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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.

12300 SE Mallard Way, Suite 275 Milwaukie, OR 97222 (503) 227-1165

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What is a Representation Letter?

A representation letter is a written statement provided by a company’s management to its auditors as part of the audit process. The representation letter confirms that the information provided to the auditors is complete, accurate, and fairly presented in accordance with the applicable financial reporting framework. The letter also confirms that the management has disclosed to the auditors all relevant information that may be necessary for the auditors to properly understand the company’s financial position, results of operations, and cash flows. The representation letter helps to ensure that the auditors have all the necessary information to conduct an audit in accordance with professional standards.

Why is a Representation Letter Required?

The purpose of the representation letter is to provide the auditor with assurance that the financial statements accurately reflect the company’s financial position and performance. The letter also helps the auditor to identify any potential areas of concern or risk that may need to be addressed during the audit process.

Contents of a Representation Letter

A representation letter typically includes the following:

• A statement that the financial statements being audited are complete and accurate
• A statement that the financial statements are in accordance with generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS)
• A statement that the company’s management team is responsible for the preparation and fair presentation of the financial statements
• A statement that the company’s management team has made all necessary disclosures in the financial statements
• A statement that the company’s management team has disclosed all material transactions and events that have occurred during the period being audited
• A statement that the company’s management team has disclosed all material off-balance sheet transactions, arrangements, and obligations
• A statement that the company’s management team has disclosed all material changes in accounting principles that have occurred during the period being audited
• A statement that the company’s management team has disclosed all material related-party transactions that have occurred during the period being audited
• A statement that the company’s management team has disclosed all material contingencies and commitments that have occurred during the period being audited

The representation letter may also include other representations, such as a representation that the company has complied with all relevant laws and regulations, and that there are no pending legal proceedings that could have a material impact on the financial statements.

Importance of the Representation Letter

The representation letter is an important part of the audit process, as it provides the auditor with assurance that the financial statements are accurate and complete. This helps the auditor to form an opinion on the financial statements and to issue an audit report stating whether the financial statements are presented fairly, in all material respects.

Without a representation letter, the auditor may not be able to complete the audit, as they may not have sufficient evidence to form an opinion on the financial statements. This could lead to delays or other issues in the audit process, and may impact the company’s ability to obtain financing or meet other regulatory requirements.

In summary, a representation letter is a written statement signed by the company’s management that confirms the accuracy and completeness of the financial statements. It is an important part of the audit process, as it helps the auditor to form an opinion on the financial statements and to issue an audit report.

Amy is a Certified Public Accountant (CPA), having worked in the accounting industry for 14 years. She is a seasoned finance executive having held various positions both in public accounting and most recently as the Chief Financial Officer of a large manufacturing company based out of Michigan.

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Creating a Representation Letter

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Note: Want to skip the guide and go straight to the free templates? No problem - scroll to the bottom. Also note: This is not legal advice.

Introduction

Drafting a representation letter is an essential step in the legal process. Failure to do so can lead to a misunderstanding between parties, leaving one or both at risk of potential legal repercussions. Representation letters clearly outline the roles and responsibilities of each party involved and ensure that the individual or business being represented understands their rights, obligations and scope of authority. What’s more, these letters also protect against any legally-binding mistakes made by the representative during the course of their work.

At Genie AI, our team have developed a vast community template library which holds millions of data points which inform our AI as to what constitutes a market-standard representation letter. With our library, anyone can quickly draft and customise high quality legal documents without paying for costly lawyer fees - it’s open source! Our simple yet comprehensive guide provides step-by-step guidance on how to create your own representation letter using our template library; so you can trust you’re getting it right every time.

So if you’re looking for free representation letter templates with no strings attached – Genie AI is here for you. Read on below to get started with our step-by-step guide now and access our template library today!

Definitions (feel free to skip)

Legal Binding: A legally binding agreement is an enforceable agreement between two or more parties, which is legally recognized by a court of law.

Notarization: Notarization is a process that ensures the authenticity of a document and is typically done by a notary public.

Informed Consent: Informed consent is a process in which a person voluntarily agrees to participate in something after being fully informed of the risks, benefits, and other details of the activity.

Enforceable: Enforceable means that a legal agreement or contract is legally binding and can be enforced by the courts.

Explain the purpose of a representation letter and why it is important

Outline the key elements that should be included in the representation letter such as an introduction, a description of the agreement, the responsibilities of each party, the signatures of the parties, and any other details that may be necessary, describe the process of how to write and organize a representation letter, taking into account the legal aspects and the desired outcome, provide guidance on the formatting and layout of a representation letter, explain how to sign and date a representation letter, including the requirements for notarization and other legal measures, discuss how to ensure that the representation letter is legally binding and enforceable, such as by using specific language in the letter, list the documents, evidence and information needed to support a representation letter, such as witness statements or other forms of proof, explain when and how to use a representation letter in legal matters, and the types of situations that require a representation letter, detail the responsibilities of the representative and the individual or company represented, such as the obligations of each party and their rights with respect to the agreement, discuss the potential legal implications of not having a representation letter in place, such as the consequences of not meeting legal requirements, provide recommendations for how to ensure that a representation letter meets all legal requirements, summarize the key points of the article, get started.

