a management representation letter is quizlet

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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Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer? “Sufficient audit evidence has been made available to the auditor to permit the issuance of an unmodified opinion.” “There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed.” “We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.” “No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements.”

“Sufficient audit evidence has been made available to the auditor to permit the issuance of an unmodified opinion.”

This answer is correct, that is, not included, because while the chief executive officer and the chief financial officers must make information available to the auditor, they do not make a judgment on whether evidence is sufficient.

Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor should obtain written management representations acknowledging that management has Implemented internal control policies and procedures designed to detect all illegal acts. Documented the procedures performed to evaluate the governmental unit’s compliance with laws and regulations. Identified and disclosed all laws and regulations that have a direct and material effect on its financial statements. Reported all known illegal acts and material weaknesses in internal control structure to the funding agency or regulatory body.

Identified and disclosed all laws and regulations that have a direct and material effect on its financial statements.

This answer is correct because the professional standards state that the auditor should consider obtaining representations from management that it has identified and disclosed to the auditor all laws and regulations that have a direct and material effect on the determination of financial statement amounts. The section also suggests obtaining a representation that management is responsible for the entity’s compliance with laws and regulations applicable to it.

Which of the following statements ordinarily is included among the written client representations obtained by the auditor? Management acknowledges that there are no material weaknesses in the internal control. Sufficient audit evidence has been made available to permit the issuance of an unmodified (unqualified) opinion. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed. Management acknowledges responsibility for illegal actions committed by employees.

Compensating balances and other arrangements involving restrictions on cash balances have been disclosed.

The date of the management representation letter should coincide with the date of the

Balance sheet. Latest interim financial information. Auditor’s report. Latest related-party transaction.

Auditor’s report.

The requirement is to determine the proper date for a client’s representation letter. AU-C 580 states that the representation letter should be dated as of the date of the auditor’s report.

A purpose of a management representation letter is to reduce Audit risk to an aggregate level of misstatement that could be considered material. An auditor’s responsibility to detect material misstatements only to the extent that the letter is relied on. The possibility of a misunderstanding concerning management’s responsibility for the financial statements. The scope of an auditor’s procedures concerning related-party transactions and subsequent events.

The possibility of a misunderstanding concerning management’s responsibility for the financial statements.

The requirement is to identify a purpose of a management representation letter. Answer (c) is correct because a management representation letter is meant to reduce the possibility of a misunderstanding concerning management’s responsibility for the financial statements. Answer (a) is incorrect because reducing audit risk to an aggregate level of misstatement that could be considered material is not a logically sound statement. Answer (b) is incorrect because the management representation letter does not modify an auditor’s responsibility to detect material misstatements. Answer (d) is incorrect because management representation letters are not a substitute for other procedures.

For which of the following matters should an auditor obtain written management representations? Management’s cost-benefit justifications for not correcting internal control weaknesses. Management’s knowledge of future plans that may affect the price of the entity’s stock. Management’s compliance with contractual agreements that may affect the financial statements. Management’s acknowledgment of its responsibility for employees’ violations of laws.

Management’s compliance with contractual agreements that may affect the financial statements.

The requirement is to identify the matter on which an auditor should obtain written management representations. Answer (c) is correct because written representations are ordinarily obtained on noncompliance with aspects of contractual agreements that may affect the financial statements. Answer (a) is incorrect because auditors do not ordinarily obtain a cost-benefit justification from management related to internal control weaknesses. Answer (b) is incorrect because written representations are not ordinarily obtained on such future plans. Answer (d) is incorrect because management may or may not be responsible for employee violations of laws, and because such a representation is not ordinarily obtained. See AU-C 580 for information on client representations.

Of which of the following matters is a management representation letter required to contain specific representations? Length of a material contract with a new customer. Information concerning fraud by the CFO. Reason for a significant increase in revenue over the prior year. The competency and objectivity of the internal audit department.

Information concerning fraud by the CFO.

