confirming information provided to the auditor during the engagement, especially where other evidence may not be available
Representations may address matters that are:
- Explicitly required by auditing standards (e.g., completeness of information)
- Necessary to support other audit evidence obtained during the engagement
- Specific to the entity and its circumstances (e.g., unusual transactions)
Example: While auditing Gies Co., the engagement partner requests a written representation from Gies Co.'s CEO and CFO confirming that all material transactions have been recorded and that no side agreements exist with customers. These representations supplement the auditor's revenue testing procedures.
Who Provides the Representations
Written representations must be requested from members of management with appropriate responsibilities and knowledge of the matters involved. Typically, this includes:
- The Chief Executive Officer (CEO) — responsible for overall operations
- The Chief Financial Officer (CFO) — responsible for financial reporting
The representation letter should be signed by the highest-level individuals who have responsibility for the financial statements and knowledge of the matters covered. For most entities, this means both the CEO and CFO. Don't confuse this with the engagement letter, which is signed at the start of the audit.
The auditor should also consider whether representations from other individuals are needed—for example, from the head of a subsidiary or from legal counsel regarding litigation matters.
Required Representations
Certain representations are mandatory on every audit engagement. The auditor must obtain written representations from management that confirm:
| Required Representation | Description |
|---|---|
| Responsibility for financial statements | Management acknowledges its responsibility for preparing and fairly presenting the financial statements in accordance with the applicable framework |
| Completeness of information | Management has provided the auditor with all relevant information and access, as agreed in the engagement letter terms |
| Completeness of transactions | All transactions have been recorded and are reflected in the financial statements |
| Recognition, measurement, and disclosure | Management believes the effects of any uncorrected misstatements are immaterial, individually and in the aggregate |
| Reasonable estimates | Significant assumptions used in making accounting estimates are reasonable |
Specific Representations
Beyond the required general representations, the auditor obtains written representations on specific topics relevant to the engagement:
Fraud
Management confirms that it has:
- Disclosed to the auditor all known instances of fraud or suspected fraud affecting the entity involving management, employees with significant roles in internal control, or others where the fraud could have a material effect
- Disclosed all allegations of fraud communicated by employees, former employees, analysts, regulators, or others
Laws and Regulations
Management represents that all known instances of noncompliance or suspected noncompliance with laws and regulations whose effects should be considered in preparing the financial statements have been disclosed.
Related Parties
Management confirms that it has disclosed:
- The identity of all related parties and the nature of all related-party relationships
- All related-party transactions that have been properly recorded and disclosed
Subsequent Events
Management acknowledges that all events occurring after the balance sheet date that require adjustment or disclosure have been properly reflected in the financial statements.
Example: During the audit of BIF Partners, the auditor learns through inquiry that a significant customer filed for bankruptcy in January, after BIF Partners' December 31 fiscal year-end. The auditor obtains a written representation that management has disclosed all subsequent events, including this customer's bankruptcy, and has evaluated whether an adjustment to accounts receivable is necessary.
Date and Period Covered
The representation letter must be dated as of the date of the auditor's report—not before, not after. This is the same date the auditor has obtained sufficient appropriate audit evidence.
Key timing requirements:
- The representations cover the period(s) referred to in the auditor's report (e.g., the fiscal year ended December 31, 20X4)
- If the auditor's report is dual-dated due to a subsequent event, an additional representation may be needed to cover the later date
- The letter should be obtained before or on the date the audit report is issued
If management dates the representation letter before the audit report date, the auditor may need to obtain an updated letter. The representation letter should never be dated after the auditor's report date, as this would mean the representations were not available when the auditor formed the opinion.
Effect of Unreliable or Refused Representations
Doubt About Reliability
If the auditor has concerns about the competence, integrity, or ethical values of management, or if management's representations are inconsistent with other audit evidence, the auditor must:
- Consider the effect on the reliability of other representations and audit evidence
- Take appropriate action, which may include modifying the audit opinion
- Consider whether to withdraw from the engagement
Refusal to Provide Representations
If management refuses to provide one or more of the requested written representations, the auditor must:
- Discuss the refusal with management and those charged with governance
- Reevaluate management's integrity and the effect on the reliability of other representations
- Disclaim an opinion on the financial statements (if management refuses to provide the required representations about its responsibility or completeness)
A refusal to provide the required representation letter is a scope limitation serious enough to require a disclaimer of opinion in virtually all cases. This is a high-priority exam topic—the CPA exam frequently tests the consequences of a refused representation letter.
Example: Illini Entertainment's CEO agrees to sign the representation letter, but the CFO refuses, citing personal legal concerns. The auditor must evaluate the impact—if the CFO's refusal means the auditor cannot obtain adequate representations about the financial statements, the auditor should issue a disclaimer of opinion.
Relationship to Other Audit Evidence
Written representations are an essential but complementary form of audit evidence. Key principles:
- Representations do not substitute for other audit procedures the auditor would otherwise perform
- If a representation contradicts other evidence, the auditor must investigate the discrepancy and consider the effect on other aspects of the audit
- Representations about matters already corroborated through other procedures provide additional assurance but are not the primary source of evidence
- Representations are particularly valuable for matters involving management intent (e.g., the intent to hold a debt instrument to maturity), which are difficult to corroborate through other means
On the CPA exam, remember: the representation letter is required audit evidence, but it is not sufficient by itself. The auditor still needs to perform substantive testing and other procedures. Think of the representation letter as a "safety net" that ensures management has gone on record about key assertions—not a shortcut that eliminates the need for other evidence.
Summary
| Topic | Key Point |
|---|---|
| Purpose | Confirm management's responsibility and information provided during the audit |
| Who signs | CEO and CFO (or equivalent members of management with appropriate responsibilities) |
| Date | Same date as the auditor's report |
| Required topics | Responsibility, completeness, recognition/measurement/disclosure, uncorrected misstatements |
| Specific topics | Fraud, laws/regulations, related parties, subsequent events |
| Refusal effect | Disclaimer of opinion (scope limitation) |
| Reliability concern | Reevaluate integrity; possible opinion modification or withdrawal |
| Relationship to other evidence | Complements but does not replace other procedures |
When you see an exam question about the management representation letter, focus on three things: (1) it must be dated as of the auditor's report date, (2) it is signed by the CEO and CFO, and (3) a refusal to sign results in a disclaimer of opinion. These three facts cover the majority of representation letter questions.