• Understand what a representation letter is - it is a document that is signed by two parties to confirm the agreement they have made and the rights and responsibilities of each party
• Learn why representation letters are important - they provide a legal and binding agreement between the parties involved, and ensure that all parties are aware of the terms of the agreement
• Understand the consequences of not using a representation letter - without a representation letter, there is no written record of the agreement, which could lead to disputes and misunderstandings between the parties involved.
• Introduction: Introduce the purpose of the representation letter, the parties involved and their roles.
• Description of Agreement: Outline the details of the agreement, including the scope of the representation, the terms, and any other relevant information.
• Responsibilities of Each Party: Describe the duties and responsibilities that each party has in the agreement.
• Signatures of the Parties: Include the signature of each party on the letter.
• Other Details: Include any other details that may be necessary to clarify the agreement, such as timelines, deadlines, or any other special conditions.

When you can check this off your list and move on to the next step:

• Once all of the key elements have been outlined in the representation letter, you can move on to the next step in the guide.
• Start by outlining the scope of the representation. What are the legal rights and responsibilities of each party?
• Include an introduction that outlines the purpose of the representation letter and how it will be used.
• Identify the parties involved in the agreement.
• Provide a full description of the agreement, including any conditions or restrictions.
• Identify any potential risks or liabilities associated with the agreement.
• List out all the responsibilities of each party, including any obligations or duties.
• Include a signature line for each party at the bottom of the letter.
• Proofread the letter and make sure all information is correct and accurate.

When you have completed this step, you should have an organized representation letter that clearly outlines the scope of the agreement and the rights and responsibilities of each party.

• Begin the letter with the date and the recipient’s name and address
• Include a salutation, such as “Dear [Name],”
• Write out the purpose of the letter in the opening sentence
• Explain the purpose and the desired outcome of the letter in detail
• Include any relevant legal information that may be necessary
• Make sure to include all of the pertinent facts and evidence to provide clarity
• End the letter with a formal closing, such as “Sincerely,”
• Sign and date the letter
• Make sure to include any additional information, such as a notarization or other legal measures

When you have completed the formatting and layout of your representation letter and it includes the necessary information, you can check this step off your list and move on to the next step.

• Have all parties signing the letter present at the same time in front of a notary public
• Each party should sign the letter in the presence of the notary
• Every signing party should also provide a valid form of identification
• The notary should also sign and date the letter
• Once all parties have signed and the notary has notarized the letter, it is legally binding
• After completing the steps above, you can be sure that the letter is valid and enforceable
• Now you can move on to the next step in the guide.
• Research the legal requirements and regulations in your jurisdiction to make sure the representation letter is legally binding
• Use precise and unambiguous language when drafting the letter, such as stating the exact obligations of each party
• Ensure the letter clearly outlines the roles, rights, and obligations of each party
• Include a signature line for both parties and make sure each signature is witnessed and notarized
• Check that the letter is dated accurately
• Once you have completed the steps above, you can be sure that the representation letter is legally binding and enforceable
• Gather any documents that will be used as evidence, such as contracts, agreements, or other documents that are relevant to the case.
• Collect any witness statements, including any written or verbal statements from people who can provide proof in the case.
• Assemble any other forms of proof, such as photographs, recordings, or other physical evidence.
• Make sure all information is organized and accessible for use in the representation letter.

Once you have collected all documents, evidence, and information, you can check this step off your list and move on to the next step.

• Understand the purpose of a representation letter. It is a document used to enter into an agreement between an individual or company and their representative.
• Learn the types of legal matters that require a representation letter. These may include negotiations, contract disputes, court proceedings, and more.
• Research the laws and regulations that apply to the specific situation. This will help you know what must be included in the representation letter.
• When you have gathered the necessary information and documents, you can proceed to drafting the representation letter.
• When the letter is written and signed, it is ready to be used in the legal proceeding.

You will know you have completed this step when you have gathered all the necessary information and documents, and have drafted the representation letter.

