who signs management representation letter

What is a Management Representation Letter?

Getting through financial audits can be frustrating for companies, especially when asked to provide management representation letters.

This article will clarify exactly what a management representation letter is, why auditors request them, what should be included, and provide examples to make the process smooth and compliant.

You'll learn the purpose of these letters, see template examples, understand international audit standards, and gain key takeaways to improve financial reporting at your organization.

Introduction to Management Representation Letters

A management representation letter is a formal document signed by a company's senior management that is provided to external auditors. It contains certain written representations that auditors require in order to complete an audit and form an opinion on the company's financial statements.

Defining the Management Representation Letter in Audit Context

The management representation letter serves an important role within the financial statement audit process. Auditors use it as audit evidence to support their assessment of whether the financial statements are free of material misstatement. Specifically, auditors request written confirmation from management regarding the accuracy and completeness of information provided during the audit. This includes representations related to:

• The financial statements and adequacy of disclosures
• Proper recording of transactions and account balances
• Internal controls over financial reporting
• Compliance with laws and regulations

By obtaining these written representations from management, auditors gain additional audit evidence to complete their testing and analysis. The management representation letter also outlines management's responsibilities under the audit engagement.

Essential Components of a Management Representation Letter

A standard management representation letter contains certain key statements that auditors rely upon. These include:

• Financial statement disclosures : Confirmation that management has provided the auditors with all relevant information and access needed to perform the audit.
• Recognition, measurement and disclosure : Assertion that the financial statements comply with the applicable financial reporting framework and standards.
• Non-compliance : Disclosure of any non-compliance with laws and regulations.
• Litigation and claims : Details of any actual, pending or threatened litigation and claims that could impact the financial statements.

The letter will also typically list areas of significant estimates and judgments made by management in preparing the financial statements. For example, allowances for doubtful accounts, asset impairment assessments, and assumptions used in valuation models.

By obtaining written representation on these matters, auditors gain evidence to issue their audit opinion. The management representation letter should be signed by the CEO and CFO or equivalent members of senior management.

Legal and Ethical Implications of Management Representations

Signing a management representation letter has legal and ethical implications. Management must ensure representations made to the auditors are accurate and made in good faith. Intentionally misrepresenting information or omitting relevant details could constitute fraud and result in legal liability.

Auditors also have a duty to assess the reasonableness of management representations and corroborate them with other audit evidence. Relying solely on management representations without further verification could call into question the quality of the audit.

Overall, the management representation letter facilitates open and transparent communication between management and auditors. It serves as a legally binding confirmation of management's fulfillment of its financial reporting responsibilities.

What is the main purpose of a management representation letter?

The main purpose of a management representation letter is to obtain written confirmation from management that they have fulfilled their responsibility for the fair presentation of the financial statements. This letter documents that management has provided the auditors with all relevant information and access needed to conduct the audit.

Some key purposes of the management representation letter include:

Confirming management's responsibility for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework (e.g. GAAP or IFRS).

Affirming that management has provided the auditors with all relevant information and access to records, documentation and personnel that is necessary for the audit.

Disclosing any instances of fraud involving management, employees with significant internal control roles, or those that cause a material misstatement of the financial statements.

Presenting details on matters that impact the financial statements - such as plans or intentions that may affect asset/liability carrying values, information about related parties, contingencies, subsequent events, etc.

Stating that all transactions have been recorded and are reflected in the financial statements. This helps confirm completeness and cut-off assertions.

So in summary, the management representation letter serves as important audit evidence that validates information provided by management to the auditors. It also formally documents management's responsibilities and representations concerning the financial statements.

What is the meaning of management representation?

Management representation refers to written confirmation provided by management of an entity to the auditors regarding the accuracy and completeness of financial statements and adequacy of internal controls.

The management representation letter is a key audit evidence prepared at the completion of the audit process. It contains management's assertions regarding:

• Fair presentation of financial statements
• Completeness of information provided to auditors
• Proper accounting policies used
• Reasonableness of significant estimates made

Essentially, through this letter, management takes responsibility for the fair presentation of the financial statements. They confirm to the auditors that they have fulfilled their financial reporting responsibilities.

The management representation letter covers all periods encompassed by the audit report and is dated the same date as the completion of audit fieldwork. It is addressed to the engagement partner and signed by those with appropriate responsibilities for the financial statements, usually the Chief Executive Officer and Chief Financial Officer.

By obtaining written representations from management, the auditors demonstrate they have obtained sufficient appropriate audit evidence to support their audit opinion. The representations serve as necessary supplementary corroboration of management's oral assertions made during the audit.

In summary, the management representation letter is a written statement from management provided to the auditors as part of the audit evidence. It confirms management's compliance with financial reporting responsibilities to enable auditors to form their audit opinion.

What is an example of a management representation letter?

We are providing this letter in connection with your audit of the cost representation statement of USAID resources managed by (Client Name) under Contract No. XXX “Project Name” for the period MM/DD/YY to MM/DD/YY.

We confirm, to the best of our knowledge and belief, the following representations made to you during your audit:

• We have made available to you all financial records and related data, including service auditor reports.
• There have been no communications from regulatory agencies concerning noncompliance with or deficiencies on financial reporting practices.
• We have no knowledge of any known or suspected fraudulent financial reporting or misappropriation of assets involving management or employees with significant roles in internal control.
• We have disclosed to you the results of our assessment of risk that the cost representation statement may be materially misstated as a result of fraud.
• There are no material transactions that have not been properly recorded in the accounting records.
• We believe the effects of any uncorrected financial statement misstatements aggregated by you are immaterial.
• We have disclosed all liabilities, both actual and contingent.
• There are no violations or possible violations of laws or regulations whose effects should be considered.

We confirm that the representations we have made to you during your audit are complete, truthful, and accurate.

Sincerely, [Signature] [Client Representative Name and Title]

What is the difference between management letter and management representation letter?

The key differences between a management letter and a management representation letter in an audit are:

Focus : The management letter focuses on identifying weaknesses and areas of improvement in the company's financial reporting process and internal controls. Management representation, on the other hand, focuses on providing evidence of management's understanding and support of the audit process.

Purpose : The purpose of a management letter is to communicate deficiencies in internal control and make suggestions for improvements. The purpose of a management representation letter is to confirm certain information that the auditors have requested from management.

Content : A management letter contains comments and recommendations from the auditor about issues encountered during the audit. A management representation letter contains specific statements by management regarding matters such as the fairness of financial statements.

Timing : A management letter is typically issued after the audit report while a management representation letter is obtained during the audit.

In summary, while both letters relate to the audit process, the management letter aims to provide suggestions for improvement while the management representation letter serves as audit evidence regarding management's assertions. The management representation letter supports the audit by confirming the accuracy of the financial statements.

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The purpose and importance of management representation letters.

Management representation letters serve several key purposes in the audit process. Most importantly, they provide additional audit evidence to support the auditor's opinion on the financial statements.

Reinforcing the Auditor's Collection of Audit Evidences

Management representation letters reinforce the audit evidence the auditor has already obtained throughout the audit. As outlined in ISA 500 Audit Evidence, auditors must obtain sufficient appropriate evidence to support their opinion. The letter serves as written representation from management on important assertions related to the financial statements. This includes the completeness and accuracy of information provided to the auditor.

Management's Accountability for Financial Reporting

Additionally, the letter highlights management's responsibilities over financial reporting. Management, not the auditor, is responsible for the preparation and fair presentation of the financial statements. The representation letter formally documents that management has fulfilled these duties, a key assertion needed to issue an audit opinion.

Assurance on Contingent and Off-Balance-Sheet Liabilities

Auditors also rely on management's representations on significant estimates and disclosures. This includes assurance from management that the financial statements appropriately reflect contingent liabilities and off-balance-sheet liabilities in accordance with the applicable financial reporting framework.

