Representations by management are a source of audit evidence normally sought from the directors at the concluding stages of an audit to confirm various matters stated in the accounts particularly those which concern questions of facts or judgement which are difficult for the auditor to prove objectively e.g. there is no need to obtain a letter of representation on the bank balance as this can be proved objectively but there is need to obtain a representation that all contingent liabilities have been properly stated because this is difficult to prove.
Management makes various oral representations throughout the audit in response to specific inquiries. The auditor should not rely on unsupported oral representations of management as being sufficient reliable evidence when they relate to matters that are material to the financial information. The auditor should obtain written representations from management on matters material to the financial information when other sufficient appropriate audit evidence cannot reasonably be expected to exist.
After receiving representations from management the auditor should;
- Seek other audit evidence from sources inside or outside the entity that supports or disprove the representations given.
- Evaluate whether the representations made by management are consistent with other audit evidence available.
- Consider whether the person making the representation appear to be well informed on the matter in question.
Representations by management should not be taken as a substitute for other evidence that the auditor could reasonably expect to be available, it is simply an additional source of evidence. If the auditor is unable to obtain sufficient appropriate evidence regarding a matter, which has a material effect on the financial statements, this constitutes a limitation in the scope of the audit even if representations have been obtained.
Representations by management are mainly used where no other evidence exists or would reasonably be expected to exist, where a matter is material to the financial statements and written confirmation is required or where the auditor is seeking evidence to support other audit evidence gathered using other means.
If a representation by management is contradicted by other evidence, the auditor should investigate the circumstances and where necessary reconsider the reliability of other representations made by management.
A written representation is better audit evidence than oral representations and can take the form of;
A letter of representation addressed to the auditor and signed by management.
- A letter from the auditor explaining the auditor’s understanding of management’s representations duly acknowledged and accepted by management.
- Relevant minutes of the board of directors.
The auditor should inform management at an early stage i.e. in the letter of engagement that he might require written representations from time to time to avoid refusal by management in providing such representations.