Question

Financial Auditing

Please list and discuss the following items concerning management representative letters:

Are management representative letters required?

What are their purposes?

What representatives have to be present?

What representatives may be present?

Who has to sign them?

What date should the letters show?

Answer 1

A management representation letter is a specialized letter written by a company’s external auditors and then signed by the senior company management. The date of the document cannot be later than the date at which the audit finishes. The letter verifies that the information provided is accurate and disclosed to the auditors.

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. It’s basically a get out of jail card for the auditor

The representations letter must cover all periods encompassed by the audit report, and must be dated the same date of audit work completion. It is used to let the client's management declare in writing that the financial statements and other presentations to the auditor are sufficient and appropriate and without omission of material facts to the financial statements, to the best of the management's knowledge. It serves to document management's representations during the audit, reducing misunderstandings of management's responsibilities for the financial statements

Following is a sample of the representations that may be included in the management representation letter:

• Management is responsible for the proper presentation of the financial statements in accordance with the applicable accounting framework

• All financial records have been made available to the auditors

• All board of directors minutes are complete

• Management has made available all letters from regulatory agencies regarding financial reporting noncompliance

• There are no unrecorded transactions

• The net effect of all uncorrected misstatements is immaterial

• The management team acknowledges its responsibility for the system of financial controls

• All related party transactions have been disclosed

• All contingent liabilities have been disclosed

• All unasserted claims or assessments have been disclosed

• The company has disclosed all liens and other encumbrances on its assets

• All material transactions have been properly recorded

• Management is responsible for systems designed to detect and prevent fraud

• Management has no knowledge of fraud within the company

• The financial statements conform to the applicable accounting framework

A management representation letter is a form letter written by a company's external auditors, which is signed by senior company management.