In summary, representation letters serve as a final confirmation from management that they have fulfilled their financial reporting responsibilities. The letters provide key audit evidence and accountability to support the auditor's work in accordance with auditing standards.

Drafting a Management Representation Letter: Best Practices

A management representation letter is an important part of the audit process. It documents certain written representations made by management to the auditors regarding the company's financial statements.

Drafting an effective management representation letter requires following several best practices:

Management Representation Letter Template: A Starting Point

When creating a management representation letter, it's best to start with a template. This ensures all relevant topics are covered such as:

• Management's responsibility for the preparation and fair presentation of the financial statements
• Availability of all financial records and related data
• Completeness of information provided regarding transactions and events
• Disclosure of all liabilities, both actual and contingent
• Non-existence of any fraud or illegal acts

Tailor the template to the specific circumstances and transactions of the business. But the template establishes a solid foundation.

Who Should Sign the Management Representation Letter

Typically the management representation letter should be signed by:

• The CEO or Managing Director
• The CFO or Financial Controller

This demonstrates the company's overall governance has reviewed the representations and attests to their validity and completeness.

In some cases, representation from heads of divisions or departments may also be necessary regarding transactions or activities under their specific purview.

Customizing Representations to Reflect Unique Organizational Circumstances

While a template is useful, each management representation letter must be customized to reflect the distinct transactions and activities of the organization. Specifically call out areas the auditors have highlighted as potential risks or requiring further representations.

For example, if the company underwent a major acquisition, restructuring, or system implementation, representations would be needed to address the associated impacts and risks regarding financial reporting.

The management representation letter is not a mere formality. It serves as an indispensable record of the critical dialogue between management and auditors. Following these best practices helps craft letters that clearly communicate important representations.

Management Representation Letter Samples and Examples

Management representation letters are important documents in the financial audit process. They contain written confirmation from management about the accuracy and completeness of financial statements and disclosures. Reviewing examples can help companies understand what to include in their own letters.

Analyzing a Management Representation Letter Sample

Here is an excerpt from a sample management representation letter:

We acknowledge our responsibility for the fair presentation in the financial statements of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (GAAP). We have provided you with unrestricted access to persons within the Company...

This excerpt demonstrates several key elements:

• Acknowledgment of management's responsibility for financial statements conforming to GAAP
• Confirmation that auditors had full access to people and information

Other standard inclusions are statements around contingent liabilities, litigation matters, plans or intentions that may affect assets or liabilities, and confirmation that appropriate disclosures have been made.

Analyzing examples helps identify customary terms to include.

Management Representation Letter PDF: Accessibility and Format

Management representation letters are often provided to auditors as PDF files. This locked, uneditable format:

• Facilitates easy sharing of the definitive final version
• Allows clear version control with digital signatures
• Enables reliable long-term archival storage

PDF format removes ambiguity around which representation letter version was relied upon.

Real-World Examples: Complex Issues

Consider these excerpts from real-world representation letters:

"The restructuring provision of $20 million represents our best estimate of costs to complete the plant closure based on current plans..."

"We confirm that we have properly recorded and disclosed the acquisition of Company XYZ in the financial statements..."

These excerpts demonstrate how companies transparently address complex real situations like restructurings or major transactions in the representation letter.

Real examples provide assurance that the company has appropriately considered complex accounting matters.

Comparing Management Letters and Management Representation Letters

Management letters and management representation letters serve important but distinct purposes in the audit process.

Management Letter vs Management Representation Letter: Clarifying the Distinction

A management letter communicates deficiencies or recommendations for improvement identified by the auditor during the audit. These may relate to internal controls, processes, or compliance issues that could be made more effective.

In contrast, a management representation letter obtained near the end of an audit contains specific written representations from management about the accuracy and completeness of the financial statements and disclosures. Common representations confirm that:

• Financial statements are fairly presented
• Significant assumptions used by management are reasonable
• All relevant information has been provided to the auditor
• There are no undisclosed side agreements or contingencies

While management letters offer suggestions, representation letters confirm critical facts underlying the audit.

The Role of the Auditor in Relation to Management Representations

Auditors use both tools to fulfill their responsibilities:

Management letters reflect the auditor's duty to communicate control deficiencies to those charged with governance. This allows the entity to take timely remedial action.

Representation letters provide audit evidence as part of the auditor's risk assessment procedures under auditing standards. They represent a form of documentary evidence about management's intents, knowledge and accuracy of the financial statements.

If management were unwilling to sign the representation letter, the auditor would need to reconsider their audit opinion.

Impact on Audit Opinions and Auditor's Reports

The management letter has no direct bearing on the auditor's opinion, unless the issues it raises cast doubt on the fairness of the financial statements.

However, matters raised in the representation letter directly relate to the audit evidence obtained. If management refuses to sign the letter, the auditor would likely issue a qualified opinion or disclaimer of opinion on the financial statements due to the limitation on audit scope and evidence.

In summary, while management letters offer helpful recommendations, representation letters provide the auditor written confirmation of critical information pertinent to the audit itself. Both play key roles in the audit process.

International Standards on Auditing: ISA 580 Management Representations

The International Standards on Auditing (ISA) provide a framework for conducting high quality external audits. ISA 580 specifically focuses on obtaining appropriate written representations from management to support the audit evidence gathered.

Understanding ISA 580 and Its Relevance to Management Representation Letters

ISA 580 outlines the auditor's responsibilities for obtaining written representations from management to confirm certain matters or to support other audit evidence. Some key points:

• Requires auditors to obtain written representations from management that they have fulfilled their financial reporting responsibilities
• Covers areas like recognition, measurement, presentation, and disclosure of information as per the financial reporting framework
• Helps auditors obtain confirmation on matters material to the financial statements, like the completeness of information provided
• Allows for detection of material misstatements due to fraud

By adhering to ISA 580, auditors can ensure management representation letters align with the necessary audit evidence requirements.

Compliance with International Standards on Auditing

It is critical that management representation letters comply with ISA guidelines, including:

• Obtaining representations from appropriate individuals : Those with overall responsibility for financial reporting, such as the CEO and CFO
• Written format : Printed on the organization's letterhead and signed by hand
• Date : No earlier than the date of the audit report
• Wording : Clear acknowledgement of responsibilities, accuracy of information provided, etc.

Strict compliance ensures the representations constitute valid and appropriate audit evidence as per ISA 500.

Case Studies: Adherence to ISA 580 in Practice

Company A - Drafted a management representation letter that was vague, unsigned, and outdated. By not adhering to ISA 580, they had to invest additional time and resources to obtain proper representations.

Company B - Carefully followed ISA 580 requirements. The CFO and CEO signed off on a letter confirming completeness of information and awareness of responsibilities. This aligned smoothly with the audit process.

As exemplified, non-compliance ultimately wastes time and resources. Whereas alignment with ISA 580 standards helps streamline external audits.

Conclusion and Key Takeaways

Management representation letters are important, standard audit evidence that reduce risk. They signify management's representations concerning the financial statements and accountability for internal controls, fraud, and information provided to auditors.

Summarizing the Role of Management Representation Letters in Audits

Management representation letters summarize key information and representations from management to auditors. They serve several key functions:

• Confirm management's responsibility for the preparation and fair presentation of the financial statements
• Disclose any issues or deficiencies in internal controls
• Affirm that all relevant information has been provided to auditors
• Highlight any fraud, illegal acts, or noncompliance with laws and regulations

By obtaining these written representations, auditors reduce engagement risk and confirm their understanding of management's views and positions.

