representation letter auditing

Mastering Audit Communication: Your Ultimate Guide to Letters and Memos for Auditors

•   March 19, 2024

Effective communication is the cornerstone of successful auditing, and at its core are key documents—Audit Letters, Management Representation Letters, and Memos. These documents play a pivotal role in articulating findings, commitments, and the overall narrative of financial landscapes.

In this blog, we aim to guide auditors in understanding and adeptly drafting these essential communications, offering insights into their significance and ensuring clarity and impact in the language of auditing. Join us on this journey to enhance your proficiency in navigating the complexities of audit communication!

Setting the Stage with Engagement Letters

As you embark on your journey through the intricacies of auditing, it’s essential to set the stage with clear communication. Let’s delve into the first two types of audit letters that play a pivotal role in this process.

Audit Letter Type 1 – Engagement Acceptance Letter

In the world of auditing, an Engagement Acceptance Letter is your starting point. This letter serves as the formal agreement between you and your client, establishing the foundation for a successful audit. Its purpose is to outline the scope of the engagement, discuss the associated fees, and define the timeline for the audit.

Think of it as the roadmap that guides both parties through the audit journey. Pay close attention to its key components – the scope, fees, and timeline – as they lay the groundwork for a transparent and efficient audit process.

Audit Letter Type 2 – Management Representation Letter

Now, let’s talk about the Management Representation Letter. In the audit journey, this document carries substantial importance, acting as a formal confirmation from management. Beyond its formal appearance, it serves as a pivotal tool in upholding the accuracy and comprehensiveness of the financial data being assessed.

As you traverse the audit terrain, grasping the significance of the confirmations delineated by management within this letter becomes paramount. Consider it as your gateway to garnering insights and assurances directly from those entrusted with the financial statements’ integrity.

As you progress in your audit journey, the audit letters will be your guiding lights, providing clarity and structure to the complex world of financial examination.

Audit Planning and Execution

Now, we’ll delve into the crucial aspects of audit planning and execution. As you progress in your audit journey, understanding the intricacies of planning and executing the audit is paramount. Let’s explore three key elements in this phase:

1. Audit Plan Memo

The Audit Plan Memo is your blueprint for a successful audit. In this phase, you’re not just checking boxes; you’re developing a comprehensive audit strategy. The memo outlines how you’ll approach the audit, identifying key risks and procedures.

It’s your roadmap to ensure nothing is overlooked. As you dive into this, consider it as your opportunity to craft a tailored approach that aligns with the unique aspects of the business under examination.

2. Audit Work Program

Now, let’s talk about the Audit Work Program. This is where the nitty-gritty details come into play. Here, you’re detailing specific audit procedures, outlining the timing for each task, and establishing what results you expect to achieve.

Think of it as your checklist for the actual execution of the audit. Precision is key – the more detailed your work program, the smoother the audit process will flow.

3. Audit Inquiries

Audit Inquiries are your tools for gathering additional information. This is where communication skills shine. You’ll be engaging with various stakeholders to seek clarification and insights. Understand the pivotal role inquiries play in the audit process and be prepared with examples of common inquiries.

Crafting effective audit inquiries extends beyond mere questioning; it entails formulating pertinent queries to extract precise information, thereby enriching the breadth and caliber of your audit. Consider the following overarching inquiry categories to guide your inquiry development across various facets of a financial statement audit:

• Have any organizational pressures surfaced, prompting potential manipulation of financial statements?
• Are there any reported instances of suspected fraud within the past year?
• What measures are in place to prevent and identify fraudulent activities?

Accounting Policies:

• Can you elucidate the revenue recognition process tailored to your industry?
• Have there been recent alterations in accounting policies impacting the financial statements?
• How are intricate accounting estimates determined and documented?

Related Parties:

• Can you furnish a comprehensive list of all related parties associated with the organization?
• What types of transactions occur with these related parties?
• Are there any related party transactions that might influence the financial statements?

By concentrating on these general inquiry topics and customizing them to suit the specific audit context, you’ll be adept at gathering requisite information for a thorough and dependable audit.

As you progress through audit planning and execution, remember that each of these elements is interconnected, forming a cohesive strategy.

The Art of Audit Reporting

Let’s explore the art of audit reporting – a critical phase where your findings are communicated effectively. Let’s delve into two key components in this stage:

1. Management Letter

The Management Letter is your tool for communicating deficiencies and weaknesses identified during the audit. It goes beyond just highlighting problems; it provides constructive recommendations for improvements.

Think of it as a collaborative effort to enhance the overall efficiency and effectiveness of the audited entity. In this type of audit letter, clarity and diplomacy are essential as you navigate through potential challenges, offering valuable insights for the betterment of the organization.

2. Audit Report

The Audit Report is the culmination of your audit efforts, expressing the auditor’s opinion on the financial statements. It’s not just a summary; it’s a structured document with key elements that convey your findings to stakeholders.

Mastering the art of crafting a clear and concise audit report is crucial. Understand the structure – from the introduction to the opinion – and ensure each element serves its purpose in conveying the true financial picture. Your report is not only a reflection of your audit but also a tool for stakeholders to make informed decisions.

In the realm of audit reporting, effective communication is the key. Your ability to convey findings and recommendations with precision ensures that your audit has a meaningful impact. As you move forward in your exploration of audit processes, these reporting components will be your instruments for fostering transparency and accountability.

Additional Letters and Memos

Now, We’ll explore additional audit letters and memos crucial to a comprehensive audit process. Let’s delve into three key components:

1. Internal Control Memorandum

The Internal Control Memorandum is your guide to assessing and documenting internal controls within the audited entity. This critical memo goes beyond financial figures, focusing on the processes and safeguards in place.

