Question

You are the audit senior of Sparrow Ltd (Sparrow) for the year ended 30 June 2020. As is
customary in completing your examination, you request that the chief executive officer (CEO)
of Sparrow, Michal Theobald, furnish you with a management representation letter. Michael
reads the representations that you are requesting that he make, and he refuses to furnish the
letter, stating:
You are asking me to tell you all kinds of things that I hired you to figure out. For
example, you are asking me to say that ‘all known assets of the company at balance
date were recorded in the books of account. I paid you to carry out an audit and you
should know whether or not that’s true yourself.
Required:
If the client does not accept your explanation and continues to refuse to furnish the letter, what
will be the impact on your auditor’s report?

Answer 1

Management representation letter is a formal letter , written by the external auditor & signed by the company's senior accounting executive like CEO or CFO, attesting to all the documents ,contracts, books of accounts and all other relevant papers, that are to be audited.

Officially, the audit should commence only after this procedure is carried out.After all, what is the point in auditing inaccurate details? So,this is required under AU Section 333 of the Public Company accounting Oversight Board(PCAOB)--which deals with the contents ,this letter from the management , should contain.

The executive signing this letter , every year ,for the auditor to commence audit , will be confirming the following:

1. Accounting policies, practices, being followed in general & regarding inventory or any such areas requiring special mention,in particular.

2.All documents, contracts that need to be verified and form basis for certain accounting treatment.

3. Minutes of meeting of the Board of directors , where-ever required

4.Internal control mechanism, in force

5. Contingent liabilities provided

6. presence of any related party transcations

7. In general, accuracy of record-keeping & accounting treatment

8. Encumbrances & claims made

9. any litigation pending

10. Accuracy of records for maintenance of company's assets & identifying them with their physical location, wherever possible.

So, this way, it is absolutely necessary for the auditor to obtain a signed copy of the mandate to audit , from the management .

So, the the chief executive officer (CEO) of Sparrow is not correct in refusing to furnish the letter , addressed to the auditor.

If he continues in such a way, the auditor is well within the scope of AU 333 to issue a qualified audit opinion, stating that subject to what had been provided, the under-mentioned opinion is fair & true.

It limits the scope of the audit and finally the audit report, that is issued. Based on the nature of representation , the management failed to provide, the auditor can decide if just qualifying his opinion , will suffice , to absolve himself.

Else, in extreme cases, the auditor , will be compelled to excuse himself from the audit engagement.