Letter Of Representation-Fundamentals of Auditing-Lecture Notes, Study notes of Auditing

Download Letter Of Representation-Fundamentals of Auditing-Lecture Notes and more Study notes Auditing in PDF only on Docsity! Lesson 34 LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES Letter of Representation It is now normal audit practice for the auditor to obtain a letter from the management addressed to the auditor confirming any representations given by the management to the auditor. This letter is known as the management letter or the letter of representation. Representations in this context can be defined as a statement made to convey an opinion. Reasons why the letter of representation is obtained Auditors are required to carry out procedures designed to obtain sufficient appropriate audit evidence to determine with reasonable confidence whether the financial statements are free of material misstatement. Representations from management are a source of evidence. Management representations as Audit Evidence In the course of an audit, numerous questions are asked of the client's management and staff. Replies are usually verbal. Most of the queries are: a. Not material to the financial statements. Examples are queries re missing documents or errors in bookkeeping, or b. Capable of being corroborated by other evidence. For example, provisions in respect of litigation can be confirmed by the client's solicitors or the life of plant can be confirmed by examining technical literature. However, in some cases: a. Where knowledge of the facts is confined to management, for example, the management's intentions to close or keep open a material loss-making branch. This would have an affect on the value of the assets at the branch. b. Where the matter is principally one of judgment and opinion, for example, the readability of old stock. Then: i. The auditor should ensure that there is no conflicting evidence; ii. The auditor may be unable to obtain corroborating evidence; iii. The auditor should obtain written confirmation of any representations made; The auditor must decide for himself whether the total of other evidence and management's written representations are sufficient for him to form an unqualified opinion. Procedures The following procedures should be adopted: a. The auditor should summarize in his working papers all matters that are material and also subject to uncorroborated oral representations by management, b. In addition these matters should be either. i. Formally minuted as approved by the Board of Directors at a meeting ideally attended by the auditor; ii. Included in the signed letter of representation. c. Standard letters should not be used as: i. Each audit is different; ii. The letter is important and should receive very careful attention; iii. The management should participate in its production. There should be much drafting, review and discussion. d. The letter should be: i. Signed at a high level – e.g. chief executive, financial director; ii. Approved and minuted at a board meeting at which, ideally, the auditor would be present. e. The preparation of the letter should begin at an early stage, e.g. at the beginning of the final audit in order to avoid the possibility of the auditor being faced with a refusal to sign by the management. If there is a refusal by management to cooperate then the, auditor should: i. do all he can to persuade management to cooperate; docsity.com ii. prepare a statement setting out his understanding of the principal representations made, with a request that management confirm it; iii. if management disagree with this statement, discuss and negotiate until a correct understanding has been reached; iv. if management refuse altogether to cooperate, either on principle or because the are themselves uncertain about a particular matter, consider if he has obtained al the information and explanations he requires and consequently may need to qualify his report on grounds of limitation of scope. f. The representation letter or board resolution making representations should be approved as late as possible in the audit, after the analytical review, but, as it is audit evidence, before the audit report is prepared. If there is a long delay between the approval of the representation and the audit report, the auditor may need to do the: audit work/or obtain a supplementary letter of representation. It is suggested to dating the letter on the day the financial statements are approved. Contents The contents of the letter of representation should not include routine matters, for example, that all fixed assets exist and are the property of the company or that stock is valued at the lower of cost and net realizable value. The letter should include only matters which: a. are material to the financial statements, and b. the auditors cannot obtain independent corroborative evidence. Example of a Letter of Representation To ABC & Co. Chartered Accountants Gentlemen, We confirm that to the best of our knowledge and belief, and, having made appropriate enquiries of other directors and officials of the company, the following representations given to you in connection with your audit of the company's financial statements for the year ending 31st December 20x7: 1. We acknowledge as directors our responsibility for the financial statements, which you have prepared for the company. All the accounting records have been made available to you for the purpose of your audit and all the transactions undertaken by the company have been properly reflected and recorded in the accounting records. All other records and related information, including minutes of all management and shareholders' meetings, have been made available to you. 2. The provision for warranty claims has been estimated at 2% of annual turnover as in previous years. This amount is in accordance with our opinion of the probable extent of warranty claims. We know of no events which would materially affect the amount of these claims 3. As stated in Note 12 to the Accounts, there exists a contingent liability in respect of the company's guarantee of the bank overdraft of NBG Ltd, an associated company now in receivership. In our opinion the assets of NBG Ltd will realize sufficient to satisfy the bank and no actual liability will arise. 4. It is the intention of the Board of Directors to continue production for at least the next three years so that valuation of the assets and liabilities of that plant should appropriately be on the going concern basis Yours Sincerely, Company Secretary Signed on behalf of the Board of XYZ Co Ltd 14 March 20x8 Verification of Liabilities A balance sheet will contain many liabilities grouped under various headings. The headings may include: Non Current Liabilities  Debenture  Bank loans Current Liabilities  Trade creditors  Accrued expenses docsity.com