Your task is to identify strengths and weaknesses, providing insights that help the organization enhance its control environment. Be meticulous in documenting your assessment and, where necessary, recommend corrective actions to fortify internal controls.

2. Fraud Risk Assessment Memorandum

In the ever-evolving landscape of auditing, addressing fraud risks is paramount. The Fraud Risk Assessment Memorandum is your tool for evaluating these risks comprehensively. Here, you not only identify potential areas of vulnerability but also suggest mitigation measures.

Your role is not just to uncover risks but to empower the organization to proactively guard against fraudulent activities.

3. Subsequent Events Memorandum

The Subsequent Events Memorandum is your way of addressing events that unfold after the balance sheet date. Understanding the importance of this memo is crucial in reaching a well-informed audit conclusion.

Be vigilant in capturing and evaluating subsequent events, as they can significantly impact the financial statements. This memorandum is your mechanism for ensuring that the audit conclusions remain relevant and up-to-date in light of any post-balance sheet developments.

External Confirmation Letters:

4. bank confirmation letters (bcls).

Sending Bank Confirmation Letters (BCLs) serves as a vital step in confirming the existence and specifics of loans, credit lines, or account balances held by the organization under audit. This verification process ensures the accuracy of financial liabilities reported in the statements.

5. Debtors Confirmation Letters

Engaging in Debtors Confirmation Letters involves reaching out to customers (debtors) of the organization under audit to verify outstanding balances owed. This verification helps to confirm the accuracy of accounts receivable reported in the financial statements.

As you navigate through these additional audit letters and memos, remember that each plays a unique role in contributing to a thorough and insightful audit. Your attention to detail and strategic thinking in this phase further solidify the integrity of the audit process.

Beyond Formal Documentation

In the dynamic landscape of auditing, formal documentation is just one piece of the puzzle. Informal notes and emails serve as the behind-the-scenes communication that adds depth to your audit process.

1. The Role of Informal Notes

Informal notes are your personal record-keeping tools. They capture your thoughts, observations, and insights as you navigate through the audit journey. Think of them as your audit diary, providing a narrative that complements the formal documentation.

These notes serve as a valuable resource, offering context to your decision-making process and providing a traceable trail of your audit exploration.

2. The Importance of Emails

Emails are the communication lifeline in the modern business world, and auditors are no exception. The exchanges of information, clarifications, and confirmations through emails can be critical in supporting your audit findings.

They provide a real-time snapshot of interactions with stakeholders, offering insights into the discussions and agreements that shape the audit process.

Understanding the significance of informal notes and emails is not just about record-keeping; it’s about capturing the essence of the audit journey. These informal channels contribute to the transparency and credibility of your findings. Remember that the combination of formal and informal documentation creates a comprehensive picture, enriching the narrative of your audit conclusions.

Best Practices for Drafting Audit Communications

Key elements to include in audit communications.

In crafting effective audit communications, clarity and completeness are paramount.

• Ensure that your communications encompass key elements such as a concise executive summary, a thorough description of findings, recommended actions, and a clear timeline for resolution.
• Transparency is key—provide sufficient context and supporting details to facilitate a comprehensive understanding of the audit results.
• Additionally, include references to relevant audit standards and methodologies to reinforce the credibility of your communication.

Tone and Language Tips on drafting Audit Communications

• Maintain a professional and objective tone throughout your audit communications.
• Avoid jargon and technical language that may be unclear to your audience.
• Strive for a balance between precision and accessibility, ensuring that your message is easily comprehensible to both financial experts and non-experts.
• Emphasize collaboration and constructive dialogue in your language, fostering an environment conducive to addressing issues and implementing improvements.

Ensuring Compliance with Professional Auditing Standards in your Audit Communications

• Adherence to professional auditing standards is non-negotiable.
• Clearly reference the specific auditing standards and frameworks applied in your audit communication. This not only bolsters the credibility of your findings but also assures stakeholders that your audit process aligns with established professional norms.
• Regularly update your knowledge of auditing standards to stay current and consistently apply them to your audit communications, maintaining the highest level of professional integrity.

In summary, effective audit communications require a thoughtful blend of clarity, transparency, and professionalism. By incorporating key elements, maintaining an appropriate tone, and ensuring compliance with auditing standards, you not only convey findings accurately but also contribute to a collaborative and constructive audit process. Clear, concise, and compliant communications are the cornerstone of building trust and credibility in the realm of auditing.

Challenges and Solutions in Audit Communication

Common challenges faced by auditors.

• Complexity of Findings: Communicating intricate audit findings in a clear and understandable manner can be challenging, especially when dealing with technical or complex financial information.
• Balancing Transparency and Sensitivity: Striking the right balance between transparency and sensitivity, particularly when addressing issues or discrepancies, can be delicate. Auditors need to convey the truth without causing unnecessary alarm.
• Managing Stakeholder Expectations: Meeting the diverse expectations of stakeholders, who may have varying levels of financial literacy and understanding, poses a challenge. Ensuring that the audit communication is tailored to different audiences is crucial.
• Ensuring Timeliness: The pressure to deliver audit communications promptly can be a hurdle. Timely communication is essential for addressing issues promptly and maintaining stakeholder confidence.

Strategies to Overcome These Challenges

• Simplify Complex Findings: Break down complex findings into digestible and straightforward language. Use visual aids such as charts or graphs to enhance clarity. Providing additional context can help stakeholders better grasp intricate financial information.
• Transparent and Tactful Communication: Be transparent about audit findings while choosing language carefully. Focus on facts and avoid language that may create unnecessary panic. Presenting solutions alongside identified issues can mitigate potential concerns.
• Tailored Communication for Stakeholders: Customize communication based on the audience. For financial experts, delve into technical details, while providing a more high-level overview for non-experts. This approach ensures that all stakeholders can comprehend and act upon the information provided.
• Effective Time Management: Implement efficient time management practices throughout the audit process. Establish realistic timelines for communication milestones, allowing for thorough review and validation of findings before dissemination. Clear communication with stakeholders regarding expected timelines is essential.