This is correct because auditors must obtain a representation that those signing the letter have no knowledge of fraud or suspected fraud committed by (1) management, (2) employees who have significant roles in internal control, or (3) others where the fraud could have a material effect on the financial statements.

Management representation letter.

This answer is correct because the professional standards require that the auditor obtain such a statement in the management representation letter.

Which of the following statements ordinarily is included among the written client representations obtained by the auditor? Compensating balances and other arrangements involving restrictions on cash balances have been disclosed. Management acknowledges responsibility for illegal actions committed by employees. Sufficient audit evidence has been made available to permit the issuance of an unqualified opinion. Management acknowledges that there are no material weaknesses in the internal control.

The requirement is to identify the information ordinarily included among the written client representations obtained by the auditor. Answer (a) is correct because AU-C 580 includes information on compensating balances in the list of representations normally obtained. Answer (b) is incorrect because management need not acknowledge a responsibility for employee illegal actions. Answer (c) is incorrect because the auditor, not the client, determines whether sufficient audit evidence has been made available. Answer (d) is incorrect because, for purposes of a financial statement audit, management need not attempt to determine whether material weaknesses in internal control exist.

Which of the following auditing procedures is ordinarily performed last? Reading of the minutes of the directors’ meetings. Confirming accounts payable. Obtaining a management representation letter. Testing of the purchasing function.

Obtaining a management representation letter.

This answer is correct because a management representation letter should be received and dated as of the last day of fieldwork (the date of the auditor’s report).

March 24, year 2.

March 24, year 2. This answer is correct because the management representation letter should be dated no earlier than the date of the auditor’s report and is normally the same date as the auditor’s report. The auditor’s report is dated when sufficient appropriate audit evidence has been obtained, March 24, year 2, in this case.

An auditor should obtain written representations from management concerning litigation claims and assessments. These representations may be limited to matters that are considered either individually or collectively material, provided an understanding on the limits of materiality for this purpose has been reached by The auditor and the client’s lawyer. Management and the auditor. Management, the client’s lawyer, and the auditor. The auditor independently of management.

Management and the auditor.

This answer is correct because materiality must be determined by management and the auditor. The client’s lawyer only becomes involved when an inquiry has been directed to him/her.

Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor should obtain written management representations acknowledging that management has Identified and disclosed all laws and regulations that have a direct and material effect on its financial statements. Implemented internal control policies and procedures designed to detect all illegal acts. Expressed both positive and negative assurance to the auditor that the entity complied with all laws and regulations. Employed internal auditors who can report their findings, opinions, and conclusions objectively without fear of political repercussion.

This answer is correct because, in addition to normal representations, auditors should consider obtaining additional representations from management acknowledging that (1) management is responsible for the entity’s compliance with laws and regulations and (2) management has identified and disclosed to the auditor all laws and regulations that have a direct and material effect on the financial statements.

Which of the following matters would an auditor most likely include in a management representation letter? Communications with the audit committee concerning weaknesses in internal control. The completeness and availability of minutes of stockholders’ and directors’ meetings. Plans to acquire or merge with other entities in the subsequent year. Management’s acknowledgment of its responsibility for the detection of employee fraud.

The completeness and availability of minutes of stockholders’ and directors’ meetings.

The requirement is to identify the matter that an auditor most likely would include in a management representa-tion letter. Auditors will generally request assurance as to the completeness and availability of minutes of stockholders’ and directors’ meetings. See AU-C 580 for written representations ordinarily obtained by the auditor.

Which of the following management roles would typically be acknowledged in a management representation letter? Management has the responsibility for the design of controls to detect fraud. Management communicates its views on ethical behavior to its employees. Management’s knowledge of fraud is communicated to the audit committee. Management’s compensation is contingent upon operating results.

Management has the responsibility for the design of controls to detect fraud.

This answer is correct because the professional standards indicate that auditors should obtain representations on management’s acknowledgement of its responsibility for the design and implementation of programs and controls to prevent and detect fraud.