Final Thoughts on Best Practices and Compliance

It is critical that management representation letters adhere to regulations and professional standards. Key best practices include:

• Ensuring the letter is dated as of the date of the auditor's report
• Having the letter signed by those with appropriate responsibilities and authority
• Disclosing all relevant issues completely and accurately
• Following the guidelines and requirements outlined in ISA 580 and other applicable standards

Diligent compliance promotes accuracy, transparency, and accountability.

Encouraging Diligence and Transparency in Financial Reporting

At their core, management representation letters aim to foster diligent, truthful, and transparent financial reporting. By eliciting key written representations from management, auditors promote an environment of responsibility, compliance, and ethical practice. This ultimately supports the accuracy and reliability of financial statements for all stakeholders.

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Management Representation Letter: Format, Content, Signature

Home » Bookkeeping » Management Representation Letter: Format, Content, Signature

As of 2019, the FASB requires publicly traded companies to prepare financial statements following the Generally Accepted Accounting Principles (GAAP). Auditors are required by professional standards to report, in writing, internal control matters that they believe should be brought to the attention of those charged with governance (the board). Generally, if your auditor is going to put an internal control matter in a letter, they have assessed that the matter was the result of a deficiency in internal controls. This is an important part of that audit that the profession does not take lightly.

One common example of a deficiency in internal control that’s severe enough to be considered a material weakness or significant deficiency is when an organization lacks the knowledge and training to prepare its own financial statements, including footnote disclosures. The “SAS 115” letter is usually issued when any significant deficiencies or material weaknesses would have been discussed with management during the audit, but are not required to be communicated in written form. In performing an audit of your Plan’s internal controls and plan financials, your auditors are required to obtain an understanding of the Plan’s operations and internal controls.

A management representation letter is a form letter written by a company’s external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis. The CEO and the most senior accounting person (such as the CFO) are usually required to sign the letter. The letter is signed following the completion of audit fieldwork, and before the financial statements are issued along with the auditor’s opinion. External auditors follow a set of standards different from that of the company or organization hiring them to do the work.

In doing so, they may become aware of matters related to your Plan’s internal control that may be considered deficiencies, significant deficiencies, or material weaknesses. Audits performed by outside parties can be extremely helpful in removing any bias in reviewing the state of a company’s financials. Financial audits seek to identify if there are any material misstatements in the financial statements. An unqualified, or clean, auditor’s opinion provides financial statement users with confidence that the financials are both accurate and complete. External audits, therefore, allow stakeholders to make better, more informed decisions related to the company being audited.

The representation should reaffirm your client’s understanding of all significant terms in the engagement letter. A relevant assertion is a financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated.

The purpose of an internal audit is to ensure compliance with laws and regulations and to help maintain accurate and timely financial reporting and data collection. It also provides a benefit to management by identifying flaws in internal control or financial reporting prior to its review by external auditors.

Depending on materiality and other qualitative factors, the auditors will consider the deficiency to be an “other” matter, significant deficiency, or material weakness. The auditor has discretion on which category the deficiency falls into, but are otherwise required to use the standard wording and definitions in the letter.

It serves to document management’s representations during the audit, reducing misunderstandings of management’s responsibilities for the financial statements. The definition of good internal controls is that they allow errors and other misstatements to be prevented or detected and corrected by (the nonprofit’s) employees in the normal course of performing their duties.

Material weaknesses or significant deficiencies may exist that were not identified during the audit, and auditors are required to disclose this in their written communication. The auditor’s report contains the auditor’s opinion on whether a company’s financial statements comply with accounting standards. The results of the internal audit are used to make managerial changes and improvements to internal controls.

What is a management representation letter?

A management representation letter is a form letter written by a company’s external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis.

A control objective provides a specific target against which to evaluate the effectiveness of controls. Management representation is a letter issued by a client to the auditor in writing as part of audit evidences. The representations letter must cover all periods encompassed by the audit report, and must be dated the same date of audit work completion.

These types of auditors are used when an organization doesn’t have the in-house resources to audit certain parts of their own operations. The assertion of completeness is an assertion that the financial statements are thorough and include every item that should be included in the statement for a given accounting period. The assertion of completeness also states that a company’s entire inventory, even inventory that may be temporarily in the possession of a third party, is included in the total inventory figure appearing on a financial statement. The compilation standards do not require practitioners to obtain a management representation letter, but this does not mean that it’s not a prudent thing to do. Obtaining a representation letter helps to ensure your client understands the services that you have provided, the limitations on the work you have completed, and that they are ultimately responsible for their financial statements.

The biggest difference between an internal and external audit is the concept of independence of the external auditor. When audits are performed by third parties, the resulting auditor’s opinion expressed on items being audited (a company’s financials, internal controls, or a system) can be candid and honest without it affecting daily work relationships within the company. Auditors evaluate each internal control deficiency noted during the audit to determine whether the deficiency, or a combination of deficiencies, is severe enough to be considered a material weakness or significant deficiency. In assessing the deficiency, auditors consider the magnitude of potential misstatements of your financial statements as well as the likelihood that internal controls would not prevent or detect and correct the misstatements.

Representation to Management

• In an audit of financial statements, professional standards require that auditors obtain an understanding of internal controls to the extent necessary to plan the audit.
• written confirmation from management to the auditor about the fairness of various financial statement elements.
• Auditors use this understanding of internal controls to assess the risk of material misstatement of the financial statements and to design appropriate audit procedures to minimize that risk.

The idea behind a management representation letter is to take away some of the legal burdens of delivering wrong financial statements from the auditor to the company. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. Internal auditors are employed by the company or organization for whom they are performing an audit, and the resulting audit report is given directly to management and the board of directors. Consultant auditors, while not employed internally, use the standards of the company they are auditing as opposed to a separate set of standards.

If the auditors detect an unexpected material misstatement during your audit, it could indicate that your internal controls are not functioning properly. Conversely, lack of an actual misstatement doesn’t necessarily mean that your internal controls are working.

The determination of whether an assertion is a relevant assertion is based on inherent risk, without regard to the effect of controls. Financial statements and related disclosures refers to a company’s financial statements and notes to the financial statements as presented in accordance with generally accepted accounting principles (“GAAP”). References to financial statements and related disclosures do not extend to the preparation of management’s discussion and analysis or other similar financial information presented outside a company’s GAAP-basis financial statements and notes.

External audits can include a review of both financial statements and a company’s internal controls. When a company’s financial statements are audited, the principal element an auditor reviews is the reliability of the financial statement assertions. In the United States, the Financial Accounting Standards Board (FASB) establishes the accounting standards that companies must follow when preparing their financial statements.

In an audit of financial statements, professional standards require that auditors obtain an understanding of internal controls to the extent necessary to plan the audit. Auditors use this understanding of internal controls to assess the risk of material misstatement of the financial statements and to design appropriate audit procedures to minimize that risk. written confirmation from management to the auditor about the fairness of various financial statement elements. The purpose of the letter is to emphasize that the financial statements are management’s representations, and thus management has the primary responsibility for their accuracy.

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This letter is useful for setting the expectations of both parties to the arrangement. Almost all companies receive a yearly audit of their financial statements, such as the income statement, balance sheet, and cash flow statement. Lenders often require the results of an external audit annually as part of their debt covenants. For some companies, audits are a legal requirement due to the compelling incentives to intentionally misstate financial information in an attempt to commit fraud.

Management representation letter

As long as there’s a reasonable possibility for material misstatement of account balances or financial statement disclosures, your internal controls are considered to be deficient. An auditor typically will not issue an opinion on a company’s financial statements without first receiving a signed management representation letter. An audit engagement is an arrangement that an auditor has with a client to perform an audit of the client’s accounting records and financial statements. The term usually applies to the contractual arrangement between the two parties, rather than the full set of auditing tasks that the auditor will perform. To create an engagement, the two parties meet to discuss the services needed by the client.