In conclusion, overcoming challenges in audit communication involves a combination of clear strategies and thoughtful approaches. By simplifying complex information, maintaining transparency, tailoring communication to diverse audiences, and managing time effectively, auditors can enhance the effectiveness of their communication processes and build trust with stakeholders.

Effective communication is the bedrock of trust and transparency in auditing, encompassing various letters and memos that shape the narrative of financial integrity. From Audit Letters affirming accuracy to Management Representation Letters committing to compliance, and specialized communications in outsourcing scenarios, each plays a vital role in fostering collaboration between auditors, management, and stakeholders.

Key Takeaways:

• Audit Letters: Bridge understanding between auditors and stakeholders, signaling potential issues and affirming accuracy.
• Management Representation Letters: Serve as commitments to compliance and transparency, offering insights into organizational governance.
• Audit Memos: Act as the narrative thread guiding auditors and providing stakeholders with a comprehensive summary of the audit journey.
• Outsourcing-Specific Letters and Memos: Essential for setting expectations, defining responsibilities, and upholding independence in outsourcing scenarios.

As auditors, the call to action is clear — leverage effective communication not just as a formality but as a powerful tool to build confidence, strengthen relationships, and enhance financial integrity collectively. Embrace clarity, transparency, and precision in your communications, fostering an environment where stakeholders, regardless of their financial acumen, can actively contribute to the ongoing journey of trust and reliability in the audit process.

If you enjoyed learning about audit communication, be sure to explore more of  our Blogs  covering Accounting, Tax, and Outsourcing!

• Our Audit Process
• SOC 1 Audits
• SOC 2 Audits
• HIPAA Audits
• HITRUST Certification
• FedRAMP Compliance
• CMMC Compliance Assessment
• Penetration Testing
• Leadership Team
• What is SOC 2?
• What is a SOC 2 Report?
• What is SOC 1?
• 2022 Trust Services Criteria (TSCs)
• Audit Terms

Understanding an Audit Letter of Representation (LOR)

This article addresses the what, when, why, and who’s related to letters of representation for audits, specifically SOC audits.

What is a Letter of Representation?

A letter of representation (a.k.a., representation letter, rep. letter, LOR) in audit services is a form letter from the American Institute of Certified Public Accountants typically prepared by the external auditors on behalf of a company’s management that is signed by a member of executive leadership. By signing the letter of representation, the executive attests to the external auditor that all of the information submitted is accurate, and that all material information has been disclosed to the auditors. For a financial audit, that material would be the financial statements and internal controls over financial reports. In the context of a SOC 1  or SOC 2  examination, company representation letters allow the management of the company to not only confirm that all material information has been disclosed to the service auditors, but also to take responsibility for the presentation and accuracy of the assertion and description in the report and to confirm that the controls were designed and operating effectively during the period of the assessment.

As you can imagine, a letter of representation is an important piece of evidence in any audit. Management’s representations and attestations in the letter provide some assurance that the information provided during the examination is reliable to use in audit procedures and to base its opinion. Management’s attestation in the representation letters also shifts blame to management in the case that a control failure is missed during an audit or inaccuracies because information was not made available or disclosed to the service auditor.

When is a Letter of Representation Prepared?

As it is a form letter, a letter of representation may be prepared at any point during a SOC 1 or SOC 2 examination. However, paragraph .54 of AT-C section 205 (SSAE 18) specifies that a representation letter must be dated as of the date of the service auditor’s report. The letter may be signed any time from the date of the report and the report is issued. However, because it is an important piece of evidence supporting an audit opinion, the letter of representation should be signed before the report is issued ( AICPA’s SOC 1 Guide 4.189).

Why is the Letter of Representation Important?

As noted earlier, the simple answer is that the letter of representation is required by the American Institute of Certified Public Accountants, the governing body for attestation services. If management refuses to provide the requested representations, the service auditor would consider it “a limitation on the scope of the examination sufficient to preclude an unmodified opinion and may be sufficient to cause the practitioner to withdraw from the engagement” (Paragraph .A64 of AT-C section 205 ). Similar actions would be taken should the service auditor conclude that there is sufficient doubt about the competence, integrity, ethical values, or diligence of those providing the written representations; or the service auditor concludes that the written representations are otherwise not reliable and is unable to resolve the concerns through additional procedures. From a practical standpoint, because management’s written representations are an important consideration when forming the service auditor’s opinion, the service auditor would not ordinarily be able to issue the report until the service auditor had received the representation letter.

Who is Responsible for the Letter of Representation?

The AICPA’s guidance requires, when the engagement covers a modified or extended period, that the auditor obtain management’s written representation in the form of a representation letter addressed to the auditor. The AICPA requires that the service auditor request the written representations from management.

What are the Contents of a Letter of Representation in Auditing?

Paragraph .38 of AT-C section 320 (SSAE 18) states that “the service auditor to request from management written representations required by paragraph .50 of AT-C section 205 as well as those required by paragraph .36 of AT-C section 320 .” The auditor and management may add additional representations to the letter. The written representations required by paragraph .50 of AT-C section 205 are identified in items a-i and the written representations required by paragraph .36 of AT-C section 320 in items j-k.