If management refuses to furnish certain written representations that the auditor believes are essential, which of the following is appropriate? The auditor can rely on oral evidence relating to the matter as a basis for an unmodified (unqualified) opinion. The client’s refusal does not constitute a scope limitation that may lead to a modification of the opinion. This may have an effect on the auditor’s ability to rely on other representations of management. The auditor should issue an adverse opinion because of management’s refusal.

This may have an effect on the auditor’s ability to rely on other representations of management.

This answer is correct because management’s refusal to furnish such written representations constitutes a scope limitation which is sufficient to preclude an unmodified opinion. In addition, the auditor should consider whether s/he can rely on other representations of management.

The date of the management representation letter should coincide with the Date of the auditor’s report. Balance sheet date. Date of the latest subsequent event referred to in the notes to the financial statements. Date of the engagement agreement.

Date of the auditor’s report.

This answer is correct because the representation letter should be dated as of the date of the auditor’s report.

In obtaining written representations from management, materiality limits ordinarily would apply to representations related to Amounts concerning related-party transactions. Irregularities involving members of management. The availability of financial records. The completeness of minutes of directors’ meetings.

Amounts concerning related-party transactions.

This answer is correct because related-party transactions are so limited by the professional standards. That standard’s approach is that, unless stated otherwise, representations may be limited to those that are considered material to the financial statements.

Which of the following expressions most likely would be included in a management representation letter? No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements. There are no significant deficiencies identified during the prior year’s audit of which the audit committee of the board of directors is unaware. We do not intend to provide any information that may be construed to constitute a waiver of the attorney-client privilege. Certain computer files and other required audit evidence may exist only for a short period of time and only in computer-readable form.

No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.

This answer is correct because the auditors obtain management’s assurance in the representation letter that no significant events occurred subsequent to the balance sheet date that would require adjustment and/or disclosure.

Which of the following matters most likely would be included in a management representation letter? An assessment of the risk factors concerning the misappropriation of assets. An evaluation of the litigation that has been filed against the entity. A confirmation that the entity has complied with contractual agreements. A statement that all material internal control weaknesses have been corrected.

A confirmation that the entity has complied with contractual agreements.

This answer is correct because management representation letters ordinarily include confirmation that the entity has complied with contractual agreements.

A written representation from a client’s management which, among other matters, acknowledges responsibility for the fair presentation of financial statements, should normally be signed by the Chief executive officer and the chief financial officer. Chief financial officer and the chairman of the board of directors. Chairman of the audit committee of the board of directors. Chief executive officer, the chairman of the board of directors, and the client’s lawyer.

Chief executive officer and the chief financial officer.

This answer is correct because ordinarily the chief executive officer and the chief financial officers should sign the letter of representations. These are the individuals who the auditor believes are responsible for and knowledgeable about the matters covered by the representations.

To which of the following matters would an auditor not apply materiality limits when obtaining specific written client representations? Disclosure of compensating balance arrangements involving restrictions on cash balances. Information concerning related-party transactions and related amounts receivable or payable. The absence of errors and unrecorded transactions in the financial statements. Fraud involving employees with significant roles related to internal control.

Fraud involving employees with significant roles related to internal control.

This answer is correct because the professional standards require that a materiality limit not apply to fraud involving management or employees who have significant roles in internal control.

An auditor is reporting on comparative financial statements for three years. Which of the following statements is correct regarding written representations from management? The representation letter needs to address the prior-year’s financial statements not covered in the report. The representation letter needs to address only the most current year covered in the report. The representation letter needs to address only the two most recent years covered in the report. The representation letter needs to address all of the years being covered in the report.

The representation letter needs to address all of the years being covered in the report.

Correct! As stated in AICPA Professional Standards (AU-C 580.20) “The written representations should be for all financial statements and period(s) referred to in the auditor’s report.

Which of the following statements would an auditor most likely require management to indicate in a written representation letter obtained for an audit? Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud. Management plans to expand into international operations during the next few years. Management believes the financial statements are accurately stated in accordance with generally accepted auditing standards (GAAS). Management believes the company is the premier company in its industry regarding service to customers.

Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud.