As a result of the Sarbanes-Oxley Act (SOX) of 2002, publicly traded companies must also receive an evaluation of the effectiveness of their internal controls. As noted above, an internal control letter is usually the result of a deficiency in internal controls discovered during the audit, most commonly from a material audit adjustment. The letter includes required language regarding the severity of the deficiency.

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The parties then agree on the services to be provided, along with a price and the period during which the audit will be conducted. This information is stated in an engagement letter, which is prepared by the auditor and sent to the client. If the client agrees with the terms of the letter, a person authorized to do so signs the letter and returns a copy to the auditor. By doing so, the parties indicate that an audit engagement has been initiated.

Also, the letter provides supplementary audit evidence of an internal nature by giving formal management replies to auditor questions regarding matters that did not come to the auditor’s attention in performing audit procedures. Some auditors request written representations of all financial statement items. All auditors require representations regarding receivables, inventories, plant and equipment, liabilities, and subsequent events. The letter is required at the completion of the audit fieldwork and prior to issuance of the financial statements with the auditor’s opinion.

Auditors spend a lot of time assessing how material audit adjustments and immaterial adjustments that have the potential to be material will be communicated in the internal control letter. The Representation Letter is issued with the draft audit and is required by auditing standards to finalize the audit. The Representation Letter is a letter from the Association to our firm confirming responsibilities of the board and management for the financial statements, as well as confirming information provided to us during the audit. The President or Treasurer and Management need to sign the Representation Letter and return it back to our office within 60 days from the date the draft audit was issued. Representation Letters received after the 60-day mark may result in additional auditing procedures in order to finalize the audit and comply with auditing standards at an additional expense to the Association.

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Understanding the Representation Letter

Written by David T. Schwindt, CPA

What is a Representation Letter? As a Board member or manager of a community management company, you may be asked to sign a representation letter at the conclusion of an audit or a reviewed financial statement engagement.  Although the letter is from the Association/management company to the CPA, the CPA will generally draft the letter on behalf of the Association.   The letter includes certain assertions about the Association during the period covered by the financial statements.  Those assertions include but are not limited to the following:

• The Association/management company has provided the CPA with all requested financial information.
• The Association/management company has disclosed all related party transactions.
• The Association/management company has disclosed all existing and potential litigation.
• The Association/management company has disclosed any knowledge of fraud or financial irregularities.
• The Association takes responsibility for the design and implementation of a system of internal controls.  These controls include but are not limited to safeguarding assets, approving transactions and minimizing the risk of someone perpetrating a theft of money or information and not being discovered in a reasonable amount of time. Although the Board is ultimately responsible for this activity, it is common that Boards rely upon the management company to assist in this responsibility.

In some instances, the management company may sign a different representation letter because the responsibilities are slightly different.

Why is the Representation Letter necessary? The American Institute of Certified Public Accounts has determined that those charged with governance (the board of directors and the community management company) should take responsibility for the assertions in the representation letter.  CPAs are mandated to obtain the signed representation letter before issuing the final financial statements.

Who should sign the representation letter? Most often, the Board Chair, Board Treasurer and community manager signs the letter.

When does the Representation Letter need to be signed? The letter needs to be signed at the end of the engagement generally after a draft of the financial statements are issued.  Schwindt & Co combines the representation letter with the management letter comments and proposed adjusting journal entries for ease of review.  When the signed document is received by our office, we are then able to issue the final financial statements.

Should a new Board member or community manager who was not involved with Association management or governance during the period under audit or review be hesitant about signing the representation letter? This is a common question and the answer is simple.  No!  The first paragraph of the representation states that whoever signs the letter does so based on the best knowledge and belief of the person signing.  This means that even though you may be new to the Board or management company, it is perfectly fine to sign the letter because you will only be asserting to issues that you have knowledge.  It is very common for Board members/managers to sign a representation letter even though they were not involved during the period being audited or reviewed.

• Representation letters are normal and required before the issuance of audited/reviewed financial statements.
• Board members are only asserting to issues that they are aware of and new board members and managers frequently are required to sign representation letters.
• The Board Chair, Board Treasurer and community manager are generally required to sign the representation letter.

Questions regarding this article may be directed to David T. Schwindt, CPA at Schwindt & Co. (503) 227-1165.

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The Role of Management Representation Letters in Audits

Explore the significance of management representation letters in audits, their preparation process, and common misunderstandings in this insightful overview.

Audits are a critical component of financial transparency and corporate governance. Within this process, management representation letters play an essential role that often goes unnoticed by those outside the accounting profession.

These documents serve as a written assertion from company management regarding the accuracy and completeness of information provided to auditors. Their importance cannot be overstated, as they underpin the trust and integrity of the entire audit process.

Purpose of Management Representation Letters

Management representation letters serve as a formal attestation from a company’s executives to the auditors, confirming the veracity of the financial statements and disclosures. These letters are a professional necessity, providing auditors with assurances that all relevant information has been disclosed. They are a testament to the management’s confidence in their financial reporting and their commitment to transparency.

The letters also support the auditor’s assessment of the risk of material misstatement in the financial statements. By obtaining written confirmations, auditors can reduce the extent of substantive testing required, which can streamline the audit process. This efficiency is beneficial for both the auditors and the company being audited, as it can lead to a more focused and timely audit.

Moreover, these letters can be a safeguard against potential disputes or legal issues that may arise post-audit. In instances where inaccuracies are discovered after the audit has been completed, the letter serves as a record that management had affirmed the completeness and accuracy of the information at the time of the audit. This can be particularly important in cases where financial statements are later found to be fraudulent or misleading.

Preparing a Management Representation Letter

The preparation of a management representation letter is a meticulous process that requires careful attention to detail and a comprehensive understanding of the company’s financial affairs. It is a collaborative effort between management and auditors to ensure that all significant information is accurately reflected.

Necessary Statements Identification

Identifying the necessary statements to be included in the management representation letter is a foundational step. These statements typically cover a range of areas such as the acknowledgment of responsibility for the fair presentation of financial statements in conformity with the applicable financial reporting framework, confirmation of the completeness of the information provided, and the disclosure of any subsequent events that may affect the financial statements. Management must also confirm that they have made the auditors aware of all known instances of fraud or suspected fraud affecting the company. The identification process is guided by professional auditing standards, such as those issued by the American Institute of Certified Public Accountants (AICPA) or the International Auditing and Assurance Standards Board (IAASB).

Information Completeness

Ensuring the completeness of information in the management representation letter is paramount. This involves a thorough review of the company’s financial records and disclosures to verify that all relevant information has been included. Management must confirm that all transactions have been recorded and are reflected in the financial statements. They must also attest to the appropriateness of the accounting policies applied and whether any unrecorded liabilities exist. This step is critical as it directly impacts the credibility of the financial statements and the audit’s outcome. The completeness of information also extends to the disclosure of any related party transactions and the effects of any uncorrected misstatements identified during the audit.

Review and Approval

The final step in preparing a management representation letter is the review and approval by the company’s top executives, typically the CEO and CFO. This review process is not merely a formality; it is an active examination to ensure that the letter accurately reflects the company’s financial position and that all statements can be substantiated. The approval signifies that management has taken ownership of the representations made within the letter. It is also an opportunity for management to discuss any concerns or clarifications with the auditors before the letter is finalized. The signed letter is then dated as of the last day of fieldwork, signifying that the representations are relevant and up-to-date with the findings of the audit.

Misconceptions About Representation Letters

A common misunderstanding about management representation letters is that they are a mere formality, a routine sign-off without substantial impact on the audit’s outcome. This view underestimates the letter’s function as a document that auditors rely upon for assurance beyond the financial data and records they examine. It is not simply a procedural step, but a declaration that can have legal implications for the signatories, particularly if it is later found that the information provided was knowingly false or misleading.

