Question

Define a management representation letter.

A. A letter from management to the auditor acknowledging management's responsibility for the preparation of the financial statements and details of any verbal representations made by management during the course of the audit.
B. A written statement by management provided to the auditor to confirm certain matters or to support other audit evidence.
C. A letter from auditor informing management about concerns.
D. A written statement containing details of any verbal representations made by management during the course of the audit.

Answer 1

A management representation letter is a document from management to the auditors acknowledging their responsibility for the financial statements and confirming verbal representations made during the audit. Option A provides the most correct definition, emphasizing the importance of this letter in the audit process.

Step-by-step explanation:

A management representation letter is a letter from a company's management to its auditors. This letter serves several important functions in the audit process. Firstly, it acknowledges management's responsibility for the preparation and fair presentation of the financial statements. Secondly, it provides written assertion of any verbal representations made by management during the audit, helping to document these discussions. Lastly, it may confirm the provision of all relevant information to the auditors. This letter is particularly important because it can serve as audit evidence in certain cases. It should be noted that while this letter is crucial for the audit process, the responsibility for the accuracy and completeness of the information in the financial statements rests with management, not the auditors.

Considering the options provided:

Option A describes the management representation letter accurately. It mentions the acknowledgment by management of their responsibility for the financial statements and details any verbal representations made.Option B is partly correct but lacks the acknowledgment aspect of management's responsibility for the financial statements.Option C is not describing a management representation letter but rather a potential communication from an auditor to management.Option D focuses only on verbal representations, missing the broader purpose of the management representation letter.

Hence, Option A is the most accurate definition of a management representation letter. This letter helps to ensure that the auditors and the company's management have a clear, written understanding of management's responsibilities and the representations they have made during the audit. It's also a key document that supports the integrity and transparency of the financial reporting process and provides assurance to stakeholders that the company's financial statements are reliable.