• Brainstorm and list out all of the responsibilities and obligations that the representative and the individual or company they are representing should fulfill
• Make sure to include the individual or company’s rights with respect to the agreement in the representation letter
• Review the list of responsibilities and obligations and make sure that all parties involved are comfortable with the terms
• Once all parties have agreed to the terms, add the details to the representation letter
• When the representation letter is complete, have all parties involved sign it
• Once all parties have signed the representation letter, it is legally binding and enforceable
• You will know this step is complete when all parties have signed the representation letter and the document is finalized.
• Research and understand the legal requirements for the representation letter, and the potential risks and consequences of not meeting these requirements.
• Consider the potential risks of not having a representation letter in place, such as enforcement of contract terms, liability for damages, or penalties for breach of contract.
• Consult a lawyer or other legal expert to ensure that you are aware of all the potential legal implications of not having a representation letter in place.
• Once you have a thorough understanding of the potential legal implications of not having a representation letter in place, move on to the next step.

• Draft the representation letter with a clear and concise legal language, making sure all the parties involved are named and referenced. • Ensure that the agreement is signed by all the parties involved, or their representatives. • Make sure that the agreement contains a specific and detailed description of the services or goods to be provided, including a timeline and payment structure. • Include clauses that detail the legal consequences of a breach of contract and dispute resolution. • Ensure that the letter is written in accordance with the applicable laws of the jurisdiction where the agreement is to be made. • Check that the agreement is clear and unambiguous, with no room for interpretation. • Check that the agreement is legally binding and that all parties have read and understood the contents.

You can check this off your list and move on to the next step once you have completed the above steps to ensure that the representation letter meets all legal requirements.

• Gather all relevant information needed for the representation letter, including the client’s name, address, and the reasons why legal representation is needed. • Make sure that the representation letter is written in a clear and professional manner, with all legal requirements stated clearly. • Ensure that the representation letter adheres to the laws of the state or jurisdiction where the representation letter is being used. • Include all relevant details that are necessary for the document, such as names, signatures, dates, and any other relevant information. • Double check that all the necessary information has been included and that the representation letter meets all legal requirements.

Once you have gathered the necessary information and double checked that the representation letter meets all legal requirements, you can check this off your list and move onto the next step.

Q: What is the difference between a representation letter and a legal opinion?

Asked by Sarah on October 1st, 2022. A: A representation letter is an agreement between two parties, while a legal opinion is an interpretation of the law given by a lawyer. A representation letter typically outlines the responsibilities of both parties, confirms the terms of an agreement, and makes any necessary representations about the accuracy of information or the ability of one party to perform its obligations. A legal opinion, on the other hand, is an analysis of applicable law which assesses the legal risks associated with a particular transaction or situation. It is often used to provide guidance on how to proceed in a certain situation.

Q: When do I need a representation letter?

Asked by James on December 12th, 2022. A: Representation letters are typically used to provide written confirmation that certain terms have been agreed upon between two parties. This can be useful when there may be a dispute in the future as to what was agreed upon. Representation letters can also be used to confirm that all necessary information has been disclosed and that all parties understand each other’s responsibilities. Representation letters can be used in many different contexts including contracts, investments, mergers and acquisitions, and joint ventures.

Q: What should be included in a representation letter?

Asked by Elizabeth on April 4th, 2022. A: A representation letter should include all relevant details about the two parties involved in the agreement and their respective roles and responsibilities. It should also include any representations made by either party about the accuracy of information or their ability to perform their obligations. Additionally, it should clearly state all agreed upon terms and conditions.

Q: How do I draft a representation letter for my business?

Asked by Michael on January 14th, 2022. A: Drafting a representation letter for your business should begin with understanding your specific needs and what you are trying to achieve with your document. You should then consider what types of representations you need to make, who will be involved in the agreement, and what types of terms and conditions need to be included. Once you have these details determined, you can begin drafting your representation letter using templates or software tools available online.

Q: How do I sign a representation letter?

Asked by Jessica on May 9th, 2022. A: The signing process for a representation letter will depend on the specific document requirements set out by your jurisdiction and applicable laws. Generally speaking, both parties must sign the document in order for it to be legally binding. Depending on your jurisdiction and applicable laws, this may require an original signature by each party or simply an electronic signature via an appropriate software tool or service provider.

Q: What are some common pitfalls when creating a representation letter?

Asked by Joshua on August 22nd, 2022. A: One common pitfall when creating a representation letter is not being clear enough about each party’s obligations or expectations from the agreement. It’s important to ensure that all relevant details are explicitly stated in order to avoid any potential misunderstandings or disputes down the road. Additionally, you should ensure that any representations made by either party are accurate and truthful as this could have legal implications if false information is provided. Finally, you should ensure that all applicable laws are taken into account when drafting your document in order to ensure compliance with those laws and regulations.

Q: What are some best practices when creating a representation letter?