The following summarizes the minimal representations to be included in the letter:

A. Include the management’s assertion about the description, controls, control objectives (SOC 1), and trust services criteria (SOC 2) based on the criteria.

B. A statement that all relevant matters are reflected in the description or evaluation of the related controls or assertion.

C. A statement that all known matters contradicting the control objectives, trust services criteria, or assertion and any communications from regulatory agencies or others affecting the control objectives, trust services criteria, or assertion have been disclosed to the practitioner, including any communications between the end of the period addressed and the written assertion and the date of the service auditor’s report.

D. Acknowledge responsibility for:

• the description in the report and the assertion:
• selecting the applicable criteria; and
• determining that the applicable criteria is appropriate.

E. A statement that any events after to the period (or point in time) related to the description, control objectives, or trust services criteria being reported on, which would have a material effect on the control objectives, trust services criteria, or assertion, have been disclosed to the auditor.

F. A statement that the individual signing and the company have provided the service auditor with all relevant information and access.

G. When applicable, a statement that the individual signing believes the effects of uncorrected misstatements are immaterial, when considered individually and in aggregate, to the control objectives or trust services criteria.

H. When applicable, a statement that significant assumptions used to make any material estimates are reasonable.

I. A statement that the individual signing and the company have disclosed the following to the service auditor:

• Any and all deficiencies in internal control relevant to the engagement of which the responsible party is aware;
• Knowledge of any actual, suspected, or alleged fraud or violation of laws or regulations affecting the control objectives or trust services criteria; and
• Other matters as the service auditor deems appropriate.

J. A statement that any instances of noncompliance with laws and regulations or uncorrected misstatements attributable to the service organization that may affect one or more user entities have been disclosed to the service auditor.

K. A statement that any knowledge of actual, suspected, or alleged fraud by the management or employees of the service organization that could adversely affect the fairness of the presentation of management’s description of the service organization’s system or the completeness or achievement of the control objectives stated in the description have been disclosed to the service auditor.

An audit letter of representation is a form letter prepared by a company’s service auditor and signed by a member of senior management. In the letter, management attests to the accuracy and completeness of the information provided to the service auditors for their analysis. The letter must be dated as of the date of the report and signed on or after that date. The service auditor must obtain a signed representation letter that includes, at a minimum, the required representations specified by the AICPA in order to opine an audit.

Isaac Clarke is a partner at Linford & Co., LLP. He began his career with Ernst & Young in 2003 where he developed his audit expertise over a number of years. Isaac specializes in and has conducted numerous SOC 1 and SOC 2 examinations for a variety of companies—from startups to Fortune 100 companies. Isaac enjoys helping his clients understand and simplify their compliance activities. He is attentive to his clients’ needs and works meticulously to ensure that each examination and report meets professional standards.

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The Role of Management Representation Letters in Audits

Explore the significance of management representation letters in audits, their preparation process, and common misunderstandings in this insightful overview.

Audits are a critical component of financial transparency and corporate governance. Within this process, management representation letters play an essential role that often goes unnoticed by those outside the accounting profession.

These documents serve as a written assertion from company management regarding the accuracy and completeness of information provided to auditors. Their importance cannot be overstated, as they underpin the trust and integrity of the entire audit process.

Purpose of Management Representation Letters

Management representation letters serve as a formal attestation from a company’s executives to the auditors, confirming the veracity of the financial statements and disclosures. These letters are a professional necessity, providing auditors with assurances that all relevant information has been disclosed. They are a testament to the management’s confidence in their financial reporting and their commitment to transparency.

The letters also support the auditor’s assessment of the risk of material misstatement in the financial statements. By obtaining written confirmations, auditors can reduce the extent of substantive testing required, which can streamline the audit process. This efficiency is beneficial for both the auditors and the company being audited, as it can lead to a more focused and timely audit.

Moreover, these letters can be a safeguard against potential disputes or legal issues that may arise post-audit. In instances where inaccuracies are discovered after the audit has been completed, the letter serves as a record that management had affirmed the completeness and accuracy of the information at the time of the audit. This can be particularly important in cases where financial statements are later found to be fraudulent or misleading.

Preparing a Management Representation Letter

The preparation of a management representation letter is a meticulous process that requires careful attention to detail and a comprehensive understanding of the company’s financial affairs. It is a collaborative effort between management and auditors to ensure that all significant information is accurately reflected.

Necessary Statements Identification

Identifying the necessary statements to be included in the management representation letter is a foundational step. These statements typically cover a range of areas such as the acknowledgment of responsibility for the fair presentation of financial statements in conformity with the applicable financial reporting framework, confirmation of the completeness of the information provided, and the disclosure of any subsequent events that may affect the financial statements. Management must also confirm that they have made the auditors aware of all known instances of fraud or suspected fraud affecting the company. The identification process is guided by professional auditing standards, such as those issued by the American Institute of Certified Public Accountants (AICPA) or the International Auditing and Assurance Standards Board (IAASB).

Information Completeness

Ensuring the completeness of information in the management representation letter is paramount. This involves a thorough review of the company’s financial records and disclosures to verify that all relevant information has been included. Management must confirm that all transactions have been recorded and are reflected in the financial statements. They must also attest to the appropriateness of the accounting policies applied and whether any unrecorded liabilities exist. This step is critical as it directly impacts the credibility of the financial statements and the audit’s outcome. The completeness of information also extends to the disclosure of any related party transactions and the effects of any uncorrected misstatements identified during the audit.

Review and Approval

The final step in preparing a management representation letter is the review and approval by the company’s top executives, typically the CEO and CFO. This review process is not merely a formality; it is an active examination to ensure that the letter accurately reflects the company’s financial position and that all statements can be substantiated. The approval signifies that management has taken ownership of the representations made within the letter. It is also an opportunity for management to discuss any concerns or clarifications with the auditors before the letter is finalized. The signed letter is then dated as of the last day of fieldwork, signifying that the representations are relevant and up-to-date with the findings of the audit.

