Question

in an audit of financial statements, in what circumstances is the auditor required to obtain a management representation letter? what are the purposes of obtaining the letter? to whom should the representation letter be addressed, and when should it be dated? who should sign the letter, and what would be the effect of his or her refusal to sign the letter? in what respects may an auditor's other responsibilities be relieved by obtaining a management representation letter?

Answer 1

An auditor is required to obtain a management representation letter to confirm oral representations, document their appropriateness, and reduce misunderstandings. It should be addressed to the auditor, dated the same date as the auditor's report, and signed by company's top executives. Refusal to sign can lead to an adverse audit opinion and does not relieve the auditor's other responsibilities.

Step-by-step explanation:

In an audit of financial statements, an auditor is required to obtain a management representation letter under certain circumstances. This letter is typically a standard step in the audit process and is obtained after all audit procedures considered necessary have been performed and before the issuance of the auditor's report. The purposes of the management representation letter are to:

• Confirm oral representations made by management to the auditor.
• Indicate and document the continued appropriateness of such representations.
• Reduce the possibility of misunderstanding concerning the matters that are the subject of the representations.

The representation letter should be addressed to the auditor and it should be dated the same date as the auditor's report. It signifies that management has taken responsibility for the fairness of the financial statements and disclosures. The individuals who should sign the letter are usually the company's chief executive officer and chief financial officer, or others with equivalent authority and responsibility.

If management refuses to sign the management representation letter, it may cast doubt on the reliability of the representations and consequently may lead to the auditor being unable to issue an unmodified opinion, or in some cases, any opinion at all. While obtaining a management representation letter provides the auditor with certain assurances, it does not relieve the auditor of other responsibilities, such as evaluating the overall presentation of the financial statements and confirming the appropriateness of the accounting policies used by management.