Asked by Emily on November 17th, 2022. A: When creating a representation letter it’s important to ensure that all relevant details are explicitly stated so as to avoid any potential misunderstandings or disputes down the road. Additionally, it’s important to ensure that any representations made by either party are accurate and truthful as this could have legal implications if false information is provided. You should also ensure that all applicable laws are taken into account when drafting your document in order to ensure compliance with those laws and regulations. Finally, it’s important to take into account any potential unforeseen circumstances which could arise from your agreement so as to ensure that these situations are covered in your document if they occur in the future.

Q: Is there a difference between UK vs USA vs EU jurisdictions when creating a representation letter?

Asked by Hannah on February 23rd, 2022. A: Yes – there may be differences between jurisdictions when it comes to creating a representation letter depending on which country’s laws apply to your situation or agreement. Generally speaking though there are some common elements which must be included such as clearly stating each party’s obligations and ensuring that all applicable laws are taken into account when drafting your document in order to ensure compliance with those laws and regulations regardless of jurisdiction. Additionally, it’s important to check if there are any specific requirements under local law which must be taken into account when creating your document as well as ensuring that any representations made by either party are accurate and truthful as this could have legal implications if false information is provided regardless of jurisdiction too.

Q: Is it possible for me to create my own representation letter without involving an attorney?

Asked by Matthew on June 28th, 2022. A: Yes – it is possible for you to create your own representation letter without involving an attorney depending on the complexity of your situation or agreement as well as any specific requirements set out under local law which must be taken into account when creating your document. However it’s important to note that using an attorney may provide additional benefits such as providing advice regarding applicable legal risks associated with your particular transaction or situation as well as ensuring that all necessary information has been disclosed accurately and truthfully before signing off on any agreement or contract .

Q: Are there different types of representation letters I can create?

Asked by John on July 12th, 2022 A: Yes – there are different types of representation letters depending on what type of agreement you need for your particular situation or transaction such as contracts, investments, mergers & acquisitions, joint ventures etc… Each type of agreement will require different elements such as outlining each party’s roles & responsibilities as well as confirming all agreed upon terms & conditions etc… It’s important to understand what type of agreement you need before beginning drafting process so as make sure all necessary elements are included in order for it be legally binding if required later down the line .

Q: Can I use online services or software tools available online help me create my own representation letter?

Asked by David on September 18th 2022 A: Yes – there are online services available which can help you create your own representation letter depending on what type of agreement you need for your particular situation or transaction such as contracts, investments mergers & acquisitions , joint ventures etc… These services typically provide templates which allow you fill out relevant details about both parties involved in agreement such their roles & responsibilities , confirm agreed upon terms & conditions etc… Additionally , some services also allow you sign electronically via appropriate software tool or service provider .

Q: Does every industry have its own specific laws regarding creating a representation letter?

Asked by Ashley on March 8th 2022 A: No - not necessarily - while certain industries may have laws specific to them regarding creating a representation Letter , generally speaking most agreements will require same elements such outlining each party’s roles & responsibilities confirming terms & conditions etc… However , it’s important check whether there are any specific industry requirements need taken into account depending upon business model ( e . g . SaaS , technology , B2B ) , sector , jurisdiction etc… before beginning drafting process .

Example dispute

Suing a company over a representation letter.

• A plaintiff may sue a company for damages if they believe that the company has made false or misleading representations in a representation letter.
• The plaintiff must prove that the representations were false and that the company acted negligently or recklessly.
• The plaintiff must also show that the representations caused them to suffer some kind of financial loss or other harm.
• The plaintiff may be entitled to damages such as lost profits, attorney’s fees, or other costs associated with the lawsuit.
• The plaintiff may also seek an injunction or other equitable relief if the representation letter has caused irreparable harm.
• The court may also require the company to issue a corrective representation letter if the company has made false or misleading representations.

Templates available (free to use)

Rule 144 Seller S Representation Letter Non Affiliate Sale Of Restricted Securities Sas 72 Representation Letter

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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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Understanding an Audit Letter of Representation (LOR)

This article addresses the what, when, why, and who’s related to letters of representation for audits, specifically SOC audits.

What is a Letter of Representation?

A letter of representation (a.k.a., representation letter, rep. letter, LOR) in audit services is a form letter from the American Institute of Certified Public Accountants typically prepared by the external auditors on behalf of a company’s management that is signed by a member of executive leadership. By signing the letter of representation, the executive attests to the external auditor that all of the information submitted is accurate, and that all material information has been disclosed to the auditors. For a financial audit, that material would be the financial statements and internal controls over financial reports. In the context of a SOC 1  or SOC 2  examination, company representation letters allow the management of the company to not only confirm that all material information has been disclosed to the service auditors, but also to take responsibility for the presentation and accuracy of the assertion and description in the report and to confirm that the controls were designed and operating effectively during the period of the assessment.