Correct! A management representation letter routinely requires management to take responsibility for the design, implementation, and maintenance of programs and controls to detect fraud.

Management’s responses to inquiries can be corroborated by each of the following, except Visits to the entity’s premises and plant facilities. Inspection of documents and internal control manuals. Preparation of the summary of unadjusted differences. Observation of entity activities and operations.

Preparation of the summary of unadjusted differences.

Correct! The purpose of the “summary of unadjusted differences” is to determine whether identified differences between the accounting records and the audit evidence that are not individually material might be material in the aggregate. These items represent differences already identified and are not applicable to supporting management’s responses to the auditor’s inquiries.

This is a required item in the management representation letter. Management must acknowledge its responsibility for the design and implementation of programs and controls to prevent and detect fraud.

A management representation letter routinely includes a statement pointing out that senior management has no knowledge of any fraud or suspected fraud involving management, which includes the CFO.

To which of the following matters would an auditor not apply materiality limits when obtaining specific written representations from management? Disclosure of compensating balance arrangements involving restrictions on cash balances. Information concerning related party transactions and related amounts receivable or payable. The absence of errors and unrecorded transactions in the financial statements. Fraud involving employees with significant roles in the internal control structure.

Fraud involving employees with significant roles in the internal control structure.

Because of the possible effects of fraud on other areas of the audit, materiality limits would not apply to the reporting of fraud involving employees with significant roles in internal control in the written management representations.

One purpose of a management representation letter is to reduce Audit risk to an aggregate level of misstatement that could be considered material. An auditor’s responsibility to detect material misstatements only to the extent that the letter is relied upon. The possibility of a misunderstanding concerning management’s responsibility for the financial statements. The scope of an auditor’s procedures concerning related party transactions and subsequent events.

A management representation letter is obtained by the auditor to reduce the possibility of a misunderstanding concerning management’s responsibility for the financial statements and to document the representations made by management during the course of the audit.

Which of the following statements would most likely be included among the written client representations obtained by the auditor? Compensating balances and other arrangements involving restrictions on cash balances have been disclosed. Management acknowledges responsibility for illegal actions committed by employees. Sufficient evidential matter has been made available to permit the issuance of an unqualified opinion. Management acknowledges that there are no material weaknesses in the internal control.

The management representations letter would appropriately include statements about the disclosure of compensating balances and other arrangements involving restrictions on cash balances.

We have disclosed to you all known instances of noncompliance or suspected noncompliance with laws and regulations whose effects should be considered when preparing financial statements.” The foregoing passage most likely is from a(n) Client engagement letter. Report on compliance with laws and regulations. Management representations letter. Attestation report on an internal control structure.

Management representations letter.

The management representation letter commonly includes a statement as to violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency.

The auditor is concerned with events occurring through the date of the report that might impact the financial statements. Therefore, the management representation letter should be dated with the date of the auditor’s report.

Which of the following matters would an auditor most likely include in a management representations letter? Communications with the audit committee concerning weaknesses in internal control structure. The completeness and availability of minutes of stockholders’ and directors’ meetings. Plans to acquire or merge with other entities in the subsequent year. Management’s acknowledgment of its responsibility for the detection of all employee fraud.

The management representations letter typically includes a comment along the following lines: “We have provided you with access to all information, of which we are aware that is relevant to the preparation and fair presentation of the financial statements such as records, documentation and other matters, and additional information that you have requested from us for the purpose of the audit.” The foregoing passage encompasses the completeness and availability of all minutes of any meetings of stockholders and the board of directors.

Key Co. plans to present comparative financial statements for the years ended December 31, 2005, and 2006, respectively. Smith, CPA, audited Key’s financial statements for both years and plans to report on the comparative financial statements on May 1, 2007. Key’s current management team was not present until January 1, 2006. What period of time should be covered by Key’s management representation letter? January l, 2005, through December 31, 2006. January 1, 2005, through May 1, 2007. January 1, 2006, through December 31, 2006. January 1, 2006, through May 1, 2007.

