Question

S H Associates has just performed an audit of Bob's Bikes. S H was unable to obtain a written representation from management about internal control. Which of the following is true?

1) S H must still assume that management has assessed the effectiveness of internal control.
2) Depending on other factors in the audit, S H can still issue an unqualified opinion.
3) S H should consider this situation a limitation on the scope of the audit.
4) Management does not need to give S H a letter if it has disclosed all known internal control deficiencies.

Answer 1

An auditor does not have to assume management has assessed the effectiveness of internal controls without a written representation. The inability to obtain such a representation should be considered a scope limitation and might affect the type of opinion the auditor can issue on the financial statements. However, management is generally expected to provide this representation, irrespective of disclosure of known deficiencies.

Step-by-step explanation:

When an audit is conducted, one area of consideration is the management's assessment of the effectiveness of internal controls. If during an audit, like the one performed on Bob's Bikes by S H Associates, the auditors are unable to obtain a written representation from management about internal controls, there are various implications.

First, it is not required for an auditor to assume that management has assessed the effectiveness of internal control in the absence of a written representation. Thus, option (1) is not correct. An auditor relies on management's assertions as a basis for the audit, and if written representations are not provided, this could impact the auditor's assessment of the audit evidence and the conclusions drawn from it.

As for option (2), issuing an unqualified opinion may still be possible, but it heavily depends on the other audit evidence available and whether the lack of a written representation from management is deemed to adversely affect the auditor's ability to form an opinion on the financial statements. If the auditor concludes that there is sufficient appropriate audit evidence and the lack of written representation does not constitute a limitation, an unqualified opinion could be issued.

Regarding option (3), an auditor should indeed consider the incapacity to obtain a written representation about internal controls as a scope limitation. A scope limitation may lead the auditor to conclude that it is necessary to express a qualified opinion or disclaim an opinion if the potential effect on the financial statements could be material and pervasive.

Last, option (4) articulates that management is not obligated to provide a letter if it has disclosed all known internal control deficiencies, which is misleading. Auditors typically request a written representation from management as part of the audit process, even when all known deficiencies are disclosed, because it formally documents management's responsibility for the design and implementation of internal controls.

Answer 2

S H Associates should consider not obtaining a written representation from management about internal control during the audit of Bob's Bikes as a limitation on the scope of the audit. Depending on other audit evidence, S H might still issue an unqualified opinion, but this is not guaranteed. The correct answer is approximately option 2.

Step-by-step explanation:

A student has inquired whether S H Associates must assume that management has assessed the effectiveness of internal control despite not obtaining a written representation from management during the audit of Bob's Bikes.

To this, we respond that S H Associates should consider the inability to obtain a written representation from management a limitation on the scope of the audit. In the field of audit and assurance, such a limitation could hinder the auditor's ability to form an opinion and thus may prevent the issuance of an unqualified opinion.

However, depending on the auditor's assessment of other audit evidence gathered during the audit, it may still be possible to issue an unqualified opinion, but this situation requires careful consideration of all relevant auditing standards and the sufficiency of other audit evidence.