Annual Audit Manual

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9053 Management and its responsibilities
Oct-2012

In This Section

Management from whom written representations requested

Management's responsibilities

Overview

This topic explains:

  • Management from whom written representation is requested.
  • Description of management's responsibilities in the written representations.
Management from whom written representations requested

CAS Requirement

The auditor shall request written representations from management with appropriate responsibilities for the financial statements and knowledge of the matters concerned (CAS 580.9).

CAS Guidance

Written representations are requested from those responsible for the preparation of the financial statements. Those individuals may vary depending on the governance structure of the entity, and relevant law or regulation; however, management (rather than those charged with governance) is often the responsible party. Written representations may therefore be requested from the entity's chief executive officer and chief financial officer, or other equivalent persons in entities that do not use such titles. In some circumstances, however, other parties, such as those charged with governance, are also responsible for the preparation of the financial statements (CAS 580.A2).

Due to its responsibility for the preparation of the financial statements, and its responsibilities for the conduct of the entity's business, management would be expected to have sufficient knowledge of the process followed by the entity in preparing and presenting the financial statements and the assertions therein on which to base the written representations (CAS 580.A3).

In some cases, however, management may decide to make inquiries of others who participate in preparing the financial statements and assertions therein, including individuals who have specialized knowledge relating to the matters about which written representations are requested. Such individuals may include (CAS 580.A4):

  • An actuary responsible for actuarially determined accounting measurements.
  • Staff engineers who may have responsibility for and specialized knowledge about environmental liability measurements.
  • Internal counsel who may provide information essential to provisions for legal claims.

In some cases, management may include in the written representations qualifying language to the effect that representations are made to the best of its knowledge and belief. It is reasonable for the auditor to accept such wording if the auditor is satisfied that the representations are being made by those with appropriate responsibilities and knowledge of the matters included in the representations (CAS 580.A5).

To reinforce the need for management to make informed representations, the auditor may request that management include in the written representations confirmation that it has made such inquiries as it considered appropriate to place it in the position to be able to make the requested written representations. It is not expected that such inquiries would usually require a formal internal process beyond those already established by the entity (CAS 580.A6).

OAG Guidance

Consider whether the individuals making the representations could be expected to be well informed on the particular matters. Consider also whether any evidence obtained (including the auditors’ knowledge from previous audits) might bring into question the reliability of the individuals representations.

Management's responsibilities

CAS Requirement

The auditor shall request management to provide a written representation 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 (CAS 580.10).

The auditor shall request management to provide a written representation that (CAS 580.11):

(a) It has provided the auditor with all relevant information and access as agreed in the terms of the audit engagement, and

(b) All transactions have been recorded and are reflected in the financial statements.

Management's responsibilities shall be described in the written representations required by paragraphs 10 and 11 in the manner in which these responsibilities are described in the terms of the audit engagement (CAS 580.12).

CAS Guidance

Audit evidence obtained during the audit that management has fulfilled the responsibilities referred to in paragraphs 10 and 11 is not sufficient without obtaining confirmation from management that it believes that it has fulfilled those responsibilities. This is because the auditor is not able to judge solely on other audit evidence whether management has prepared and presented the financial statements and provided information to the auditor on the basis of the agreed acknowledgement and understanding of its responsibilities. For example, the auditor could not conclude that management has provided the auditor with all relevant information agreed in the terms of the audit engagement without asking it whether, and receiving confirmation that, such information has been provided (CAS 580.A7).

The written representations required by paragraphs 10 and 11 draw on the agreed acknowledgement and understanding of management of its responsibilities in the terms of the audit engagement by requesting confirmation that it has fulfilled them. The auditor may also ask management to reconfirm its acknowledgement and understanding of those responsibilities in written representations. This is common in certain jurisdictions, but in any event may be particularly appropriate when:

  • Those who signed the terms of the audit engagement on behalf of the entity no longer have the relevant responsibilities;
  • The terms of the audit engagement were prepared in a previous year;
  • There is any indication that management misunderstands those responsibilities; or
  • Changes in circumstances make it appropriate to do so.

Consistent with the requirement of CAS 210, such reconfirmation of management's acknowledgement and understanding of its responsibilities is not made subject to the best of management's knowledge and belief (as discussed in paragraph A5 of this CAS) (CAS 580.A8).

CAS 450 requires the auditor to accumulate misstatements identified during the audit, other than those that are clearly trivial. The auditor may determine a threshold above which misstatements cannot be regarded as clearly trivial. In the same way, the auditor may consider communicating to management a threshold for purposes of the requested written representations (CAS 580.A14).

CAS 260 requires the auditor to communicate with those charged with governance the written representations which the auditor has requested from management (CAS 580.A22).

OAG Guidance

Exceptions are not to be worded vaguely, such as "except for matters disclosed to you," but refer to specific items, possibly by reference to accounting records, notes to the financial statements, or other written sources. Where appropriate, it is preferable to follow as closely as possible the terminology accepted for financial statement disclosure purposes.

Management's representations may be limited to matters that are considered either individually or collectively material to the financial statements if the representations are directly related to amounts included in the financial statements. For those items where a materiality measurement may apply, the word "material" has been used.

Quantitative measures of materiality for purposes of the management representation letter may be different for different representations. It is not necessary to include a quantitative measure of materiality in the letter and it is neither common practice nor encouraged. However, it may be appropriate to document in the working papers (typically the “Other auditing and completion procedures” procedure) the quantitative measures of materiality used by management for purposes of the representations that have been agreed upon with those members of management who will be signing the letter, particularly if management proposes to qualify specific representations by referring to a "materiality" threshold. Determine if the amount(s) are sufficiently low to take into consideration known errors (as represented by our SUM) and undetected errors (allowance for detection risk). Determining the amount(s) requires professional judgment, and while not prescriptive, it would be common that materiality agreed upon with management for purposes of management representations would fall between the established de minimis SUM posting level and performance materiality. For example, consider the level at which management internally tracks and posts adjustments to the financial statements.

Audit Tip

Tailor the letter to the client's specific circumstances reflecting our mutual understanding of key issues arising throughout the course of the audit. Further, endeavor to discuss the expected contents of the letter with the appropriate management officials at an early stage in order to reduce the possibility of being faced with a refusal by management to cooperate in providing such representations.