Trang 2 1 EVIDENCE OBTAINED [ISA 580] 1.1 Essential procedure ¾ Representations from management covering key areas of their responsibilities and audit evidence must be obtained in writi
SESSION 20 – MANAGEMENT REPRESENTATIONS OVERVIEW Objective ¾ To describe the use of management representations as audit evidence EVIDENCE OBTAINED ACKNOWLEDGMENT OF MANAGEMENT’S RESPONSIBILITY ¾ ¾ ¾ ¾ Essential procedure AS AUDIT EVIDENCE ¾ ¾ ¾ Essential procedure Certain instances Contradiction Essential procedure Certain instances Contradiction DOCUMANTATION ¾ ¾ ¾ ¾ Form Basic elements Basic principle Example letter 2001 SESSION 20 – MANAGEMENT REPRESENTATIONS EVIDENCE OBTAINED [ISA 580] 1.1 Essential procedure ¾ Representations from management covering key areas of their responsibilities and audit evidence must be obtained in writing ACKNOWLEDGEMENT OF MANAGEMENT’S RESPONSIBILITY 2.1 Essential procedure ¾ ¾ Evidence of the following should be obtained: management’s responsibility for the design and implementation of internal control to prevent and detect error; management’s belief that the aggregated uncorrected misstatements identified by the auditor are not material (individually and as a whole); management’s acknowledgement of responsibility for fair presentation of the financial statements; management’s approval of the financial statements Evidence on these elements can be obtained through: reviewing relevant minutes of meetings (e.g of board of directors); obtaining written representations from relevant individuals or the board as a whole; a letter from the auditor outlining their understanding of management’s representations as acknowledged, confirmed and signed by management; and the signed/approved copy of financial statements In some jurisdictions it is a requirement for management to confirm within the financial statements that they show a true and fair view AS AUDIT EVIDENCE REPRESENTATIONS DURING COURSE OF AUDIT GENERALLY SEEK CORROBORATIVE EVIDENCE 2002 REQUIRED IN SPECIFIC INSTANCES SESSION 20 – MANAGEMENT REPRESENTATIONS 3.1 ¾ Essential procedure During the audit, management will make many representations to the auditor Where such representations are material to the financial statements, the auditor should: seek corroborative evidence (implies expectation that it should be available); evaluate reasonableness/consistency against other evidence available; consider whether individuals making representations can be expected to be adequately informed on the particular matters ¾ Where representations are material to the financial statements and other sufficient appropriate audit evidence does not or cannot reasonably be expected to exist, such representations should be obtained in writing from management Confirming oral representations in writing reduces the risk of misunderstanding ¾ Note that management representations are not a substitute for evidence that should be expected to be available 3.2 Specific instances ¾ In specific circumstances, management representations may be the only audit evidence which can reasonably be expected to be available (e.g management’s intention to settle a legal claim out of court) ¾ In areas of the audit that are susceptible to understatement (eg liabilities, income, disclosures) management representations are taken stating that they are not aware of any understatement or non-disclosures Whilst such matters will be audited, there will always be a residual risk because of the nature of understatement Illustration “…We have made available to you all books of account and supporting documentation and all minutes of meetings of shareholders and the board of directors (namely those held on [dates])” “The company has satisfactory title to all assets and there are no liens or encumbrances on the company’s assets, except for those that are disclosed in Note X to the financial statements “Other than described in Note X to the financial statements, there have been no events subsequent to period end which require adjustment of or disclosure in the financial statements or notes thereto “The claim by XYZ Company has been settled for the total sum of $X which has been properly accrued in the financial statements No other claims in connection with litigation have been or are expected to be received.” 2003 SESSION 20 – MANAGEMENT REPRESENTATIONS 3.3 ¾ Contradiction If a management representation is contradicted by other audit evidence, the matter should be investigated (and the reliability of other representations reconsidered if necessary) As per the guidance in ISA 500, such inconsistency creates doubt and must be resolved 3.4 Exam tips ¾ In a question calling for audit work/procedures/tests etc it may be appropriate to refer to “obtaining management representation” BUT be specific, for example, “Ask the directors to provide a written representation that they are not aware of any legal claims against the company other than those disclosed in the financial statements” ¾ Do not throw in “obtain management representation” for good measure To suggest it as either a substitute for “better” evidence or as an unnecessary extra item of evidence is not good practice DOCUMENTATION 4.1 Form ¾ As representations from management will initially be oral, it is essential that those to be relied upon as audit evidence must be documented, eg: ¾ A specific representation letter from management Letter from auditors acknowledged by management Minutes of board meetings Schedule of uncorrected errors to support management’s representation that they are not material Whilst an audit working paper summarising representations made by management recorded may be considered appropriate, they need to be acknowledged by management – hence the form of a letter signed by management 4.2 Basic elements ¾ Addressee – the auditor ¾ Specified information ¾ Appropriately dated – ordinarily the same date as the auditor’s report ¾ Signed – ordinarily by the senior