Misconceptions About Representation Letters

A common misunderstanding about management representation letters is that they are a mere formality, a routine sign-off without substantial impact on the audit’s outcome. This view underestimates the letter’s function as a document that auditors rely upon for assurance beyond the financial data and records they examine. It is not simply a procedural step, but a declaration that can have legal implications for the signatories, particularly if it is later found that the information provided was knowingly false or misleading.

Another misconception is that the letter is solely for the benefit of the auditors. While it is true that auditors use these letters to corroborate information and reduce audit risk, the benefits extend to the management and the company as well. The process of preparing the letter encourages a comprehensive review of the company’s financial disclosures, which can lead to the identification and rectification of errors before the audit is finalized. This proactive approach can enhance the quality of financial reporting and potentially prevent future financial discrepancies.

There is also a belief that once the letter is signed and the audit is complete, the responsibilities of management in relation to the representations made are concluded. However, the representations have a lasting effect, as they are a testament to the financial condition of the company at the point of the audit. Should any issues arise from the period covered by the audit, the representations made can be scrutinized for their accuracy and completeness.

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What is a Representation Letter?

A representation letter is a written statement provided by a company’s management to its auditors as part of the audit process. The representation letter confirms that the information provided to the auditors is complete, accurate, and fairly presented in accordance with the applicable financial reporting framework. The letter also confirms that the management has disclosed to the auditors all relevant information that may be necessary for the auditors to properly understand the company’s financial position, results of operations, and cash flows. The representation letter helps to ensure that the auditors have all the necessary information to conduct an audit in accordance with professional standards.

Why is a Representation Letter Required?

The purpose of the representation letter is to provide the auditor with assurance that the financial statements accurately reflect the company’s financial position and performance. The letter also helps the auditor to identify any potential areas of concern or risk that may need to be addressed during the audit process.

Contents of a Representation Letter

A representation letter typically includes the following:

• A statement that the financial statements being audited are complete and accurate
• A statement that the financial statements are in accordance with generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS)
• A statement that the company’s management team is responsible for the preparation and fair presentation of the financial statements
• A statement that the company’s management team has made all necessary disclosures in the financial statements
• A statement that the company’s management team has disclosed all material transactions and events that have occurred during the period being audited
• A statement that the company’s management team has disclosed all material off-balance sheet transactions, arrangements, and obligations
• A statement that the company’s management team has disclosed all material changes in accounting principles that have occurred during the period being audited
• A statement that the company’s management team has disclosed all material related-party transactions that have occurred during the period being audited
• A statement that the company’s management team has disclosed all material contingencies and commitments that have occurred during the period being audited

The representation letter may also include other representations, such as a representation that the company has complied with all relevant laws and regulations, and that there are no pending legal proceedings that could have a material impact on the financial statements.

Importance of the Representation Letter

The representation letter is an important part of the audit process, as it provides the auditor with assurance that the financial statements are accurate and complete. This helps the auditor to form an opinion on the financial statements and to issue an audit report stating whether the financial statements are presented fairly, in all material respects.

Without a representation letter, the auditor may not be able to complete the audit, as they may not have sufficient evidence to form an opinion on the financial statements. This could lead to delays or other issues in the audit process, and may impact the company’s ability to obtain financing or meet other regulatory requirements.

In summary, a representation letter is a written statement signed by the company’s management that confirms the accuracy and completeness of the financial statements. It is an important part of the audit process, as it helps the auditor to form an opinion on the financial statements and to issue an audit report.

Amy is a Certified Public Accountant (CPA), having worked in the accounting industry for 14 years. She is a seasoned finance executive having held various positions both in public accounting and most recently as the Chief Financial Officer of a large manufacturing company based out of Michigan.

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What is a Representation Letter?

An auditor’s responsibility is to gather audit evidence regarding a subject matter. This evidence comes from several audit procedures. Based on this evidence, the auditor must conclude whether the subject matter meets specific criteria. In the case of external audits , it includes examining a client’s financial statements to establish whether they are free from material misstatements.

In some cases, however, auditors may not have the option to apply some substantive audit procedures . However, that does not imply the auditor must not consider those areas. It also does not infer that auditors must provide a negative opinion regarding those areas. In these cases, auditors can also obtain a representation letter from the client’s management.

A representation letter is a form of written representation obtain from a client. Written representations are audit evidence that auditors collect. Similarly, they are necessary information that auditors may require related to a specific audit assignment. These are similar to audit inquiries but in a written form. The international auditing standard that deals with written representations are ISA 580 Written Representations.

It is a written statement written by auditors. This statement attests to the accuracy of the financial statements given to the auditors for analysis. Auditors present this letter to the client’s management, who signs the letter constructing a form of audit evidence. While this evidence is necessary, it may not represent sufficient appropriate audit evidence.

Once presented to the management, a senior official will sign the representation letter. Usually, a client’s CEO, CFO, or other higher senior accounting personnel sign the letter. This process must take place before auditors present an audit report regarding the client’s financial statements. The content of the representation letter may vary from one firm to another. However, there are some similar elements or contents that are present in every representation letter.

What are the Contents of the Representation Letter?

A typical representation letter will include various areas to cover the auditors’ liability towards the audit assignment. It will also include areas to ensure the management is aware of its responsibility to prepare accurate financial statements. According to accountingtool.com , representation letters will cover the following areas.

