Misstatements and written representations - Written represen...

Learning Outcomes

After reading this article, you will be able to explain the purpose of written representations in auditing, identify key matters commonly covered by such representations, assess their reliability as audit evidence, and describe auditor actions when representations are not provided or are inconsistent. You will also be able to apply these concepts in evaluating misstatements and determine reporting implications for the audit opinion under the ACCA Audit and Assurance syllabus.

ACCA Audit and Assurance (AA) Syllabus

For ACCA Audit and Assurance (AA), you are required to understand the role and significance of written representations in the completion and review stage of an audit. In your revision, focus on the following points:

• The purpose and appropriate use of written representations obtained from management and those charged with governance.
• The procedure for obtaining written representations as required by ISA 580.
• The relationship between written representations and other forms of audit evidence.
• Common matters and assertions covered by written representations.
• The reliability and limitations of written representations as evidence.
• Actions if written representations are not provided, are incomplete, or contradict other audit evidence.
• The impact on the auditor's report when written representations are not obtained.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What are three key purposes for obtaining written representations from management in an audit?
2. If management refuses to sign a requested written representation letter, what type of modification may be required in the audit report?
3. Name two examples of assertions or matters frequently covered by written representations.
4. True or false? Written representations alone are sufficient evidence for all material matters in the financial statements.

Introduction

Written representations are statements made in writing by management and, where appropriate, those charged with governance, confirming matters relevant to the preparation of the financial statements and the audit. ISA 580 requires auditors to obtain such representations for key matters, particularly where other evidence is limited or unavailable.

Key Term: written representation
A written statement provided by management to the auditor to confirm certain matters or to support other audit evidence.

The Purpose and Scope of Written Representations

Written representations primarily serve three functions in the audit process:

• Confirming management’s responsibility for preparing true and fair financial statements in accordance with the reporting framework.
• Supporting other evidence for matters involving judgement, knowledge confined to management, or when other audit evidence cannot be obtained.
• Stating that all relevant information and explanations have been made available to the auditor.

Written representations strengthen the understanding of management’s roles, the completeness of records, and provide assurance about areas where physical evidence may not exist.

Key Term: management representation letter
The formal document in which management makes the required written representations, dated and signed before the auditor’s report is finalized.

Common Matters Covered by Written Representations

While written representations are tailored for each engagement, typical topics include:

• Confirmation that all books, records, and explanations requested have been provided to the auditor.
• The responsibility for preparing the financial statements and selecting appropriate accounting policies.
• Disclosure of all known instances of fraud, non-compliance with laws, and significant events after the reporting date.
• Appropriateness of estimates and assumptions used in the financial statements.
• Completeness of related parties’ disclosures and contingent liabilities.
• Communication of uncorrected misstatements and confirmation they are immaterial, if applicable.

Key Term: assertion
A statement by management relating to a recognition, measurement, or disclosure in the financial statements.

Reliability of Written Representations as Audit Evidence

Although ISA 580 requires that written representations are obtained for certain matters, auditors must exercise professional scepticism regarding their reliability. Written representations are less persuasive than independent external or documentary evidence because they originate from the client. They are particularly useful when other forms of audit evidence cannot reasonably be expected.

Written representations should never be used as the sole source of evidence for any material balance, transaction, or disclosure that can be substantiated otherwise.

Key Term: professional scepticism
A questioning mind and critical assessment of evidence throughout the audit.

Procedures for Obtaining Written Representations

The auditor is responsible for preparing the draft of the written representation letter, which is then reviewed and signed by appropriate members of management—usually the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). The date of the letter must be on or near the date of the auditor’s report to ensure it covers the entire period under audit.

The letter should be on the client’s letterhead, addressed to the auditor, and must be signed before the auditor finalizes the audit opinion.

Worked Example 1.1

A company’s directors provide a written representation that all known instances of fraud have been disclosed. During the audit, the auditor identifies evidence suggesting an undisclosed fraud. Can the auditor rely solely on the written representation?

Answer:
No. Written representations do not override substantive evidence. The auditor must investigate further, reconsider the risk assessment, and perform additional procedures as needed.

Limitations and Issues Related to Written Representations

Written representations are not substitutes for sufficient and appropriate audit evidence that should exist—especially for material items. If more reliable evidence is available, it must be obtained.

If a written representation contradicts other audit evidence, the auditor must resolve the conflict; this may lead to re-evaluating risk or requiring additional procedures.

If there are doubts about the competence, integrity, or diligence of management, the reliability of all audit evidence, including written representations, is affected.

Worked Example 1.2

Suppose management refuses to sign the written representation letter. What must the auditor do?

Answer:
The auditor should discuss the reasons for refusal with management and those charged with governance. If the letter is still not provided, this constitutes a scope limitation. The auditor should likely issue a disclaimer of opinion or consider withdrawing from the engagement if permitted by law.

Exam Warning

Failing to obtain required written representations, or relying on them when more robust evidence is available, may lead to an inappropriate audit opinion and exam marks lost. Always explain how you would respond if management refuses or representations are inconsistent.

Reporting Implications

When written representations are not obtained, or are incomplete or unreliable, the auditor must consider the effect on the audit opinion. If sufficient appropriate audit evidence cannot be obtained, this is a limitation of scope. The auditor may need to qualify the opinion or disclaim if the possible effects are material and pervasive.

If representations relate to an uncorrected misstatement, the management letter should document that management believes the effect is immaterial. The auditor should request this representation be included in the written statement.

Summary

Written representations are a required part of audit evidence for key management assertions, matters restricted to management’s judgement, or where alternative evidence is unavailable. While a necessary part of the audit, they are weaker evidence compared to independent sources and must be considered alongside all other findings. Inadequate or missing written representations can have direct reporting consequences for the auditor’s opinion.

Key Point Checklist

This article has covered the following key knowledge points:

• Explain the purpose of written representations and when they are necessary.
• Identify common matters and assertions included in management representation letters.
• Assess the reliability and limitations of written representations as audit evidence.
• Describe procedures for drafting, obtaining, and evaluating written representations.
• State the required auditor response if representations are refused or inconsistent.
• Explain the impact of written representations on the audit opinion and reporting.

Key Terms and Concepts

• written representation
• management representation letter
• assertion
• professional scepticism