Application and Other Explanatory Material
Written Representations as Audit Evidence (Ref: Para. 2)
A1. Written representations are an important source of audit evidence. If management modifies or does not provide the requested written representations, it may alert the auditor to the possibility that one or more significant issues may 4 SA 705(Revised), “Modifications to the Opinion in the Independent Auditor’s Report”. exist. Further, a request for written, rather than oral, representations in many cases may prompt management to consider such matters more rigorously, thereby enhancing the quality of the representations. Management from Whom Written Representations Requested (Ref:
A2. Written representations are requested from those responsible for the preparation and presentation of the financial statements. Those individuals may vary depending on the governance structure of the entity, and relevant law or regulation; however, management (rather than those charged with governance) is often the responsible party. Written representations may therefore be requested from the entity’s chief executive officer and chief financial officer, or other equivalent persons in entities that do not use such titles. In some circumstances, however, other parties, such as those charged with governance, are also responsible for the preparation and presentation of the financial statements.
A3. Due to its responsibility for the preparation and presentation of the financial statements, and its responsibilities for the conduct of the entity’s business, management would be expected to have sufficient knowledge of the process followed by the entity in preparing and presenting the financial statements and the assertions therein on which to base the written representations.
A4. In some cases, however, management may decide to make inquiries of others who participate in preparing and presenting the financial statements and assertions therein, including individuals who have specialized knowledge relating to the matters about which written representations are requested. Such individuals may include:
actuary responsible for actuarially determined accounting measurements. Staff engineers who may have responsibility for and specialized knowledge about environmental liability measurements. Internal counsel who may provide information essential to provisions for legal claims.
A5. In some cases, management may include in the written representations qualifying language to the effect that representations are made to the best of its knowledge and belief. It is reasonable for the auditor to accept such wording if the auditor is satisfied that the representations are being made by those with appropriate responsibilities and knowledge of the matters included in the representations.
A6. To reinforce the need for management to make informed representations, the auditor may request that management include in the written representations, confirmation that it has made such inquiries as it considered appropriate to place it in the position to be able to make the requested written representations. It is not expected that such inquiries would usually require a formal internal process beyond those already established by the entity. Written Representations about Management’s Responsibilities (Ref:
A7. Audit evidence obtained during the audit that management has fulfilled the responsibilities referred to in paragraphs 9 and 10 is not sufficient without obtaining confirmation from management that it believes that it has fulfilled those responsibilities. This is because the auditor is not able to judge solely on other audit evidence whether management has prepared and presented the financial statements and provided information to the auditor on the basis of the agreed acknowledgement and understanding of its responsibilities. For example, the auditor could not conclude that management has provided the auditor with all relevant information agreed in the terms of the audit engagement without asking it whether, and receiving confirmation that, such information has been provided.
A8. The written representations required by paragraphs 9 and 10 draw on the agreed acknowledgement and understanding of management of its responsibilities in the terms of the audit engagement by requesting confirmation that it has fulfilled them. The auditor may also ask management to reconfirm its acknowledgement and understanding of those responsibilities in written representations. This is particularly appropriate when: Those who signed the terms of the audit engagement on behalf of the entity no longer have the relevant responsibilities; The terms of the audit engagement were prepared in a previous year;
There is any indication that management misunderstands those
responsibilities; or Changes in circumstances make it appropriate to do so.
Consistent with the requirement of SA 210,5 such reconfirmation of
management’s acknowledgement and understanding of its responsibilities is not made subject to the best of management’s knowledge and belief (as discussed in paragraph A5 of this SA). 5 SA 210, “Agreeing the Terms of Audit Engagements,” paragraph 6(b).
A9. The mandates for audits of the financial statements of certain entities may be broader than those of other entities. As a result, the premise, relating to management’s responsibilities, on which an audit of the financial statements of such an entity is conducted may give rise to additional written representations. These may include written representations confirming that transactions and events have been carried out in accordance with legislation or proper authority.
Other Written Representations (Ref: Para. 12)
Additional Written Representations about the Financial Statements
A10. In addition to the written representation required by paragraph 9, the auditor may consider it necessary to request other written representations about the financial statements. Such written representations may supplement, but do not form part of, the written representation required by paragraph 9. They may include representations about the following:
Whether the selection and application of accounting policies are
appropriate; and Whether matters such as the following, where relevant under the applicable financial reporting framework, have been recognized, measured, presented or disclosed in accordance with that framework: o Plans or intentions that may affect the carrying value or classification of assets and liabilities; o Liabilities, both actual and contingent; o Title to, or control over, assets, the liens or encumbrances on assets, and assets pledged as collateral; and o
Aspects of laws, regulations and contractual agreements that may
affect the financial statements, including non-compliance.