1. The management is responsible for the proper presentation and accurate preparation of the financial statements. It will also include a reference to the applicable accounting framework for this purpose. 2. The auditors have received all the financial records related to the audit. 3. The board of directors meeting minutes are complete. 4. There are no unrecorded transactions. 5. The management has disclosed all related party transactions. 6. The management has provided all letters from regulatory agencies regarding financial reporting noncompliance if required. 7. The net effect of all uncorrected misstatements is immaterial. 8. The financial statements conform to the applicable accounting standards. 9. The management doesn’t have any knowledge of fraud within the company. 10. The financial statements account for all material transactions. 11. The management is responsible for systems designed to detect and prevent fraud. 12. The client has disclosed all liens and other encumbrances on its assets. 13. The management has disclosed all contingent liabilities. 14. The management acknowledges its responsibility for the system of financial controls. 15. The client has disclosed all unasserted claims or assessments.

Overall, the representation letter will consist of all the management’s responsibilities for the financial statements and the audit. This letter will decrease the auditors’ responsibility if there is a future dispute. Similarly, it places responsibility on the management for areas where it must ensure proper accounting and controls. Auditors will not allow the management to make changes to the representation letter before signing.

What Happens If Auditors Cannot Obtain Reliable Representation Letters?

In some cases, auditors cannot obtain a reliable representation letter from the management. These may occur when the auditor has concerns about the competence, integrity, or diligence of the management. In these cases, the standards require auditors to determine the effect that such issues may have on the reliability of the representation letters.

When auditors obtain representation letters that are inconsistent with other audit evidence, they must perform procedures to resolve any discrepancies. If they cannot do so, they will need to reconsider the prior assessment of the client’s management. The auditors must also determine the effects such circumstances will have on the reliability of the representation letter or the audit assignment.

If auditors conclude that the representation letter is not reliable, they must take appropriate actions. These may include establishing the possible effect on the opinion in the auditor’s report. The same cases will apply when the management refuses to provide a representation letter. The auditor must discuss it with the management before taking any actions.

Representation letters are a form of written representation and constitute an essential part of audits. These letters attest to the accuracy of the financial statements presented by the client’s management. There are several areas which representation letters cover. If auditors cannot obtain reliable representation letters, they will need to evaluate the situation and take appropriate actions.

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A formal written record of representations made by the management of an organization to the auditors. The letter is prepared by the auditor and signed by management on a date as near as possible to the date of the auditors’ report and after all audit work has been completed, including the review of events occurring after the balance sheet date, for example. The information referred to in the letter is material to the financial statements for which the auditor is unable to obtain independent corroborative evidence. These matters might include any future legal claims and adjusting events.

From:   letter of representation   in  A Dictionary of Accounting »

Subjects: Social sciences — Business and Management

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What is a Representation Letter?

May 18, 2021

Representation Letter 

What is a representation letter?

• From Association to CPA
• Represents the audited financial statements are the responsibility of management/those charged with governance (Board)
• Management confirms to best of their knowledge

What is the timing of a representation letter?

• Dated the same date as the audit report
• Sent to client with the draft audit
• Board and management company review audited financials and footnotes
• Board and management sign the representation letter upon approval of the financials
• Send to CPA. Notification the final audit report can be prepared and released

Why do we request a signed representation letter?

• Lack of a signed representation letter is considered a scope limitation requiring a qualified audit report, disclaimer of opinion or withdrawal from the audit
• Assures the CPA that management and Board have provided all information requested for the audit

American Institute of Certified Public Accountants (AICPA) Conclusion

“…as management, you are asked to acknowledge that you – rather than the auditor – have primary responsibility for the financial statements and that to the best of your knowledge these statements are correct. The letter does not change or add to your fundamental responsibilities, nor does it relieve the auditor of any of his or her responsibilities. It simply clarifies the traditional roles that management and the auditor perform.”

• Required by auditing and accounting standards
• Clarifies to the best of management’s/board’s knowledge that the statements are correct
• Must be signed by those governing and managing an association
• Notifies the CPA the final audit can be issued

In More Detail

• Representation letters are provided in connection with an audit
• Limited to material matters
• An omission or misstatement of accounting information might cause judgement to be changed or influenced

Management confirmations about the financial statements and the information provided to the auditor

• Reference to the engagement letter which discusses the responsibilities of management and the auditor
• Management is responsible for the financial statements. They are the financial presentations of management
• No material misstatements due to fraud or error
• Management is responsible for sufficient internal controls to prevent and detect fraud
• Management believes any estimates are supported by reasonable assumptions (bad debt allowance)
• Any related party activities have been accounted for appropriately and disclosed (footnotes)
• Subsequent events have been disclosed (special assessment, result of litigation)
• Any uncorrected misstatements do not have a material affect on the financial statements
• Litigation is been disclosed (footnotes)
• Material concentrations have been disclosed (FDIC)
• Guarantees – obligations that the association should disclose in the financial statements (significant contracts – large project)
• Any interfund loans that will not be paid have been authorized to be treated as a transfer

Information Provided to the Auditor

• Access to all information
• Access to personnel
• All significant transactions have been recorded
• Management acknowledgement that it does not believe fraud has occurred
• No knowledge of allegations of suspicion of fraud
• Management has no know knowledge of legal non-compliance
• Information for any possible litigation has been shared with the auditor
• Any related party transaction information has been shared with the auditor
• All association assets are owned without liens
• Management acknowledges the requirement
• The information presented is accurate, appropriate and complete
• There have not been significant changes in measurements (component remaining life, estimated current replacement cost)
• Management is assessing members in order to fund reserves based on the latest reserve study
• Revenue Ruling 70-604 resolution approved by members (required for form 1120)
• Management request clarification of tax filing and return presentation as needed
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Understanding the Representation Letter