January 1, 2005, through May 1, 2007.

The management representation letter should address all periods covered by the auditor’s report. Key’s management representation letter, therefore, should cover the two periods being audited up through the date of the report, i.e., from January 1, 2005, through May 1, 2007. This requirement exists even if management was not present during all periods covered by the auditor’s report.

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Management Representation Letter: Format, Content, Signature

Home » Bookkeeping » Management Representation Letter: Format, Content, Signature

As of 2019, the FASB requires publicly traded companies to prepare financial statements following the Generally Accepted Accounting Principles (GAAP). Auditors are required by professional standards to report, in writing, internal control matters that they believe should be brought to the attention of those charged with governance (the board). Generally, if your auditor is going to put an internal control matter in a letter, they have assessed that the matter was the result of a deficiency in internal controls. This is an important part of that audit that the profession does not take lightly.

One common example of a deficiency in internal control that’s severe enough to be considered a material weakness or significant deficiency is when an organization lacks the knowledge and training to prepare its own financial statements, including footnote disclosures. The “SAS 115” letter is usually issued when any significant deficiencies or material weaknesses would have been discussed with management during the audit, but are not required to be communicated in written form. In performing an audit of your Plan’s internal controls and plan financials, your auditors are required to obtain an understanding of the Plan’s operations and internal controls.

A management representation letter is a form letter written by a company’s external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis. The CEO and the most senior accounting person (such as the CFO) are usually required to sign the letter. The letter is signed following the completion of audit fieldwork, and before the financial statements are issued along with the auditor’s opinion. External auditors follow a set of standards different from that of the company or organization hiring them to do the work.

In doing so, they may become aware of matters related to your Plan’s internal control that may be considered deficiencies, significant deficiencies, or material weaknesses. Audits performed by outside parties can be extremely helpful in removing any bias in reviewing the state of a company’s financials. Financial audits seek to identify if there are any material misstatements in the financial statements. An unqualified, or clean, auditor’s opinion provides financial statement users with confidence that the financials are both accurate and complete. External audits, therefore, allow stakeholders to make better, more informed decisions related to the company being audited.

The representation should reaffirm your client’s understanding of all significant terms in the engagement letter. A relevant assertion is a financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated.

The purpose of an internal audit is to ensure compliance with laws and regulations and to help maintain accurate and timely financial reporting and data collection. It also provides a benefit to management by identifying flaws in internal control or financial reporting prior to its review by external auditors.

Depending on materiality and other qualitative factors, the auditors will consider the deficiency to be an “other” matter, significant deficiency, or material weakness. The auditor has discretion on which category the deficiency falls into, but are otherwise required to use the standard wording and definitions in the letter.

It serves to document management’s representations during the audit, reducing misunderstandings of management’s responsibilities for the financial statements. The definition of good internal controls is that they allow errors and other misstatements to be prevented or detected and corrected by (the nonprofit’s) employees in the normal course of performing their duties.

Material weaknesses or significant deficiencies may exist that were not identified during the audit, and auditors are required to disclose this in their written communication. The auditor’s report contains the auditor’s opinion on whether a company’s financial statements comply with accounting standards. The results of the internal audit are used to make managerial changes and improvements to internal controls.

What is a management representation letter?

A management representation letter is a form letter written by a company’s external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis.

A control objective provides a specific target against which to evaluate the effectiveness of controls. Management representation is a letter issued by a client to the auditor in writing as part of audit evidences. The representations letter must cover all periods encompassed by the audit report, and must be dated the same date of audit work completion.

These types of auditors are used when an organization doesn’t have the in-house resources to audit certain parts of their own operations. The assertion of completeness is an assertion that the financial statements are thorough and include every item that should be included in the statement for a given accounting period. The assertion of completeness also states that a company’s entire inventory, even inventory that may be temporarily in the possession of a third party, is included in the total inventory figure appearing on a financial statement. The compilation standards do not require practitioners to obtain a management representation letter, but this does not mean that it’s not a prudent thing to do. Obtaining a representation letter helps to ensure your client understands the services that you have provided, the limitations on the work you have completed, and that they are ultimately responsible for their financial statements.

