Annual Audit Manual
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9052 Management representations as audit evidence
Oct-2012
In This Section
Overview
This topic explains:
- Management representations as audit evidence.
CAS Guidance
Audit evidence is the information used by the auditor in arriving at the conclusions on which the auditor's opinion is based. Written representations are necessary information that the auditor requires in connection with the audit of the entity's financial statements. Accordingly, similar to responses to inquiries, written representations are audit evidence (CAS 580.3).
Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. Furthermore, the fact that management has provided reliable written representations does not affect the nature or extent of other audit evidence that the auditor obtains about the fulfillment of management's responsibilities, or about specific assertions (CAS 580.4).
Written representations are an important source of audit evidence. If management modifies or does not provide the requested written representations, it may alert the auditor to the possibility that one or more significant issues may exist. Further, a request for written, rather than oral, representations in many cases may prompt management to consider such matters more rigorously, thereby enhancing the quality of the representations (CAS 580.A1).
OAG Guidance
During the course of the audit, management makes many oral representations to the engagement team, either unsolicited or in response to specific inquiries. In most cases, oral representations can be corroborated by checking with sources independent of the entity or by checking with other evidence we obtain, and therefore do not need to be confirmed in writing.
We will need to decide whether in the circumstances written representations, together with such other audit evidence as we have obtained, are sufficient to enable us to form an unqualified opinion on the financial statements. If representations by management are contradicted by other evidence, investigate the circumstances and, when necessary, reconsider the reliability of other representations made by management.
As a minimum, obtain representations from management for areas where such representations are the sole source of audit evidence which can reasonably be expected to be available. Management representations may be evidenced in writing or through summary of oral discussions with management. A written representation is better audit evidence than an oral representation. Written representations may take the form of:
- Separate written letter from management;
- Documentation in the audit file outlining representations acknowledged by management;
- Relevant minutes of meetings of management or the board of directors;
- Signed copy of the financial statements containing the relevant representation.
Where obtained, a management representation letter serves as a written confirmation by management of significant representations made by senior personnel and other employees during the audit. A formal management representation letter helps to:
- Ensure that there is no misunderstanding of the information or opinions given to us;
- Focus management attention on specific declarations;
- Remind those persons signing the letter to consider whether all important and relevant information has been brought to our attention.
When management representations relate to matters that are material to the financial statements, we need to:
- Seek corroborative audit evidence from sources inside and outside the entity;
- Evaluate whether the representations made by management appear reasonable and consistent with other audit evidence obtained, including other representations;
- Consider appropriate documentation of the representations.
Seek Corroborative Audit Evidence
Management representations are to be corroborated through application of auditing procedures, except in those circumstances where it may be impracticable to apply other auditing procedures. Do not view obtaining management representations as routine in nature, even when other corroborating procedures have been performed.
In most cases, verbal representations can be corroborated by checking with sources independent of the entity or by checking with other internal sources and other evidence that we obtain. In certain cases, such as where knowledge is confined to management or where the matter is principally one of judgment and opinion, we may not be able to obtain independent corroborative evidence and could not reasonably expect it to be available. Such cases will be limited in number; normally we would be able to corroborate management's representations. Consider, however, whether any significant evidence exists which may conflict with the representations made by management.
Evaluate Reasonableness of Representations
Based on the corroborative evidence we have obtained, evaluate whether the representations appear reasonable and are consistent with other audit evidence obtained, including other representations. Perform additional procedures when other audit evidence contradicts a representation by management and, when necessary, reconsider the reliability of other representations made by management.
Overall, we need to decide whether the representations, together with other audit evidence that we have obtained, are sufficient to enable us to form an unqualified opinion on the financial statements.
Consider Appropriate Documentation of Representations
We would normally include in the working papers evidence of management's representations in the form of a summary of verbal discussions with management or written representations from management. For certain specific matters, written representation is required (OAG Audit 9055).