Another misconception is that the letter is solely for the benefit of the auditors. While it is true that auditors use these letters to corroborate information and reduce audit risk, the benefits extend to the management and the company as well. The process of preparing the letter encourages a comprehensive review of the company’s financial disclosures, which can lead to the identification and rectification of errors before the audit is finalized. This proactive approach can enhance the quality of financial reporting and potentially prevent future financial discrepancies.

There is also a belief that once the letter is signed and the audit is complete, the responsibilities of management in relation to the representations made are concluded. However, the representations have a lasting effect, as they are a testament to the financial condition of the company at the point of the audit. Should any issues arise from the period covered by the audit, the representations made can be scrutinized for their accuracy and completeness.

How External Users Leverage Accounting Information

Strengthening your control environment for financial integrity, you may also be interested in..., understanding shareholders: roles, rights, and impact on corporate governance, the impact of external auditors on financial integrity, subsequent events impact on financial reporting, vouching in audits for robust financial integrity.

What is a Representation Letter?

An auditor’s responsibility is to gather audit evidence regarding a subject matter. This evidence comes from several audit procedures. Based on this evidence, the auditor must conclude whether the subject matter meets specific criteria. In the case of external audits , it includes examining a client’s financial statements to establish whether they are free from material misstatements.

In some cases, however, auditors may not have the option to apply some substantive audit procedures . However, that does not imply the auditor must not consider those areas. It also does not infer that auditors must provide a negative opinion regarding those areas. In these cases, auditors can also obtain a representation letter from the client’s management.

A representation letter is a form of written representation obtain from a client. Written representations are audit evidence that auditors collect. Similarly, they are necessary information that auditors may require related to a specific audit assignment. These are similar to audit inquiries but in a written form. The international auditing standard that deals with written representations are ISA 580 Written Representations.

It is a written statement written by auditors. This statement attests to the accuracy of the financial statements given to the auditors for analysis. Auditors present this letter to the client’s management, who signs the letter constructing a form of audit evidence. While this evidence is necessary, it may not represent sufficient appropriate audit evidence.

Once presented to the management, a senior official will sign the representation letter. Usually, a client’s CEO, CFO, or other higher senior accounting personnel sign the letter. This process must take place before auditors present an audit report regarding the client’s financial statements. The content of the representation letter may vary from one firm to another. However, there are some similar elements or contents that are present in every representation letter.

What are the Contents of the Representation Letter?

A typical representation letter will include various areas to cover the auditors’ liability towards the audit assignment. It will also include areas to ensure the management is aware of its responsibility to prepare accurate financial statements. According to accountingtool.com , representation letters will cover the following areas.

1. The management is responsible for the proper presentation and accurate preparation of the financial statements. It will also include a reference to the applicable accounting framework for this purpose. 2. The auditors have received all the financial records related to the audit. 3. The board of directors meeting minutes are complete. 4. There are no unrecorded transactions. 5. The management has disclosed all related party transactions. 6. The management has provided all letters from regulatory agencies regarding financial reporting noncompliance if required. 7. The net effect of all uncorrected misstatements is immaterial. 8. The financial statements conform to the applicable accounting standards. 9. The management doesn’t have any knowledge of fraud within the company. 10. The financial statements account for all material transactions. 11. The management is responsible for systems designed to detect and prevent fraud. 12. The client has disclosed all liens and other encumbrances on its assets. 13. The management has disclosed all contingent liabilities. 14. The management acknowledges its responsibility for the system of financial controls. 15. The client has disclosed all unasserted claims or assessments.

Overall, the representation letter will consist of all the management’s responsibilities for the financial statements and the audit. This letter will decrease the auditors’ responsibility if there is a future dispute. Similarly, it places responsibility on the management for areas where it must ensure proper accounting and controls. Auditors will not allow the management to make changes to the representation letter before signing.

What Happens If Auditors Cannot Obtain Reliable Representation Letters?

In some cases, auditors cannot obtain a reliable representation letter from the management. These may occur when the auditor has concerns about the competence, integrity, or diligence of the management. In these cases, the standards require auditors to determine the effect that such issues may have on the reliability of the representation letters.

When auditors obtain representation letters that are inconsistent with other audit evidence, they must perform procedures to resolve any discrepancies. If they cannot do so, they will need to reconsider the prior assessment of the client’s management. The auditors must also determine the effects such circumstances will have on the reliability of the representation letter or the audit assignment.

If auditors conclude that the representation letter is not reliable, they must take appropriate actions. These may include establishing the possible effect on the opinion in the auditor’s report. The same cases will apply when the management refuses to provide a representation letter. The auditor must discuss it with the management before taking any actions.

Representation letters are a form of written representation and constitute an essential part of audits. These letters attest to the accuracy of the financial statements presented by the client’s management. There are several areas which representation letters cover. If auditors cannot obtain reliable representation letters, they will need to evaluate the situation and take appropriate actions.

Related Posts:

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• Objectives of an Assurance Engagement

What Is a Representation Letter?

The Letter of Representations is a letter written from the Association to its accountant representing that the financial statements for the time period covered by the engagement are the responsibility of "management". In a community association, management include "those charged with governance" (the board of directors) and the professional manager. (See further discussion under “Who,” below.) Management confirms to the best of their knowledge various facts, including the following:

• That all financial records have been made available.
• That there have been no irregularities involving management, employees, etc.
• That all related party transactions have been disclosed
• That no events have occurred after the end of the fiscal year about which the CPA should know.

Each accountant may put different representations into their letters. Some of these representations may deal with insurance, legal matters, reserves and taxes. Discuss those items that are unclear with the CPA. Ask for explanations of unfamiliar terms or phrases.

It is important to note that the representation is “to the best of our knowledge”. As long as the person signing the letter does not know of any conflicting facts, they can sign the letter of representations.

A letter of representations cannot be signed earlier than the date of the audit report. Thus, most CPAs, including our firm, issue the letter along with a draft copy of the audit report. The Board should review the audit report and the report of internal controls, as well as any other documentation that is provided. Once the Board is assured that the audit is materially complete and accurate, they sign the Letter of Representations. This is the notification to the CPA that the final audit report is ready to be issued.

Why is the letter issued? The technical answer is that the letter is a requirement of the American Institute of Certified Public Accountants, the governing body for CPAs. Thus all CPAs should be requiring this letter for all audit engagements.

From a practical standpoint, this letter assures the CPA that management has given the accountant all pertinent information. The financial statements belong to the Association, not to the CPA, so it is important that management take responsibility for the amounts contained within the final audit or review report.

If a CPA cannot obtain a signed representation letter in an audit, the auditor will be required to change the report to a “qualified report”  (as compared with an “unqualified” or “clean” opinion), if limited representations can be obtained or will need too “disclaim” an opinion or “withdraw” from an engagement if no representations can be obtained.

Who should sign the representation letter? Guidance states that “the letter should be signed by those members of management with overall responsibility for financial and operating matters whom the auditor believes are responsible for and knowledgeable about, directly or through others in the organization, the matters covered by the representations”. In community associations, as discussed above, this term may involve board members as well as professional management. Thus, it is up to the CPA to determine who should sign the letter. We interpret the term “management” to include “those charged with governance”. Most professionals in this industry agree that this includes the Board of Directors.

In our firm, we ask for the president and treasurer of the association, as well as the community association manager - if there is one - to sign the report. Board members should not be hesitant to sign the representation letter if they have complied with the terms of the letter - to the best of their ability. It does not matter if a board member has been in office only a few months. The current Board is responsible for the report that is going out to the membership; thus, it is the current Board that is being asked to sign “to the best of their knowledge”. Guidance supports this determination with the statement – “If current management was not present during all periods covered by the auditor’s report, the auditor should nevertheless obtain written representations from current management on all such periods”.