Additional Written Representations about Information Provided to the
A11. In addition to the written representation required by paragraph 10, the auditor may consider it necessary to request management to provide a written representation that it has communicated to the auditor all deficiencies in internal control of which management is aware.
Written Representations about Specific Assertions
A12. When obtaining evidence about, or evaluating, judgments and intentions, the auditor may consider one or more of the following: The entity’s past history in carrying out its stated intentions. The entity’s reasons for choosing a particular course of action. The entity’s ability to pursue a specific course of action. The existence or lack of any other information that might have been obtained during the course of the audit that may be inconsistent with management’s judgment or intent.
A13. In addition, the auditor may consider it necessary to request management to provide written representations about specific assertions in the financial statements; in particular, to support an understanding that the auditor has obtained from other audit evidence of management’s judgment or intent in relation to, or the completeness of, a specific assertion. For example, if the intent of management is important to the valuation basis for investments, it may not be possible to obtain sufficient appropriate audit evidence without a written representation from management about its intentions. Although such written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own for that assertion.
Communicating a Threshold Amount (Ref: Para. 9-10, 12)
A14. SA 4506 requires the auditor to accumulate misstatements identified during the audit, other than those that are clearly trivial. The auditor may determine a threshold above which misstatements cannot be regarded as clearly trivial. In the same way, the auditor may consider communicating to management a threshold for purposes of the requested written representations. Date of and Period(s) Covered by Written Representations (Ref: Para. 13)
A15. Because written representations are necessary audit evidence, the auditor’s opinion cannot be expressed, and the auditor’s report cannot be dated, before the date of the written representations. Furthermore, because the auditor is concerned with events occurring up to the date of the auditor’s report that may require adjustment to or disclosure in the financial statements, the written representations are dated as near as practicable to, but not after, the date of the auditor’s report on the financial statements.
A16. In some circumstances it may be appropriate for the auditor to obtain a written representation about a specific assertion in the financial statements during the course of the audit. Where this is the case, it may be necessary to request an updated written representation.
A17. The written representations are for all periods referred to in the auditor’s report because management needs to reaffirm that the written representations it 6 SA 450, “Evaluation of Misstatements Identified during the Audit”, paragraph 5. previously made with respect to the prior periods remain appropriate. The auditor and management may agree to a form of written representation that updates written representations relating to the prior periods by addressing whether there are any changes to such written representations and, if so, what they are.
A18. Situations may arise where current management were not present during all periods referred to in the auditor’s report. Such persons may assert that they are not in a position to provide some or all of the written representations because they were not in place during the period. This fact, however, does not diminish such persons’ responsibilities for the financial statements as a whole. Accordingly, the requirement for the auditor to request from them written representations that cover the whole of the relevant period(s) still applies.
Form of Written Representations (Ref: Para. 14)
A19. Written representations are required to be included in a representation letter addressed to the auditor. Some laws or regulations may, however, require management to make a written public statement about its responsibilities. Although such statement is a representation to the users of the financial statements, or to relevant authorities, the auditor may determine that it is an appropriate form of written representation in respect of some or all of the representations required by paragraph 9 or 10. Consequently, the relevant matters covered by such statement need not be included in the representation letter. Factors that may affect the auditor’s determination include:
Whether the statement includes confirmation of the fulfillment of the
responsibilities referred to in paragraphs 9 and 10. Whether the statement has been given or approved by those from whom the auditor requests the relevant written representations. Whether a copy of the statement is provided to the auditor as near as practicable to, but not after, the date of the auditor’s report on the financial statements (see paragraph 13).
A20. A formal statement of compliance with law or regulation, or of approval of the financial statements, would not contain sufficient information for the auditor to be satisfied that all necessary representations have been consciously made. The expression of management’s responsibilities in law or regulation is also not a substitute for the requested written representations.
A21. The Appendix to this Standard provides an illustrative example of a representation letter.