As you can imagine, a letter of representation is an important piece of evidence in any audit. Management’s representations and attestations in the letter provide some assurance that the information provided during the examination is reliable to use in audit procedures and to base its opinion. Management’s attestation in the representation letters also shifts blame to management in the case that a control failure is missed during an audit or inaccuracies because information was not made available or disclosed to the service auditor.

When is a Letter of Representation Prepared?

As it is a form letter, a letter of representation may be prepared at any point during a SOC 1 or SOC 2 examination. However, paragraph .54 of AT-C section 205 (SSAE 18) specifies that a representation letter must be dated as of the date of the service auditor’s report. The letter may be signed any time from the date of the report and the report is issued. However, because it is an important piece of evidence supporting an audit opinion, the letter of representation should be signed before the report is issued ( AICPA’s SOC 1 Guide 4.189).

Why is the Letter of Representation Important?

As noted earlier, the simple answer is that the letter of representation is required by the American Institute of Certified Public Accountants, the governing body for attestation services. If management refuses to provide the requested representations, the service auditor would consider it “a limitation on the scope of the examination sufficient to preclude an unmodified opinion and may be sufficient to cause the practitioner to withdraw from the engagement” (Paragraph .A64 of AT-C section 205 ). Similar actions would be taken should the service auditor conclude that there is sufficient doubt about the competence, integrity, ethical values, or diligence of those providing the written representations; or the service auditor concludes that the written representations are otherwise not reliable and is unable to resolve the concerns through additional procedures. From a practical standpoint, because management’s written representations are an important consideration when forming the service auditor’s opinion, the service auditor would not ordinarily be able to issue the report until the service auditor had received the representation letter.

Who is Responsible for the Letter of Representation?

The AICPA’s guidance requires, when the engagement covers a modified or extended period, that the auditor obtain management’s written representation in the form of a representation letter addressed to the auditor. The AICPA requires that the service auditor request the written representations from management.

What are the Contents of a Letter of Representation in Auditing?

Paragraph .38 of AT-C section 320 (SSAE 18) states that “the service auditor to request from management written representations required by paragraph .50 of AT-C section 205 as well as those required by paragraph .36 of AT-C section 320 .” The auditor and management may add additional representations to the letter. The written representations required by paragraph .50 of AT-C section 205 are identified in items a-i and the written representations required by paragraph .36 of AT-C section 320 in items j-k.

The following summarizes the minimal representations to be included in the letter:

A. Include the management’s assertion about the description, controls, control objectives (SOC 1), and trust services criteria (SOC 2) based on the criteria.

B. A statement that all relevant matters are reflected in the description or evaluation of the related controls or assertion.

C. A statement that all known matters contradicting the control objectives, trust services criteria, or assertion and any communications from regulatory agencies or others affecting the control objectives, trust services criteria, or assertion have been disclosed to the practitioner, including any communications between the end of the period addressed and the written assertion and the date of the service auditor’s report.

D. Acknowledge responsibility for:

• the description in the report and the assertion:
• selecting the applicable criteria; and
• determining that the applicable criteria is appropriate.

E. A statement that any events after to the period (or point in time) related to the description, control objectives, or trust services criteria being reported on, which would have a material effect on the control objectives, trust services criteria, or assertion, have been disclosed to the auditor.

F. A statement that the individual signing and the company have provided the service auditor with all relevant information and access.

G. When applicable, a statement that the individual signing believes the effects of uncorrected misstatements are immaterial, when considered individually and in aggregate, to the control objectives or trust services criteria.

H. When applicable, a statement that significant assumptions used to make any material estimates are reasonable.

I. A statement that the individual signing and the company have disclosed the following to the service auditor:

• Any and all deficiencies in internal control relevant to the engagement of which the responsible party is aware;
• Knowledge of any actual, suspected, or alleged fraud or violation of laws or regulations affecting the control objectives or trust services criteria; and
• Other matters as the service auditor deems appropriate.

J. A statement that any instances of noncompliance with laws and regulations or uncorrected misstatements attributable to the service organization that may affect one or more user entities have been disclosed to the service auditor.

K. A statement that any knowledge of actual, suspected, or alleged fraud by the management or employees of the service organization that could adversely affect the fairness of the presentation of management’s description of the service organization’s system or the completeness or achievement of the control objectives stated in the description have been disclosed to the service auditor.

An audit letter of representation is a form letter prepared by a company’s service auditor and signed by a member of senior management. In the letter, management attests to the accuracy and completeness of the information provided to the service auditors for their analysis. The letter must be dated as of the date of the report and signed on or after that date. The service auditor must obtain a signed representation letter that includes, at a minimum, the required representations specified by the AICPA in order to opine an audit.