The biggest difference between an internal and external audit is the concept of independence of the external auditor. When audits are performed by third parties, the resulting auditor’s opinion expressed on items being audited (a company’s financials, internal controls, or a system) can be candid and honest without it affecting daily work relationships within the company. Auditors evaluate each internal control deficiency noted during the audit to determine whether the deficiency, or a combination of deficiencies, is severe enough to be considered a material weakness or significant deficiency. In assessing the deficiency, auditors consider the magnitude of potential misstatements of your financial statements as well as the likelihood that internal controls would not prevent or detect and correct the misstatements.

Representation to Management

• In an audit of financial statements, professional standards require that auditors obtain an understanding of internal controls to the extent necessary to plan the audit.
• written confirmation from management to the auditor about the fairness of various financial statement elements.
• Auditors use this understanding of internal controls to assess the risk of material misstatement of the financial statements and to design appropriate audit procedures to minimize that risk.

The idea behind a management representation letter is to take away some of the legal burdens of delivering wrong financial statements from the auditor to the company. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. Internal auditors are employed by the company or organization for whom they are performing an audit, and the resulting audit report is given directly to management and the board of directors. Consultant auditors, while not employed internally, use the standards of the company they are auditing as opposed to a separate set of standards.

If the auditors detect an unexpected material misstatement during your audit, it could indicate that your internal controls are not functioning properly. Conversely, lack of an actual misstatement doesn’t necessarily mean that your internal controls are working.

The determination of whether an assertion is a relevant assertion is based on inherent risk, without regard to the effect of controls. Financial statements and related disclosures refers to a company’s financial statements and notes to the financial statements as presented in accordance with generally accepted accounting principles (“GAAP”). References to financial statements and related disclosures do not extend to the preparation of management’s discussion and analysis or other similar financial information presented outside a company’s GAAP-basis financial statements and notes.

External audits can include a review of both financial statements and a company’s internal controls. When a company’s financial statements are audited, the principal element an auditor reviews is the reliability of the financial statement assertions. In the United States, the Financial Accounting Standards Board (FASB) establishes the accounting standards that companies must follow when preparing their financial statements.

In an audit of financial statements, professional standards require that auditors obtain an understanding of internal controls to the extent necessary to plan the audit. Auditors use this understanding of internal controls to assess the risk of material misstatement of the financial statements and to design appropriate audit procedures to minimize that risk. written confirmation from management to the auditor about the fairness of various financial statement elements. The purpose of the letter is to emphasize that the financial statements are management’s representations, and thus management has the primary responsibility for their accuracy.

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This letter is useful for setting the expectations of both parties to the arrangement. Almost all companies receive a yearly audit of their financial statements, such as the income statement, balance sheet, and cash flow statement. Lenders often require the results of an external audit annually as part of their debt covenants. For some companies, audits are a legal requirement due to the compelling incentives to intentionally misstate financial information in an attempt to commit fraud.

Management representation letter

As long as there’s a reasonable possibility for material misstatement of account balances or financial statement disclosures, your internal controls are considered to be deficient. An auditor typically will not issue an opinion on a company’s financial statements without first receiving a signed management representation letter. An audit engagement is an arrangement that an auditor has with a client to perform an audit of the client’s accounting records and financial statements. The term usually applies to the contractual arrangement between the two parties, rather than the full set of auditing tasks that the auditor will perform. To create an engagement, the two parties meet to discuss the services needed by the client.

As a result of the Sarbanes-Oxley Act (SOX) of 2002, publicly traded companies must also receive an evaluation of the effectiveness of their internal controls. As noted above, an internal control letter is usually the result of a deficiency in internal controls discovered during the audit, most commonly from a material audit adjustment. The letter includes required language regarding the severity of the deficiency.