Written by David T. Schwindt, CPA

What is a Representation Letter? As a Board member or manager of a community management company, you may be asked to sign a representation letter at the conclusion of an audit or a reviewed financial statement engagement.  Although the letter is from the Association/management company to the CPA, the CPA will generally draft the letter on behalf of the Association.   The letter includes certain assertions about the Association during the period covered by the financial statements.  Those assertions include but are not limited to the following:

• The Association/management company has provided the CPA with all requested financial information.
• The Association/management company has disclosed all related party transactions.
• The Association/management company has disclosed all existing and potential litigation.
• The Association/management company has disclosed any knowledge of fraud or financial irregularities.
• The Association takes responsibility for the design and implementation of a system of internal controls.  These controls include but are not limited to safeguarding assets, approving transactions and minimizing the risk of someone perpetrating a theft of money or information and not being discovered in a reasonable amount of time. Although the Board is ultimately responsible for this activity, it is common that Boards rely upon the management company to assist in this responsibility.

In some instances, the management company may sign a different representation letter because the responsibilities are slightly different.

Why is the Representation Letter necessary? The American Institute of Certified Public Accounts has determined that those charged with governance (the board of directors and the community management company) should take responsibility for the assertions in the representation letter.  CPAs are mandated to obtain the signed representation letter before issuing the final financial statements.

Who should sign the representation letter? Most often, the Board Chair, Board Treasurer and community manager signs the letter.

When does the Representation Letter need to be signed? The letter needs to be signed at the end of the engagement generally after a draft of the financial statements are issued.  Schwindt & Co combines the representation letter with the management letter comments and proposed adjusting journal entries for ease of review.  When the signed document is received by our office, we are then able to issue the final financial statements.

Should a new Board member or community manager who was not involved with Association management or governance during the period under audit or review be hesitant about signing the representation letter? This is a common question and the answer is simple.  No!  The first paragraph of the representation states that whoever signs the letter does so based on the best knowledge and belief of the person signing.  This means that even though you may be new to the Board or management company, it is perfectly fine to sign the letter because you will only be asserting to issues that you have knowledge.  It is very common for Board members/managers to sign a representation letter even though they were not involved during the period being audited or reviewed.

• Representation letters are normal and required before the issuance of audited/reviewed financial statements.
• Board members are only asserting to issues that they are aware of and new board members and managers frequently are required to sign representation letters.
• The Board Chair, Board Treasurer and community manager are generally required to sign the representation letter.

Questions regarding this article may be directed to David T. Schwindt, CPA at Schwindt & Co. (503) 227-1165.

12300 SE Mallard Way, Suite 275 Milwaukie, OR 97222 (503) 227-1165

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Monday-Thursday, 9 am – 3 pm Friday, By Appointment Only

Copyright 2017-2024 Schwindt & Co. | All Rights Reserved

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Letters of representation

Helpsheets and support

Published: 01 Oct 2012 Updated: 24 Jan 2022 Update History

Introduction

Requirement, audit engagements, non-audit engagements, example letter of representation, if in doubt seek advice, appendix 1: example letter of representation.

Technical helpsheet to help ICAEW members to understand the need for letters of representation in the context of auditing and to consider other situations where a letter of representation may be useful. To assist members in the preparation of letters of representation, this helpsheet also includes an example letter.

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to understand the need for letters of representation in the context of auditing and to consider other situations where a letter of representation may be useful. To assist members in the preparation of letters of representation, this helpsheet also includes an example letter.

Members may also wish to refer to the following related guidance:

• TECH 04/02 AAF Management representation letters: Explanatory note
• International Standards on Auditing (UK)

A word version of the sample letter of representation wording  is available to download and complete.

Written confirmation(s) of representations from management is a requirement of the International Standards on Auditing (UK) (ISAs (UK)) and is therefore required for each and every audit. They are also useful to confirm, in writing with clients, information, assumptions and accounting treatments in non-audit engagements.

A number of ISAs (UK) require written representations to be obtained from management. These must be obtained as near as practicable to, but not after, the date of the auditor’s report (ISA (UK) 580 paragraph 14) in the form of a letter addressed to the auditor (paragraph 15).

Representations are requested from management with appropriate responsibilities for the financial statements and knowledge of the matters concerned. In the UK, those charged with governance are responsible for the preparation of the financial statements.

Letters of representation can be, and often are, signed by more than one member of the audited entity’s staff – the auditor needs to make an assessment as to who is in the best position to provide the representations required. ISA (UK) 580 requires written representations from management that:

• It has fulfilled its responsibility for the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation, as set out in the terms of the audit engagement (paragraph 10);
• It has provided the auditor with all relevant information and access as agreed in the terms of the audit engagement (paragraph 11(a)); and
• All transactions have been recorded and are reflected in the financial statements (paragraph 11(b)).

As well as the written representations required in ISA (UK) 580, the following ISAs (UK) require subject-matter specific written representations – reference should be made to the particular ISA (UK) for the full text of the requirements:

• ISA (UK) 240 (Revised May 2021) The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements (paragraph 39);
• ISA (UK) 250 (Revised November 2019) Section A – Consideration of Laws and Regulations in an Audit of Financial Statements (paragraph 17);
• ISA (UK) 450 (Revised June 2016) Evaluation of Misstatements Identified during the Audit (paragraph 14);
• ISA (UK) 501 Audit Evidence – Specific Considerations for Selected Items (paragraph 12);
• ISA (UK) 540 (Revised December 2018) Auditing Accounting Estimates and Related Disclosures (paragraph 37);
• ISA (UK) 550 Related Parties (paragraph 26);
• ISA (UK) 560 Subsequent Events (paragraph 9);
• ISA (UK) 570 (Revised September 2019) Going Concern (paragraph 12-2(f));
• ISA (UK) 710 Comparative Information – Corresponding Figures and Comparative Financial Statements (paragraph 9); and
• ISA (UK) 720 (Revised November 2019) The Auditor’s Responsibilities Relating to Other Information (paragraph 13(c)).

