Question

In the audit of Bob's Bikes, S H Associates encountered challenges obtaining a written representation from management regarding internal control. Discuss the potential implications of the absence of this representation and how it might impact the audit process and the reliability of the financial statements. Additionally, what alternative steps might S H Associates take to address this situation and fulfill their audit responsibilities effectively?

Answer 1

When management representation regarding internal control is absent in an audit, it can impact the audit process and the reliability of financial statements. Auditors may face challenges assessing the effectiveness of internal control and determining the risk of misstatements. To address this situation, alternative steps include additional audit procedures, seeking third-party confirmation, and documenting the challenges faced.

Step-by-step explanation:

Potential Implications of Absence of Management Representation

When S H Associates encountered challenges obtaining a written representation from management regarding internal control during the audit of Bob's Bikes, it can have several implications:

1. Impact on Audit Process: The absence of management representation can make it difficult for auditors to assess the effectiveness of internal control and determine the overall risk of material misstatements. This can lead to a more extensive and time-consuming audit process.
2. Reliability of Financial Statements: Without the representation, auditors may have limited assurance on the reliability of financial statements. The absence of management representation can cast doubt on the accuracy and completeness of the reported financial information.

Alternative Steps to Address the Situation

To address the absence of management representation, S H Associates can take the following alternative steps:

• Additional Audit Procedures: The auditors can perform alternative procedures such as substantive testing to gather sufficient appropriate audit evidence. This may involve testing the accuracy and completeness of transactions or conducting more extensive inventory counts.
• Third-Party Confirmation: S H Associates can seek confirmation from external parties such as banks, customers, or suppliers to obtain corroborative evidence about the financial transactions and balances.
• Documentation of Challenges: The auditors should document the challenges faced in obtaining management representation and the alternative procedures performed. This documentation can help provide transparency and evidence of the auditors' efforts to fulfill their audit responsibilities effectively.