Real Business Owners,

The parties then agree on the services to be provided, along with a price and the period during which the audit will be conducted. This information is stated in an engagement letter, which is prepared by the auditor and sent to the client. If the client agrees with the terms of the letter, a person authorized to do so signs the letter and returns a copy to the auditor. By doing so, the parties indicate that an audit engagement has been initiated.

Also, the letter provides supplementary audit evidence of an internal nature by giving formal management replies to auditor questions regarding matters that did not come to the auditor’s attention in performing audit procedures. Some auditors request written representations of all financial statement items. All auditors require representations regarding receivables, inventories, plant and equipment, liabilities, and subsequent events. The letter is required at the completion of the audit fieldwork and prior to issuance of the financial statements with the auditor’s opinion.

Auditors spend a lot of time assessing how material audit adjustments and immaterial adjustments that have the potential to be material will be communicated in the internal control letter. The Representation Letter is issued with the draft audit and is required by auditing standards to finalize the audit. The Representation Letter is a letter from the Association to our firm confirming responsibilities of the board and management for the financial statements, as well as confirming information provided to us during the audit. The President or Treasurer and Management need to sign the Representation Letter and return it back to our office within 60 days from the date the draft audit was issued. Representation Letters received after the 60-day mark may result in additional auditing procedures in order to finalize the audit and comply with auditing standards at an additional expense to the Association.

What is a Management Representation Letter?

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Management representation letter.

A Management Representation Letter is a document written by the management of a company and provided to its auditors. This letter is part of the audit process and it’s typically required at the end of an audit engagement.

The purpose of a Management Representation Letter is to confirm the accuracy and completeness of the information that management has provided to the auditors. It’s a formal acknowledgement that the financial statements and other related information are true, complete, and correctly presented to the best of the management’s knowledge.

The letter covers various items including:

• Assertions : Management confirms that all financial records , data, and other relevant information have been made available to the auditor and are complete and accurate.
• Fraud and Irregularities : Management confirms that they have disclosed any known frauds or suspected frauds affecting the company, as well as any allegations of fraud or suspected fraud.
• Laws and Regulations : Management asserts that the company has complied with all laws and regulations that could have a significant effect on the financial statements .
• Subsequent Events : Management provides information on any events after the balance sheet date that may need to be disclosed in the financial statements or notes.
• Unrecorded Liabilities : Management asserts that there are no material liabilities, contingent or otherwise, that are not disclosed in the financial statements .

The Management Representation Letter helps the auditor obtain written confirmation of representations from management, which can be crucial when forming an audit opinion . It’s worth noting that while this letter is important, it does not relieve the auditor of the responsibility to gather sufficient appropriate audit evidence to form an audit opinion.

Example of a Management Representation Letter

Here is an illustrative example of what a Management Representation Letter might look like. Please note that actual letters would be more detailed and would vary depending on the specifics of the company and the audit.

[Company Letterhead]

[Auditor’s Name and Address]

Dear [Auditor’s Name],

In connection with your audit of the financial statements of [Company’s Name] as of [Financial Year End Date], and for the year then ended, we confirm, to the best of our knowledge and belief, the following representations:

• We have made available to you all financial records and related data, as well as all minutes of meetings of shareholders and the board of directors and its committees.
• We believe that the effects of uncorrected financial statement misstatements aggregated by you during the audit are immaterial, both individually and in the aggregate, to the financial statements as a whole.
• There have been no irregularities involving management or employees who have significant roles in internal control or that could have a material effect on the financial statements .
• We have complied with all aspects of contractual agreements that could have a material effect on the financial statements in the event of noncompliance.
• There have been no events subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements .

We acknowledge our responsibility to design, implement, and maintain internal control to prevent and detect fraud .

Yours sincerely,

[Chief Executive Officer]

[Chief Financial Officer]

Again, this is just a basic example. A real Management Representation Letter would be tailored to the specific situation and would cover all areas that are relevant to the audit.

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Management Representation Letter (MRL)

The Management Representation Letter is a letter addressed to a federal entity's external auditor, signed by senior management. The letter attests to the accuracy of the financial information that the federal entity has submitted to the auditors for their analysis.

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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.

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