Explain the purpose and use of written representations as audit evidence. State nine items that could be included in a written representation letter.

ISA-, “Written Representations”, deals with the auditor’s responsibility to obtain written representations from management and, where appropriate, those charged with governance. Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Written representations are necessary information that the auditor requires in connection with the audit of the entity’s financial statements. Accordingly, similar to responses to inquiries, written representations are audit evidence. Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. Furthermore, the fact that management has provided reliable written representations does not affect the nature or extent of other audit evidence that the auditor obtains about the fulfillment of management’s responsibilities, or about specific assertions. The objectives of the auditor are: 

(a) To obtain written representations from management and, where appropriate, those charged with governance that they believe that they have fulfilled their responsibility for the preparation of the financial statements and for the completeness of the information provided to the auditor;

(b) To support other audit evidence relevant to the financial statements or specific assertions in the financial statements by means of written representations, if determined necessary by the auditor or required by other ISAs; and

(c) To respond appropriately to written representations provided by management and, where appropriate, those charged with governance, or if management or, where appropriate, those charged with governance do not provide the written representations requested by the auditor.

It makes it absolutely clear that written representations cannot be a substitute for other evidence that the auditor could expect to be reasonably available.  For example, a representation by management as to the quantity, existence and cost of inventories is no substitute for adopting normal audit procedures regarding verification and valuation of inventories.  If the auditor is unable to obtain sufficient appropriate audit evidence that he believes would be available regarding a matter which has or may have a material effect on the financial information, this will constitute a limitation on the scope of his examination even if he has obtained a representation from management on the matter.

The items included in the written representation letter will vary depending on the engagement and the nature and basis of financial statement presentation. Some commonly included items are:

1.         Management’s acknowledgment of its responsibility for the fair presentation in the financial statements of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles

2.         Management’s belief that the financial statements are fairly presented in conformity with generally accepted accounting principles

3.         Availability of all financial records and related data

4.         Completeness and availability of all minutes of meetings of stockholders, directors, and committees of directors

5.         Communication from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices

6.         Absence of unrecorded transactions

7.         Management’s belief that the effects of any uncorrected financial statement misstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole (Note: a summary of such items should be included in or attached to the letter.)

8.         Management’s acknowledgment of its responsibility for the design and implementation of programs and controls to prevent and detect fraud

9.         Knowledge of fraud or suspected fraud affecting the entity involving (1) management, (2) employees who have significant roles in internal control, or (3) others where the fraud could have a material effect on the financial statements

.       Knowledge of any allegations of fraud or suspected fraud affecting the entity received in communications from employees, former employees, analysts, regulators, short sellers, or others

.       Plans or intentions that may affect the carrying value or classification of assets or liabilities.

.       Information concerning related-party transactions and amounts receivable from or payable to related parties

.       Guarantees, whether written or oral, under which the entity is contingently liable

.       Significant estimates and material concentrations known to management that are required to be disclosed in accordance with the AICPA’s Statement of Position-6, Disclosure of Certain Significant Risks and Uncertainties

.       Violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency

.       Un-asserted claims or assessments that the entity’s lawyer has advised are probable of assertion and must be disclosed in accordance with Financial Accounting SAS—Management Representations Standards Board (FASB) Statement No.5, Accounting for Contingencies

.       Other liabilities and gain or loss contingencies that are required to be accrued or disclosed by FASB Statement No.5

.       Satisfactory title to assets, liens, or encumbrances on assets, and assets pledged as collateral

.       Compliance with aspects of contractual agreements that may affect the financial statements

.       Information concerning subsequent events

In fact there is a difference between Audit Report and Audit evidence . Audit report never to be an audit evidence. Audit psentation always refers to audit reporting , that should involve the

Subject, Introduction,scope of audit, the sample, finding, conclusions, and recommendations

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