executive officer and senior finance officer However, the auditor may wish other directors to sign It is also important for the auditor to ensure that the letter has been discussed by the directors, eg minuted, as they all have collective responsibility for the financial statements 4.3 Refusal to provide Refusal to provide a representation necessary for audit purposes is a scope limitation and the audit opinion should be qualified or disclaimed (as appropriate) 2004 SESSION 20 – MANAGEMENT REPRESENTATIONS ¾ Before qualification, the auditor would normally discuss with management (and the audit committee) the reasons for refusing to sign the representation letter ¾ Consideration would be given to see if the matters the management disagree with could be redrafted within the representation letter In doing so, it is critical to ensure that sufficient and appropriate audit evidence is still fully obtained This may include revisiting the audit area concerned ¾ Management’s attention would be drawn to the engagement letter where it was stated that a representation letter would be required to be signed ¾ In initially refusing to sign the representation letter, but then subsequently doing so, the auditor may need to consider the integrity of management 4.4 Example letter (Entity Letterhead) (To Auditor) (Date) This representation letter is provided in connection with your audit of the financial statements of ABC Company for the year ended December 31, 20X1 for the purpose of expressing an opinion as to whether the financial statements give a true and fair view of (present fairly, in all material respects) the financial position of ABC Company as of December 31, 20X1 and of the results of its operations and its cash flows for the year then ended in accordance with (indicate applicable financial reporting framework) We acknowledge our responsibility for the design and implementation of internal control to prevent and detect error and fraud and our responsibility for the fair presentation of the financial statements in accordance with International Financial Reporting Standards (IFRS) We confirm, to the best of our knowledge and belief, the following representations: (NOTE: example representations Specific representations depend on circumstances) ¾ There have been no irregularities or fraud involving management or employees who have a significant role in internal control or that could have a material effect on the financial statements ¾ We have no knowledge of any allegations of fraud, or suspected fraud, affecting the entity’s financial statements ¾ We have disclosed to you the results of our continuous assessment of the risk that the financial statements may be materially misstated as a result of fraud ¾ We have made available to you all books of account and supporting documentation and all minutes of meetings of shareholders and the board of directors (namely those held on March 15, 20X1 and September 30, 20X1, respectively) ¾ We confirm the completeness of the information provided regarding the identification of related parties and their transactions, and that we are not aware of any further related party or related party transactions other than those already disclosed to you 2005 SESSION 20 – MANAGEMENT REPRESENTATIONS ¾ The financial statements are free of material misstatements, including omissions ¾ The Company has complied with all aspects of contractual agreements that could have a material effect on the financial statements in the event of non-compliance There has been no non-compliance with requirements of relevant law or regulatory authorities that could have a material effect on the financial statements in the event of noncompliance ¾ The following have been properly recorded and, when appropriate, adequately disclosed in the financial statements: (a) (b) (c) (d) The identity of, and balances and transactions with, related parties Losses arising from sale and purchase commitments Agreements and options to buy back assets previously sold Assets pledged as collateral ¾ We have no plans or intentions that may materially alter the carrying value or classification of assets and liabilities reflected in the financial statements ¾ We have no plans to abandon lines of product or other plans or intentions that will result in any excess or obsolete inventory, and no inventory is stated at an amount in excess of net realizable value ¾ The Company has satisfactory title to all assets and there are no liens or encumbrances on the company’s assets, except for those that are disclosed in Note X to the financial statements ¾ We have recorded or disclosed, as appropriate, all liabilities, both actual and contingent, and have disclosed in Note X to the financial statements all guarantees that we have given to third parties ¾ Other than described in Note X to the financial statements, there have been no events subsequent to period end which require adjustment of or disclosure in the financial statements or Notes thereto ¾ The claim by XYZ Company has been settled for the total sum of XXX which has been properly accrued in the financial statements No other claims in connection with litigation have been or are expected to be received ¾ We have properly recorded or disclosed in the financial statements the capital stock repurchase options and agreements, and capital stock reserved for options, warrants, conversions and other requirements (Signed and dated by the Senior Executive Officer) (Signed and dated by the Senior Financial Officer) 2006 SESSION 20 – MANAGEMENT REPRESENTATIONS FOCUS You should now be able to: ¾ explain the purpose of and procedure for obtaining management representations; ¾ discuss the quality and reliability of management representations as audit evidence; ¾ discuss the circumstances where management representations are necessary and the matters on which representations are commonly obtained 2007 SESSION 20 – MANAGEMENT REPRESENTATIONS 2008