Question

The management representation letter generally contains all of the following items, Except:

A. A statement that management is not aware of any undisclosed contingent liabilities.

B. A statement that the financials are the responsibility of management.

C. A statement that management agrees with the auditor determination of materiality.

D. A statement that management is not aware of any fraud.

Answer 1

Answer: C. A statement that management agrees with the auditor determination of materiality.

The management representation letter is prepared by the external auditor and is signed my the management of the audit client. It is documented as a part of audit evidence. . It generally contains the statements in A, B and D and many other statements. Basically it's a letter in which the management agrees that it takes responsibility for true and fair financial reporting. It is an acknowledgement that management takes responsibility for fair financial reporting and that it is not just the auditor's responsibility.

Statement C states that the management agrees with the auditor's determination of materiality, but this is false. The management does not have to agree to what auditors think is material. That is auditor judgement and also the auditors materiality figures are confidential and stays with auditors. If the management gets to know the materiality they can try to find ways avoid detection of fraud.

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