Isaac Clarke is a partner at Linford & Co., LLP. He began his career with Ernst & Young in 2003 where he developed his audit expertise over a number of years. Isaac specializes in and has conducted numerous SOC 1 and SOC 2 examinations for a variety of companies—from startups to Fortune 100 companies. Isaac enjoys helping his clients understand and simplify their compliance activities. He is attentive to his clients’ needs and works meticulously to ensure that each examination and report meets professional standards.

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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.

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• Wrapping Up Audits: The Why and How

By Charles Hall | Auditing

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Wrapping up audits is a chore. But today's post will help you do just that. Do you ever have the almost-done illusion? You think you’re almost done, but you’re not—and you’re not even close. Frustrating! 

What? I’m Not Done?

I remember my boss asking me, “what’s the status of the audit?” I answered, “oh, I’m about 90% done.” But actually I was—at best—75% through. Why the miscalculation? I mistakenly thought if the planning and transaction areas (e.g., cash) were complete, that I was nearly finished. I was wrong. Wrapping up audits takes (or least can take) a significant amount of time. 

Wrapping Up Audits — An Overview

In the final stages of an audit, we are (among other things):

• Updating subsequent events
• Considering going concern
• Creating final analytics
• Providing audit entries to the client
• Summarizing passed journal entries
• Reviewing the file
• Creating financial statements
• Completing the disclosure checklist
• Reviewing financial statements
• Obtaining a management representation letter
• Creating your audit opinion
• Creating a management letter
• Communicating control deficiencies

There is no required order for these steps. The sequence provided below is simply my normal method.

Let’s start with subsequent events.

Updating Subsequent Events

The financial statements should disclose material subsequent events such as legal settlements, the issuance of debt, the adoption of a benefit plan, or the sale of stock. And while disclosure is important, subsequent events—such as legal settlements—can affect the year-end balance sheet. Some subsequent events trigger the accrual of liabilities.

Here are common subsequent event procedures:

• Inquire of management and company attorneys about subsequent events
• Review subsequent receipts and payments
• Read the minutes created after period-end
• Review subsequent interim financial statements
• Review the subsequent year’s budget
• Obtain an understanding of management’s methods for accumulating subsequent event information

In performing these procedures, obtain subsequent event information through the audit report date. 

If you’ve sent attorneys’ letters asking about potential litigation, you may need to get an update to coincide with the audit report date. You want the attorney’s written response to be as close to the audit report date as possible. How close? Usually within two weeks. If there are significant issues, you may want to bring the written response through the audit report date.

Another critical issue in wrapping up audits is going concern.

Considering Going Concern

Even in the planning stage, auditors should consider going concern , especially if the entity is struggling financially. But as you approach the end of the audit, going concern should crystallize. Now you have your audit evidence, and it’s time to determine if a going concern opinion is necessary. Also, consider whether going concern disclosures are sufficient. If substantial doubt is present, then the entity should include going concern disclosures (even if substantial doubt is alleviated by management’s plans).

And what is substantial doubt? The Financial Accounting Standards Board defines it this way:

Substantial doubt about the entity’s ability to continue as a going concern is considered to exist when aggregate conditions and events indicate that it is probable that the entity will be unable to meet obligations when due within one year of the date that the financial statements are issued or are available to be issued.

So, for nongovernmental entities, ask “Is it probable that the company will meet its obligations for one year from the opinion date?” If it is probable that the entity will meet its obligations, then substantial doubt does not exist. If it is not probable that the entity will meet its obligations, then substantial doubt exists.

And what is the period of time to be considered when assessing going concern? One year from the audit report date—unless the entity is a government. If the entity is a government, then the evaluation period is one year from the financial statement date (though this period can lengthen in certain circumstances).

The going concern evaluation is one that management makes as it considers whether disclosures are necessary. 

Then the auditor considers going concern from an audit perspective. If substantial doubt is present, the auditor issues a going concern opinion. Also, if going concern disclosures are incorrect or inadequate, the auditor may need to modify the opinion.

Wrapping up audits also includes the creation and review of final analytics.

Creating Final Analytics

Auditors create planning analytics—the comparison of key numbers—early in the audit. Why? To look for the risk of material misstatement. Unexpected changes in numbers are indicators of potential error or fraud. They create questions. When unexpected variations exist, auditors plan procedures to test why. 

So, what is the purpose of final analytics? To determine whether unanswered questions still exit. Auditors want to know, given the audit evidence in hand, that the numbers are fairly stated.

What analytics should you use? Audit standards don’t specify particular analytics. Some auditors read the financial statements (when comparative periods are presented). Others review key ratios. And some compare current year trial balance numbers with the prior year. 

My final analytics are often the same as those in the beginning. For example, if my planning analytics include a comparison of trial balance numbers, so will my final analytics. Why do I use the same analytics? I want to know that the questions raised in the beginning are now answered. 