In addition, paragraph A25 of ISA (UK) 500 Audit Evidence highlights that the auditor may consider it necessary to obtain written representations from management and, where appropriate, those charged with governance to confirm responses to oral enquiries.

Auditors should be reminded that written representations cannot be used as sole audit evidence in relation to any specific area of the financial statements. Written representations should be used as corroborative evidence in order to support existing audit evidence, rather than as a substitute for the auditor performing specific audit procedures to obtain sufficient appropriate audit evidence.

Accounts production

Members preparing accounts, without carrying out an audit, may also find it useful to obtain written representations from their clients. Obtaining such representations is useful to emphasise the importance placed on information provided by management in order for the member to undertake the work. In particular, where the work involves the preparation of statutory accounts and there are disclosure requirements that rely on information received from management (for example, post-balance sheet events or related party transactions), this would be appropriate.

Where a firm has prepared the accounts for a client and based those accounts on assumptions and decisions made by management then the firm may wish to confirm the treatment of particular transactions or balances in writing in a letter of representation. For example, movements in a directors’ loan account.

Tax compliance

Obtaining written representations could also be appropriate in other circumstances, for example when undertaking tax computations, where information supplied is crucial to the computation and has not been independently corroborated.

The goodwill or value of a block of clients is often based on the fees or profits they can generate. Bases usually start from the fees or profits that can be generated from the current services supplied to the clients and then apply a multiple to them to obtain the value.

Basis of the calculation

The following, non-exhaustive list, may be used as a starting point of the calculation:

• Gross recurring fees
• Future fee income
• Profitability

If multiples are used within the calculation, they will depend on a wide range of factors – there is no one ‘correct’ multiple to be used, it will be for the buyer and seller to determine. Additional considerations may however include:

• Work in progress

Due diligence

For a deal to be successful the 'fit' of the fees with the buyer will need to be established. At the outset of negotiations often all that is available is a total fee figure and details of numbers of clients in certain fee brackets with an indication of the services provided and the location of the clients. Far more detail needs to be obtained during the negotiation phase. How this information is obtained varies but at some stage the buyer would expect to see client files, accounts, fee notes etc. and where staff are involved, meet with and talk to them.

The seller will need to ensure that the fundamental principle of confidentiality as discussed in section 114 of the ICAEW Code of Ethics  is adhered to and the authority of the client would usually be required prior to disclosing client confidential information. It is normal before detailed information is disclosed that a confidentiality and non-poaching agreement is formally documented between buyer and seller. Such an agreement should also include a 'hold-harmless' clause whereby the buyer agrees not to use any information obtained against the interests of the seller.

The following are some of the matters to be considered when undertaking due diligence information gathering:

• Confirmation of information and detail
• Fee levels and charging structure
• Quality of work and files
• Profitability and overheads

A period of working together, alongside each other or in cooperation or collaboration could be agreed. The arrangements can vary considerably and will be particular to each individual’s circumstances. The arrangements should be able to be terminated without either party suffering substantial loss.

The example in Appendix 1 to this helpsheet deals specifically with those matters that are required to be confirmed by the ISAs (UK), together with other common representations obtained. It is based on the example in Appendix 2 of ISA (UK) 580.

In addition, the letter of representation should include confirmations from management on matters material to the financial statements in order to support other audit evidence obtained. In particular, where amounts are included in the accounts based on management estimates or valuations (such as property or stock values), it would be appropriate to include written confirmations.

It is not current best practice to include a long list of representations about assets and liabilities included in the accounts. Such paragraphs can detract from the impact of the more important matters, and in the case of an audit should be confirmed by adequate audit evidence.

Within the specimen letter of representation, guidance and instruction are shown in italics . None of this italicised text is for inclusion in the letter of representation. Members need to ensure it has been sufficiently tailored and all italicised text has been removed, before it is sent to client’s management for them to print on their own letterhead and sign as appropriate and then return to the firm. In some paragraphs, optional or alternative wording has been provided, shown in [square brackets] and each suggestion requires individual consideration and possible amendment.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access  can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat .

• Download the sample letter of representation wording

© ICAEW 2024  All rights reserved.

ICAEW cannot accept responsibility for any person acting or refraining to act as a result of any material contained in this helpsheet. This helpsheet is designed to alert members to an important issue of general application. It is not intended to be a definitive statement covering all aspects but is a brief comment on a specific point.

ICAEW members have permission to use and reproduce this helpsheet on the following conditions:

• This permission is strictly limited to ICAEW members only who are using the helpsheet for guidance only.
• The helpsheet is to be reproduced for personal, non-commercial use only and is not for re-distribution.

For further details members are invited to telephone the Technical Advisory Service T +44 (0)1908 248250. The Technical Advisory Service comprises the technical enquiries, ethics advice, anti-money laundering and fraud helplines. For further details visit icaew.com/tas .

• Update History 01 Oct 2012 (12: 00 AM BST) First published 08 Jan 2021 (10: 40 AM GMT) Updated to reflect requirements of the revised ISAs. 05 Jan 2021 (12: 00 AM GMT) Minor edits relating to Brexit / updated regulations. Links updated. 24 Jan 2022 (01: 55 PM GMT) Changed date of latest version of ISA (May 2021). Date of specimen letter updated to match helpsheet

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