In conclusion , the AICPA in its brochure, The Representation Letter in an Audit - An Important Communication Between Management and the Independent Audito r, states the following:

“…as management, you are asked to acknowledge that you - rather than the auditor - have primary responsibility for the financial statements and that to the best of your knowledge these statements are correct. The letter does not change or add to your to your fundamental responsibilities, nor does it relieve the auditor of any of his or her responsibilities. It simply clarifies the traditional roles that management and the auditor perform.”

In summary – the Letter of Representations

• Required by auditing and accounting standards
• It simply clarifies that to the best of your knowledge that these statements are correct.
• Must be signed by those who govern and manage the Association
• Is the notification to the CPA that the final report is ready to be issued

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Demystifying ISA 580: Management Representation Letters in Auditing

Introduction: The Basics of Audit – Management Representation Letter (ISA 580)

In the intricate world of auditing, there exists a pivotal document known as the Management Representation Letter, guided by ISA 580. This document plays a central role in audits, acting as a conduit for communication between management and auditors. In this comprehensive exploration, we delve deep into the intricacies of the Management Representation Letter, covering all 19 key points outlined in the standard, from its purpose to the actions auditors must take in the face of challenges.

Detailed Analysis:

1. Understanding the Management Representation Letter

A Management Representation Letter, as stipulated by ISA 580, constitutes a formal statement presented by the management of the audited entity to the auditors. It can be furnished either spontaneously or in response to specific audit inquiries. These representations encompass a wide spectrum of subjects, ranging from general responsibilities related to the preparation of financial statements to specific assertions concerning items within the financial statements.

2. The Role of Management Representation as Audit Evidence

While Management Representation Letters hold undeniable importance, they cannot serve as a complete replacement for other audit evidence that auditors anticipate will be available. For select matters where no alternative evidence exists, such as determining whether investments are held as short-term or long-term, Management Representation can indeed function as sufficient and appropriate audit evidence.

3. Key ISA 580 Requirements

Revised ISA 580 introduces two significant stipulations:

• 3.1. In the event that a representation made by management contradicts other audit evidence, auditors are obligated to investigate the circumstances thoroughly and, if necessary, reassess the reliability of other representations provided by management.
• 3.2. If, during the course of the audit, management refuses to furnish a representation that auditors deem essential, this constitutes a scope limitation. Consequently, auditors are required to express a qualified opinion or a disclaimer of opinion.

4. Additional Vital Elements of Management Representation

• 4.1. The Management Representation Letter must be addressed directly to the auditor.
• 4.2. Its date should coincide with the date of the auditor’s report or precede it.
• 4.3. It should bear the signature of a member of management who bears primary responsibility for the preparation of financial statements and possesses pertinent knowledge in this regard.

5. Various Forms of Written Representation

Management Representation can assume various formats, including:

• 5.1. A straightforward representation provided by management.
• 5.2. A letter authored by auditors delineating their understanding of management’s representation, an acknowledgment of which is sought and obtained from management.
• 5.3. A duly authenticated copy of pertinent meetings involving the board of directors or analogous bodies.

6. The Effective Date of ISA 580

ISA 580 is effective for audits of financial statements for periods beginning on or after 1st April, 2009.

7. The Objectives of the Auditor

The objectives of the auditor, as per ISA 580, encompass:

• 7.1. Obtaining written representations from management and, where appropriate, those charged with governance, confirming their belief in fulfilling their responsibility for preparing the financial statements and ensuring the completeness of information provided to the auditor.
• 7.2. Supporting other audit evidence relevant to the financial statements or specific assertions in the financial statements through written representations, as determined necessary by the auditor or required by other SAs.
• 7.3. Responding 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.

8. Definition of Written Representations

For purposes of the SAs, “Written representations” is defined as a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. Written representations, in this context, do not include financial statements, the assertions therein, or supporting books and records.

9. References to “Management” in the Standard

For purposes of this SA, references to “management” should be read as “management and, where appropriate, those charged with governance.” In the case of a fair presentation framework, management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework; or the preparation of financial statements that give a true and fair view in accordance with the applicable financial reporting framework.

10. Management from Whom Written Representations Requested

The auditor shall request written representations from management with appropriate responsibilities for the financial statements and knowledge of the matters concerned.

11. Written Representations about Management’s Responsibilities for the Preparation of the Financial Statements

The auditor shall request management to provide a written representation that it has fulfilled its responsibility for the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation, as set out in the terms of the audit engagement.

12. Written Representations about Information Provided and Completeness of Transactions

The auditor shall request management to provide a written representation that:

• 12.1. It has provided the auditor with all relevant information and access as agreed in the terms of the audit engagement.
• 12.2. All transactions have been recorded and are reflected in the financial statements.

13. Description of Management’s Responsibilities in the Written Representations

Management’s responsibilities shall be described in the written representations required by paragraphs 9 and 10 in the manner in which these responsibilities are described in the terms of the audit engagement.

14. Other Written Representations

Other SAs may require the auditor to request written representations. If, in addition to such required representations, the auditor determines that it is necessary to obtain one or more written representations to support other audit evidence relevant to the financial statements or one or more specific assertions in the financial statements, the auditor shall request such other written representations.

15. Date of and Period(s) Covered by Written Representations

The date of the written representations shall be as near as practicable to, but not after, the date of the auditor’s report on the financial statements. The written representations shall be for all financial statements and period(s) referred to in the auditor’s report.

16. Form of Written Representations

The written representations shall be in the form of a representation letter addressed to the auditor. If law or regulation requires management to make written public statements about its responsibilities, and the auditor determines that such statements provide some or all of the representations required by paragraphs 9 or 10, the relevant matters covered by such statements need not be included in the representation letter.

17. Doubt as to the Reliability of Written Representations and Requested Written Representations Not Provided

• 17.1. If the auditor has concerns about the competence, integrity, ethical values, or diligence of management, or about its commitment to or enforcement of these, the auditor shall determine the effect that such concerns may have on the reliability of representations (oral or written) and audit evidence in general.
• 17.2. In particular, if written representations are inconsistent with other audit evidence, the auditor shall perform audit procedures to attempt to resolve the matter. If the matter remains unresolved, the auditor shall reconsider the assessment of the competence, integrity, ethical values, or diligence of management, or of its commitment to or enforcement of these, and shall determine the effect that this may have on the reliability of representations (oral or written) and audit evidence in general.

18. Requested Written Representations Not Provided

If management does not provide one or more of the requested written representations, the auditor shall:

• 18.1. Discuss the matter with management.
• 18.2. Re-evaluate the integrity of management and evaluate the effect that this may have on the reliability of representations (oral or written) and audit evidence in general.
• 18.3. Take appropriate actions, including determining the possible effect on the opinion in the auditor’s report in accordance with SA 705, having regard to the requirement in paragraph 19 of this SA.

19. Written Representations about Management’s Responsibilities

The auditor shall disclaim an opinion on the financial statements in accordance with SA 705 if:

• 19.1. The auditor concludes that there is sufficient doubt about the integrity of management such that the written representations required by paragraphs 9 and 10 are not reliable; or
• 19.2. Management does not provide the written representations required by paragraphs 9 and 10.

Conclusion: Unlocking the Significance of ISA 580

In conclusion, ISA 580, which revolves around the Management Representation Letter, is a comprehensive framework that ensures transparency, accountability, and reliability in the audit process. By covering all 19 points detailed in the standard, auditors can effectively navigate the complexities of this critical document. Understanding the nuances of ISA 580 empowers auditors to fulfill their duties with precision, integrity, and professionalism, ultimately enhancing the quality of financial reporting and instilling confidence in stakeholders.