In wrapping up your audits, consider the numbers important to your clients. Many auditors—in an exit conference—provide key analytics to management and board members, such as performance indicators or liquidity ratios. Consider whether these numbers should be a part of your final (and planning) analytics. 

Now, you are ready to provide your proposed audit entries.

Providing Audit Entries to the Client

Give your audit entries to your client. Hopefully, you discussed these adjustments with your client when you discovered them. If you did, this part is easy. You’re just giving your client the entries. If not, review the proposed adjustments with the client and see if they agree.

Your client may desire to pass on (not post) some immaterial entries. 

Summarizing Passed Journal Entries

Prior to creating the representation letter, the auditor needs to summarize passed journal entries. Why? Audit standards require management to provide a written assertion regarding whether the uncorrected misstatements are material. The summary assists in that determination. 

Once you summarize the uncorrected misstatements, you should consider whether they are material. Review your audit materiality and consider whether the passed adjustments are acceptable. If material uncorrected misstatements exist, consider the effect on your opinion.

In addition to all of the above, you need to review the audit file to make sure everything is in order. 

Reviewing the File

Perform your final review of the work papers and sign off as the reviewer. All preparer and reviewer dates must precede or coincide with the representation letter date (which is the opinion date). Why? Reviews are a part of your evidential matter. Documentation—including reviews—must exist no later than the opinion date.  See my article titled Seven Excuses for Unnecessary Audit Work Papers .

Once the audit file is ready, it’s time to create the financial statements (if you’ve been engaged to do so).

Creating Financial Statements

Larger entities usually create their own financial statements, but smaller organizations sometimes outsource this work to their auditors. 

If the auditor creates the financial statements, the following needs to occur:

• The audit firm creates the financial statements.
• The audit firm reviews the financial statements 
• The client reviews the financial statements 

If you (the auditor) are engaged to create the financial statements, complete them on time. Why? Management must read and take responsibility for the financial statements prior to signing the representation letter. 

Also, the auditor’s review of the financial statements needs to be completed prior to the date of management’s representation letter. Why? All evidential matter, including the audit firm’s review of the financial statements, must be complete before the opinion is issued.

So, management and the auditor must review the financial statements before the opinion is issued. We’ll discuss the financial statement review process for auditors in a moment, but before we do, let’s take a look at completing the disclosure checklist.

Completing the Disclosure Checklist

Whether you or your client creates the financial statements, a disclosure checklist helps ensure the completeness and propriety of the notes. Remember your audit opinion covers the financial statements and the disclosures. 

Since new accounting standards are issued throughout the year, make sure you use a current checklist. Otherwise, you may not be aware of new or amended disclosure requirements.

Now it’s time to review the financial statements.

Reviewing Financial Statements

If your audit firm creates the financial statements, at least two people should be involved—one creating and one reviewing. Why? Two reasons: (1) the self-review threat (an independence issue) and (2) blind spots.

So, what is a self-review threat? It’s the idea that the person creating something (e.g., the financial statements) will not be independent in reviewing the same. Why is this a problem? Well, we are issuing an independent auditor’s opinion. That’s why we need a second-person review of the financial statements—to mitigate the self review threat.

Additionally, a second-person review is useful in overcoming blind spots. If I create financial statements with errors, I may not see my own mistakes. I have a blind spots. Such errors are often readily apparent to a second person. See my  post about reviewing financial statement on a computer screen .

Once the financial statements have been prepared and reviewed by your audit firm and your client, it’s time to obtain the management representation letter, another step in wrapping up audits.

Obtaining a Management Representation Letter

The management letter is usually prepared by the audit firm and is provided to the client for signing. In the letter, the client is making certain assertions regarding issues such as the following:

• Management’s responsibility for the financial statements
• Management’s responsibility for internal controls
• Assurances that all transactions have been recorded
• Whether known fraud has occurred
• Whether known non-compliance with laws or regulations occurred
• The effects of uncorrected misstatements
• The assumptions used in computing estimates
• Related party transactions
• Subsequent events
• Supplementary information
• Responsibility for nonattest services

The representation letter should cover all financial statements and periods referred to in the auditor’s report. If management refuses to provide the management letter, then consider the effect upon the auditor’s report. Such a refusal constitutes a scope limitation and will usually preclude the issuance of an unmodified opinion.

Another part of wrapping up audits is creating your audit opinion.

Creating Your Audit Opinion

You’ve planned and performed your audit. 

Now you need to consider the type of opinion you’ll issue. If an unmodified opinion is merited, no problem. Use the standard opinion. But if you are going to qualify the opinion, or issue a disclaimer or adverse opinion, there’s more work to be done. Additionally, sometimes you need to add an emphasis-of-matter paragraph or an other-matter paragraph to your opinion.

