Written representations (ISA 580)

At the end of an audit, the auditor holds many oral statements from management: the debt will be paid, the inventory is saleable, there are no other claims. Spoken assurances are weak evidence, so the auditor asks for the key ones in writing, signed by management, and uses the letter to make management put on record that it has met its own responsibilities. A refusal tells the auditor a great deal.

This topic covers the definition and objectives of written representations under ISA 580, their value as audit evidence, representations about management's responsibilities, the form and contents of the letter of representation, a sample letter, and what to do if management refuses. The previous topic covered income statement tests, and the next covers misstatements and the overall review.

Key terms in plain English

Syllabus check

This topic is in syllabus area C, audit evidence, completion and reporting (25% of marks). It covers:

• written representations (ISA 580)
• the contents of a letter of representation
• audit evidence: reliability of oral and written evidence

CAMA 2020 and written representations

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

Definition and objectives

A written representation is a written statement by management provided to confirm certain matters or to support other audit evidence. The objectives of the auditor under ISA 580 are to:

• obtain written representations from management that it has fulfilled its responsibilities for the financial statements and the audit;
• obtain written representations as appropriate to support other audit evidence; and
• respond appropriately to written representations provided by management, or if management refuses to provide those requested.

ISA 580 requires the representations to take the form of a letter of representation, addressed to the auditor. Written representations may be an important source of evidence.

Written representations as audit evidence

If the auditor considers that written representations are needed to support other evidence, the auditor must request them. During the audit management makes many statements, some unsolicited and some in answer to enquiries. The auditor records the oral discussions in the working papers, but oral evidence is weak. To improve it, the auditor asks that significant discussions be confirmed in writing. Representations are likely to be needed:

• to support the auditor's understanding of management's intention or judgement, for example future plans for the business or the net realisable value of inventory; and
• for the completeness of a specific item, for example that all liabilities have been provided for.

Written representations are necessary evidence but not sufficient appropriate evidence on their own. If a representation is contradicted by other evidence, the auditor should:

• consider whether the risk assessment for that area is still appropriate
• consider whether more procedures are needed
• if there are concerns about the integrity of management, document them and consider withdrawing from the audit

Representations about management's responsibilities

ISA 580 requires management to acknowledge in writing that:

• it has fulfilled its responsibility for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework;
• it has provided the auditor with all relevant information; and
• all transactions have been recorded and are reflected in the financial statements.

Form and contents of the letter

The letter of representation is:

• usually drafted by the auditor, who knows what is needed;
• addressed to the auditor; and
• dated as near as practicable to, but not after, the date of the auditor's report.

It may include statements that:

• the letter relates to the audit of the client company;
• management has fulfilled its responsibility for the preparation of the financial statements, and they give a true and fair view and are free from material misstatement;
• the assumptions used in accounting estimates and fair values are reasonable (ISA 540);
• related party relationships and transactions have been disclosed (ISA 550);
• all events after the reporting period have been adjusted or disclosed (ISA 560);
• the effect of uncorrected misstatements, a list of which is attached, is immaterial (ISA 450);
• the auditor has been given all relevant material, including the books of account, and unrestricted access to people in the entity;
• all transactions have been recorded and are in the financial statements;
• management has disclosed all information about fraud or suspected fraud (ISA 240); and
• management has disclosed all known non-compliance with laws and regulations relevant to the financial statements (ISA 250).

It may also contain representations on specific assertions that the auditor requires.

A sample letter of representation

The letter is on the client's letterhead, addressed to the auditor and dated, for example 22 February 20X5.

It says it is given in connection with the audit of the financial statements of ABC Ltd for the year ended 31 December 20X4, for the purpose of the auditor expressing an opinion on whether they present fairly, in all material respects, or give a true and fair view, in accordance with International Financial Reporting Standards.

Management confirms, to the best of its knowledge and belief, having made such enquiries as it considered necessary, the following.

Financial statements. Management has fulfilled its responsibilities for preparation and presentation as set out in the terms of the engagement, and the statements are fairly presented. Significant assumptions in estimates, including fair values, are reasonable. Related party relationships and transactions are properly accounted for and disclosed. All events after the date of the statements that require adjustment or disclosure have been adjusted or disclosed.

The effects of uncorrected misstatements are immaterial, individually and together, and a list is attached.

Information provided. Management has provided all information, such as records and documents, and other matters relevant to the preparation of the statements; any additional information requested; and unrestricted access to people in the entity. All transactions have been recorded and are reflected in the statements.

Management has disclosed the results of its assessment of the risk of material misstatement through fraud; all information on fraud or suspected fraud affecting the entity and involving management, employees with significant roles in internal control, or others where it could be material; all allegations of fraud made by employees, former employees, analysts, regulators or others; all known non-compliance or suspected non-compliance with laws and regulations; and the identity of related parties and all related party relationships and transactions it knows of.

The letter is signed by those with the responsibility, usually the chief executive and finance director, and often approved by the board.

Refusal to provide representations

If management refuses to give requested representations, the auditor must:

• (a) discuss the matter with management
• (b) re-evaluate the integrity of management and reconsider the effect on other representations and evidence
• (c) take appropriate action, including considering the effect on the auditor's report

If the auditor concludes that the integrity of management is so doubtful that the representations are not reliable, or if management does not provide the representations about its responsibilities or the information provided, the auditor disclaims an opinion. In practice, a refusal to confirm responsibility for the statements is a serious matter that may lead to withdrawal from the engagement.

Example: Compo

In an audit of Compo, a dealer in used cars, three matters arose:

• (a) five properties were revalued by an independent surveyor
• (b) one property was sold to the marketing director
• (c) the directors refuse to provide for a bad debt

Which would be in the letter of representation?

Practical points on the letter

The letter is not a substitute for other evidence. It should not cover matters that the auditor can verify, such as the existence of a bank balance. Representations on matters of judgement, such as management's intention to hold an investment for the long term, are useful because the auditor cannot get the evidence elsewhere.

A letter dated after the audit report, or signed by someone without the authority, is not acceptable. If the auditor's report is signed some time after the date of the financial statements, a further representation or update may be needed to cover the intervening period. Where the entity has a group structure, the parent's management gives representations covering the subsidiaries, and subsidiaries give representations to the group auditor.

For a significant matter, such as management's plans in a going concern assessment, the auditor asks for a specific representation. The auditor files the signed letter with the audit working papers.

Worked examples

1. The auditor cannot verify intention from documents alone.
2. A written representation records the intention, and is tested against past conduct and the ability to hold the investment.

1. The representation is contradicted by other evidence.
2. The auditor reconsiders the risk assessment, does more work and considers the integrity of management.

1. The letter should not be dated after the report.
2. The auditor does not sign until the letter is received and correctly dated.

1. The auditor discusses it and re-evaluates integrity.
2. If not resolved, the auditor considers the effect on the report and possible withdrawal.

How to score full marks

• State that representations are addressed to the auditor and dated no later than the report.
• Say that they support, but do not replace, other evidence.
• List the main contents: responsibilities, completeness, fraud, laws, related parties, later events, uncorrected misstatements.
• Explain the steps on refusal.

Common mistakes in the exam

• Treating the letter as sufficient evidence by itself.
• Addressing the letter to the shareholders.
• Requesting representations on matters that can be verified.
• Forgetting the list of uncorrected misstatements.

Quick revision

• Written, from management, to the auditor.
• Dated at or before the report date.
• Supports; never sufficient alone.
• Refusal: discuss, integrity, effect on the report.

Practice questions

Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.

Model answers

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