Communication with Those Charged with Governance (Ref: Para. 9-
A22. SA 260(Revised)7 requires the auditor to communicate with those charged with governance the written representations which the auditor has requested from management.
Doubt as to the Reliability of Written Representations and Requested
Written Representations Not Provided
Doubt as to the Reliability of Written Representations (Ref: Para. 15-16)
A23. In the case of identified inconsistencies between one or more written representations and audit evidence obtained from another source, the auditor may consider whether the risk assessment remains appropriate and, if not, revise the risk assessment and determine the nature, timing and extent of further audit procedures to respond to the assessed risks.
A24. Concerns about the competence, integrity, ethical values or diligence of management, or about its commitment to or enforcement of these, may cause the auditor to conclude that the risk of management misrepresentation in the financial statements is such that an audit cannot be conducted. In such a case, the auditor may consider, where possible, withdrawing from the engagement, unless those charged with governance put in place appropriate corrective measures. Such measures, however, may not be sufficient to enable the auditor to issue an unmodified audit opinion.
A25. SA 2308 requires the auditor to document significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions. The auditor may have identified significant issues relating to the competence, integrity, ethical values or diligence of management, or about its commitment to or enforcement of these, but concluded that the written representations are nevertheless reliable. In such a case, this significant matter is documented in accordance with SA 230. Written Representations about Management’s Responsibilities (Ref: Para. 19)
A26. As explained in paragraph A7, the auditor is not able to judge solely on other audit evidence whether management has fulfilled the responsibilities referred to in paragraphs 9 and 10. Therefore, if, as described in paragraph 19(a), the auditor concludes that the written representations about these matters 7 SA 260(Revised), “Communication with Those Charged with Governance”, paragraph 16(c)(ii). 8 SA 230, “Audit Documentation”, refer paragraph 8 and 10. are unreliable, or if management does not provide those written representations, the auditor is unable to obtain sufficient appropriate audit evidence. The possible effects on the financial statements of such inability are not confined to specific elements, accounts or items of the financial statements and are hence pervasive. SA 705(Revised) requires the auditor to disclaim an opinion on the financial statements in such circumstances.9
A27. A written representation that has been modified from that requested by the auditor does not necessarily mean that management did not provide the written representation. However, the underlying reason for such modification may affect the opinion in the auditor’s report. For example:
The written representation about management’s fulfillment of its
responsibility for the preparation and presentation of the financial statements may state that management believes that, except for material non-compliance with a particular requirement of the applicable financial reporting framework, the financial statements are prepared and presented in accordance with that framework. The requirement in paragraph 19 does not apply because the auditor concluded that management has provided reliable written representations. However, the auditor is required to consider the effect of the non-compliance on the opinion in the auditor’s report in accordance with SA 705(Revised).
The written representation about the responsibility of management to
provide the auditor with all relevant information agreed in the terms of the audit engagement may state that management believes that, except for information destroyed in a fire, it has provided the auditor with such information. The requirement in paragraph 19 does not apply because the auditor concluded that management has provided reliable written representations. However, the auditor is required to consider the effects of the pervasiveness of the information destroyed in the fire on the financial statements and the effect thereof on the opinion in the auditor’s report in accordance with SA 705(Revised).
Paragraph A9 of the Application Section of ISA 580 (A9 of SA 580) deals with the application of the requirements of ISA 580 to the audits of public sector entities regarding the premise, relating to management’s responsibilities which may give 9 SA 705(Revised), paragraph 9. rise to additional written representations. Since as mentioned in the “Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and
Related Services”, the Standards issued by the Auditing and Assurance
Standards Board, apply equally to all entities, irrespective of their form, nature and size, a specific reference to applicability of the Standard to public sector entities has been deleted. Since it is also possible that even in case of non-public sector entities, management responsibilities may give rise to additional representations, accordingly, the spirit of Paragraph A9 in ISA 580, highlighting the fact that in case of certain entities, the need of additional representations may arise, has been retained.
Illustrative Representation Letter
The following illustrative letter includes written representations that are required by this and other SAs in effect for audits of financial statements for period beginning on or after as at [date]. It is assumed in this illustration that the applicable financial reporting framework is applicable accounting standards in India; the requirement of SA 570(Revised)10 to obtain a written representation is not relevant; and that there are no exceptions to the requested written representations. If there were exceptions, the representations would need to be modified to reflect the exceptions. (Entity Letterhead) (To Auditor)