Determine which opinion is appropriate. Most CPAs use sample reports from national publishing companies. Others use sample reports directly from the auditing standards. Regardless, place a copy of the sample report in your audit file. Why? Your peer reviewer—or someone else—might question your report language. Responding to such questions is much easier with the sample report in hand.

Create your opinion and have a second person review the report, comparing the opinion to the sample report. Check and recheck your wording.

Another consideration in wrap-up is whether you’ll issue a management letter. 

Creating a Management Letter

While not required, you can provide a written management letter to your audit client. Why would you do so? To add value to the audit. 

What is a management letter? Suggestions for improving the business. 

What should you include in the letter? It’s up to you (and dependent upon your observations during the audit), but here are a few examples:

• Suggested monthly reports for the owners or management
• Warnings regarding cyber attacks and prevention techniques
• A suggestion that excess cash be used to pay off high interest rate debt
• Procurement and bidding recommendations
• A suggestion that security cameras be installed
• Software recommendations 
• A recommendation that all equipment be physically inspected and reconciled to the property ledger 
• A suggestion that the company review its property insurance coverage
• Best practices for the implementation of new accounting standards

If you provide a management letter, give the client a draft prior to issuance. Why? To avoid the embarrassment of making inappropriate suggestions—maybe they’ve already done what you are suggesting, for example. 

In addition to the management letter, you may also need to communicate significant deficiencies and material weaknesses.

Communicating Control Deficiencies

Audit standards define significant deficiencies and material weaknesses as follows:

• Significant deficiency. A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness yet important enough to merit attention by those charged with governance.
• Material weakness. A deficiency, or a 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.

Auditing standards require a written communication of significant deficiencies and material weaknesses.

Control deficiencies are often noted during the risk assessment process, particularly as you perform walkthroughs. 

You may also note control weaknesses as you prepare audit journal entries, especially if the adjustments are material. Errors are usually the result of weak internal controls.

Regardless of how you become aware of the control weaknesses, capture them immediately. Otherwise, you may forget them later on. Also, if control weaknesses are material, you may need to communicate them to management when they are discovered (and again at the completion of the audit).

As you are wrapping up audits, create your internal control letter based on the weaknesses noted.

Consider providing a draft of the internal control letter to management prior to final issuance. Why? To avoid potential misunderstandings. If there’s a disagreement between the client and the auditor, it’s best to clear the issue prior to final issuance of the internal control letter.

One other suggestion: if there are sensitive issues, the senior audit team member (usually the engagement partner) should make this communication. It’s a time to speak the truth with tactfulness—and experience helps.

I started this chapter by saying that wrap-up can take a significant amount of time. As we have seen, there is much to be done in this closing stage of the engagement. 

Wrap Up Procedures in Auditing - A Simple Summary

Here’s a summary of wrap up procedures in auditing:

• Perform subsequent event procedures to ensure that all relevant information is included in the financial statements 
• Consider whether going concern disclosures are necessary and, if required, complete; also consider the need for a going concern opinion
• Create final analytics and determine if all significant variations in the numbers have been addressed
• Provide proposed audit entries to the client 
• Summarize and review all passed journal entries to ensure that material misstatements are not present
• Review the work paper file 
• Create the financial statements (if you have been engaged to do so)
• Complete a current disclosure checklist
• Review the financial statements 
• Obtain a signed management representation letter 
• Create your audit opinion 
• Create a management letter 
• Communicate significant deficiencies and material weaknesses 

There you have it: the wrap-up process. Now, when your boss asks, “what’s the status of the audit?” you can say, “I’m at 90 percent”—and be sure of it. This post is a part of a series of articles title The Why and How of Auditing . Check it out. The series is also  available as a book on Amazon. Be one of the thousands who have purchased this resource. You'll find it useful as a partner or a staff member.

About the Author

Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty-five years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention, The Why and How of Auditing, Audit Risk Assessment Made Easy, and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles consults with other CPA firms, assisting them with auditing and accounting issues.

John, Thanks.

When new staff are involved in an engagement, I think it’s a must for reviews to occur as often as possible. For more experienced staff, those reviews might be done weekly (or every two weeks). It just depends on the level of the personnel. But, yes, it’s good to “touch” the file as few times as possible.

Great article, Charles, thank you. How do we reconcile the concept of “minimizing touches” because of inefficiency to constant monitoring and review-as-you-go? I prefer the second for the reasons you state above, but a lot of productivity guidelines suggest otherwise.

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A formal written record of representations made by the management of an organization to the auditors. The letter is prepared by the auditor and signed by management on a date as near as possible to the date of the auditors’ report and after all audit work has been completed, including the review of events occurring after the balance sheet date, for example. The information referred to in the letter is material to the financial statements for which the auditor is unable to obtain independent corroborative evidence. These matters might include any future legal claims and adjusting events.

From:   letter of representation   in  A Dictionary of Accounting »

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