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• PROFESSIONAL LIABILITY SPOTLIGHT

Use of e-signatures for engagement documentation

• Firm Practice Management
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Is a client's electronic signature on engagement letters, management representation letters, and other documents acceptable? This is a question many practitioners pose to the AICPA Professional Liability Insurance Program. Generally speaking, e - signatures are binding and thus comparable to a "wet" signature on a hard copy document for purposes of proving their validity, enforceability, and admissibility in the event of litigation. However, there are caveats that need to be considered and understood. This column explores those considerations in order to help refute an assertion that an e - signature is not authentic.

On June 30, 2000, the Electronic Signatures in Global and National Commerce Act ( E - Sign Act), P.L. 106 - 229 , was signed into law, providing a general rule for the validity of electronic records and signatures pertaining to transactions in or affecting interstate or foreign commerce. For a signature to be valid under the E - Sign Act, information relating to a transaction affecting interstate or foreign commerce must be provided or made available to the consumer in writing. The use of an electronic record to provide or make available such information is satisfied if it meets several basic requirements related to consent, withdrawal, and notification.

The E - Sign Act is mirrored, in some form of legislation, by all states and permits most documents to be signed electronically. However, enforcement of e - signed documents can be more involved. Applicable case law challenging e - signatures demonstrates that they are most likely to be upheld, which has precedential value with respect to the successful use of e - signatures . Below we outline several common questions regarding the validity of e - signatures , summarize cases that help address these questions, and provide takeaways for CPA firms to consider.

Did the e-signature actually come from the individual whose signature is affixed?

The case: In Julie Ann Zulkiewski v. American General Life Insurance Co. , No. 299025 2012 WL 2126068 (Mich. Ct. App. 2012), someone changed the beneficiary of a life insurance policy using an e - signature . Subsequent to the insured's death, both the new beneficiary and the prior beneficiary questioned the validity of the e - signature . The court held that, absent some proof to the contrary, the individual who changed the beneficiary had the correct login information to create the change. As a result, the court upheld the record change made via the e - signature .

Takeaway: The greater the amount of personal information required to create and use an e - signature , the more likely that the signature's validity will be upheld. According to the Zulkiewski court, some of this information may include, but is not limited to:

• Account numbers;
• Tax identification numbers; and
• Mother's maiden name.

Will multiple documents with a single e-signature be upheld?

The cases: In Mitchell, et al. v. Craftworks Restaurants & Breweries, Inc. , No. 18 - 879 (RC) (D.D.C. 2018), a restaurant worker claimed not to have e - signed an employment agreement. In its opinion, the court reasoned that because documents were signed individually by the employee, there was little chance of confusion about what was being signed.

Similarly, but with a different decision, in Ruiz v. Moss Bros. Auto Group, Inc. , 232 Cal. App. 4th 836, 181 Cal. Rptr. 3d 781 (4th Dist. 2014), the alleged e - signature of an employee on an employment agreement was not upheld. The court sided with the employee who did not specifically remember signing employment documents. There was no detailed record of when or how the documents had been signed. Therefore, the court concluded that the employer lacked a security procedure to support its assertion that the employee had signed the documents.

Takeaway: If multiple documents require a signature, ensure that an e - signature is affixed to each document to help reduce confusion regarding which documents were signed.

Are documents signed on mobile devices valid?

The case: In Berkson, et al. v. GOGO LLC, et al. , 97 F. Supp. 3d 359 (E.D.N.Y. 2015), a plaintiff asserted that the e - signature should not be upheld because the mobile device screen was small and the terms were lengthy. The court used the term "browsewrap" to describe a lengthy set of contractual terms presented within a browser, including additional terms available via hyperlink. The court also explored studies on reading behavior as well as prior court decisions before upholding the terms agreed to by the signer. Typically, the e - signature will be enforceable under this decision if:

1.The presentation gave a reasonably prudent user, on inquiry, a notice of the terms;

2.The user was encouraged to examine the terms via a hyperlink; and

3.The hyperlink was placed in a prominent location where the user was likely to see it.

Takeaway: Signatories should be encouraged to review all applicable terms prior to signing an agreement, including when presented through a mobile device. For example, when a CPA firm incorporates standard terms and conditions into an engagement letter by hyperlink, the user should be encouraged to read and agree to the hyperlinked standard terms and conditions, as well as the engagement letter. In addition, testing and documenting a user's experience on different devices prior to a firm's deployment of a mobile device signature process may assist in the enforcement of an e - signature affixed to a document via a mobile device.

Is there an audit trail to support the delivery and receipt of documents?

The case: In IO Moonwalkers, Inc. v. Banc of America , 814 S.E.2d 583 (N.C. Ct. App. 2018), a customer entered into an agreement with a bank for credit card processing services. The agreement was e - signed using a third - party signature verification company. The customer e - signed the documents but later asserted it never signed them and, thus, was not bound to them. The court held that the e - signature was binding, based upon the records maintained by the third - party signature verification company. Documentation evidencing the email delivery record and return of the e - signed documents, the audit trail, was critical, proving that the documents were delivered to and returned from the customer's email account.

Takeaway: Documentation retained by third - party signature verification companies supports the enforcement of e - signatures . If a third - party solution is not used, consider retaining documentation of office time records for meetings and emails, detailing transmission and receipt of the e - signed documents. Creating this audit trail is one of the advantages of using an e - signature process.

Was there a prior understanding that supersedes the e-signed document?

The case: In Harpham v. Big Moose Inspection , 2015 WL 5945842 (Mich. App. Ct. 2015), a client e - signed a home inspection agreement while in the process of making an appointment. Specific terms were included in the document presented to the client prior to the scheduled inspection. The client asserted that an oral agreement for services existed before a written agreement was e - signed . Testimony supporting the e - signature stated that the client was emailed a copy of the agreement and had opened the document. Moreover, the client had clicked on an agreement button affirming the terms of the contract. Although the client asserted that the document had not been received or signed, the weight of the evidence supported a court ruling upholding the e - signature and the document to which it was affixed.

Takeaway: CPA firms generally discuss services to be provided with the client prior to formalizing the engagement with a written document. E - signing an engagement letter close to client and engagement acceptance discussions but before rendering services may reduce the likelihood of a client assertion that there was an oral agreement related to services.

FINAL THOUGHTS

The appropriate use of e - signatures can provide an expeditious means of executing documents relative to the delivery of professional services by CPA firms. By considering the takeaways outlined in this column, strategies may be developed to ensure that digital technology represents an efficient process and also helps to mitigate risk exposure.

Signing on the digital line

754 million: The number of global e-signature transactions in 2017, an increase from 89 million in 2012.

Source: Statistica.com.

Steven M. Platau, CPA, J.D. , is professor of accounting at the John H. Sykes College of Business, The University of Tampa. Deborah K. Rood, CPA , is a risk control consulting director at CNA. For more information about this article, contact [email protected] .

Continental Casualty Company, one of the CNA insurance companies, is the underwriter of the AICPA Professional Liability Insurance Program. Aon Insurance Services, the National Program Administrator for the AICPA Professional Liability Program, is available at 800-221-3023 or visit cpai.com.

This article provides information, rather than advice or opinion. It is accurate to the best of the authors' knowledge as of the article date. This article should not be viewed as a substitute for recommendations of a retained professional. Such consultation is recommended in applying this material in any particular factual situations.

Examples are for illustrative purposes only and not intended to establish any standards of care, serve as legal advice, or acknowledge any given factual situation is covered under any CNA insurance policy. The relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured. All products and services may not be available in all states and may be subject to change without notice.

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Letters of representation

Helpsheets and support

Published: 01 Oct 2012 Updated: 24 Jan 2022 Update History

Introduction

Requirement, audit engagements, non-audit engagements, example letter of representation, if in doubt seek advice, appendix 1: example letter of representation.

Technical helpsheet to help ICAEW members to understand the need for letters of representation in the context of auditing and to consider other situations where a letter of representation may be useful. To assist members in the preparation of letters of representation, this helpsheet also includes an example letter.

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to understand the need for letters of representation in the context of auditing and to consider other situations where a letter of representation may be useful. To assist members in the preparation of letters of representation, this helpsheet also includes an example letter.

Members may also wish to refer to the following related guidance:

• TECH 04/02 AAF Management representation letters: Explanatory note
• International Standards on Auditing (UK)

A word version of the sample letter of representation wording  is available to download and complete.

Written confirmation(s) of representations from management is a requirement of the International Standards on Auditing (UK) (ISAs (UK)) and is therefore required for each and every audit. They are also useful to confirm, in writing with clients, information, assumptions and accounting treatments in non-audit engagements.

A number of ISAs (UK) require written representations to be obtained from management. These must be obtained as near as practicable to, but not after, the date of the auditor’s report (ISA (UK) 580 paragraph 14) in the form of a letter addressed to the auditor (paragraph 15).

Representations are requested from management with appropriate responsibilities for the financial statements and knowledge of the matters concerned. In the UK, those charged with governance are responsible for the preparation of the financial statements.

Letters of representation can be, and often are, signed by more than one member of the audited entity’s staff – the auditor needs to make an assessment as to who is in the best position to provide the representations required. ISA (UK) 580 requires written representations from management that:

• It has fulfilled its responsibility for the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation, as set out in the terms of the audit engagement (paragraph 10);
• It has provided the auditor with all relevant information and access as agreed in the terms of the audit engagement (paragraph 11(a)); and
• All transactions have been recorded and are reflected in the financial statements (paragraph 11(b)).

As well as the written representations required in ISA (UK) 580, the following ISAs (UK) require subject-matter specific written representations – reference should be made to the particular ISA (UK) for the full text of the requirements:

• ISA (UK) 240 (Revised May 2021) The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements (paragraph 39);
• ISA (UK) 250 (Revised November 2019) Section A – Consideration of Laws and Regulations in an Audit of Financial Statements (paragraph 17);
• ISA (UK) 450 (Revised June 2016) Evaluation of Misstatements Identified during the Audit (paragraph 14);
• ISA (UK) 501 Audit Evidence – Specific Considerations for Selected Items (paragraph 12);
• ISA (UK) 540 (Revised December 2018) Auditing Accounting Estimates and Related Disclosures (paragraph 37);
• ISA (UK) 550 Related Parties (paragraph 26);
• ISA (UK) 560 Subsequent Events (paragraph 9);
• ISA (UK) 570 (Revised September 2019) Going Concern (paragraph 12-2(f));
• ISA (UK) 710 Comparative Information – Corresponding Figures and Comparative Financial Statements (paragraph 9); and
• ISA (UK) 720 (Revised November 2019) The Auditor’s Responsibilities Relating to Other Information (paragraph 13(c)).

In addition, paragraph A25 of ISA (UK) 500 Audit Evidence highlights that the auditor may consider it necessary to obtain written representations from management and, where appropriate, those charged with governance to confirm responses to oral enquiries.

Auditors should be reminded that written representations cannot be used as sole audit evidence in relation to any specific area of the financial statements. Written representations should be used as corroborative evidence in order to support existing audit evidence, rather than as a substitute for the auditor performing specific audit procedures to obtain sufficient appropriate audit evidence.

Accounts production

Members preparing accounts, without carrying out an audit, may also find it useful to obtain written representations from their clients. Obtaining such representations is useful to emphasise the importance placed on information provided by management in order for the member to undertake the work. In particular, where the work involves the preparation of statutory accounts and there are disclosure requirements that rely on information received from management (for example, post-balance sheet events or related party transactions), this would be appropriate.

Where a firm has prepared the accounts for a client and based those accounts on assumptions and decisions made by management then the firm may wish to confirm the treatment of particular transactions or balances in writing in a letter of representation. For example, movements in a directors’ loan account.

Tax compliance

Obtaining written representations could also be appropriate in other circumstances, for example when undertaking tax computations, where information supplied is crucial to the computation and has not been independently corroborated.

The goodwill or value of a block of clients is often based on the fees or profits they can generate. Bases usually start from the fees or profits that can be generated from the current services supplied to the clients and then apply a multiple to them to obtain the value.

Basis of the calculation

The following, non-exhaustive list, may be used as a starting point of the calculation:

• Gross recurring fees
• Future fee income
• Profitability

If multiples are used within the calculation, they will depend on a wide range of factors – there is no one ‘correct’ multiple to be used, it will be for the buyer and seller to determine. Additional considerations may however include:

• Work in progress

Due diligence

For a deal to be successful the 'fit' of the fees with the buyer will need to be established. At the outset of negotiations often all that is available is a total fee figure and details of numbers of clients in certain fee brackets with an indication of the services provided and the location of the clients. Far more detail needs to be obtained during the negotiation phase. How this information is obtained varies but at some stage the buyer would expect to see client files, accounts, fee notes etc. and where staff are involved, meet with and talk to them.

The seller will need to ensure that the fundamental principle of confidentiality as discussed in section 114 of the ICAEW Code of Ethics  is adhered to and the authority of the client would usually be required prior to disclosing client confidential information. It is normal before detailed information is disclosed that a confidentiality and non-poaching agreement is formally documented between buyer and seller. Such an agreement should also include a 'hold-harmless' clause whereby the buyer agrees not to use any information obtained against the interests of the seller.

The following are some of the matters to be considered when undertaking due diligence information gathering:

• Confirmation of information and detail
• Fee levels and charging structure
• Quality of work and files
• Profitability and overheads

A period of working together, alongside each other or in cooperation or collaboration could be agreed. The arrangements can vary considerably and will be particular to each individual’s circumstances. The arrangements should be able to be terminated without either party suffering substantial loss.

The example in Appendix 1 to this helpsheet deals specifically with those matters that are required to be confirmed by the ISAs (UK), together with other common representations obtained. It is based on the example in Appendix 2 of ISA (UK) 580.

In addition, the letter of representation should include confirmations from management on matters material to the financial statements in order to support other audit evidence obtained. In particular, where amounts are included in the accounts based on management estimates or valuations (such as property or stock values), it would be appropriate to include written confirmations.

It is not current best practice to include a long list of representations about assets and liabilities included in the accounts. Such paragraphs can detract from the impact of the more important matters, and in the case of an audit should be confirmed by adequate audit evidence.

Within the specimen letter of representation, guidance and instruction are shown in italics . None of this italicised text is for inclusion in the letter of representation. Members need to ensure it has been sufficiently tailored and all italicised text has been removed, before it is sent to client’s management for them to print on their own letterhead and sign as appropriate and then return to the firm. In some paragraphs, optional or alternative wording has been provided, shown in [square brackets] and each suggestion requires individual consideration and possible amendment.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access  can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat .

• Download the sample letter of representation wording

© ICAEW 2024  All rights reserved.

ICAEW cannot accept responsibility for any person acting or refraining to act as a result of any material contained in this helpsheet. This helpsheet is designed to alert members to an important issue of general application. It is not intended to be a definitive statement covering all aspects but is a brief comment on a specific point.

ICAEW members have permission to use and reproduce this helpsheet on the following conditions:

• This permission is strictly limited to ICAEW members only who are using the helpsheet for guidance only.
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• Update History 01 Oct 2012 (12: 00 AM BST) First published 08 Jan 2021 (10: 40 AM GMT) Updated to reflect requirements of the revised ISAs. 05 Jan 2021 (12: 00 AM GMT) Minor edits relating to Brexit / updated regulations. Links updated. 24 Jan 2022 (01: 55 PM GMT) Changed date of latest version of ISA (May 2021). Date of specimen letter updated to match helpsheet

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