MANAGEMENT REPRESENTATIONS AS A SOURCE OF AUDIT EVIDENCE


International Standard on Auditing (ISA) 580 Management Representations provides standards and guidance on the use of management representations as audit evidence, the procedures to be applied in evaluating and documenting management representations and the action to be taken if management refuses to provide appropriate representations.

The auditor should obtain appropriate representations from management

The auditor should obtain evidence that management acknowledges its responsibility for the fair presentation of the financial statements in accordance with the relevant financial reporting framework, and has approved the financial statements. The auditor can obtain evidence of management’s acknowledgment of such responsibility and approval from relevant minutes of meetings of the board of directors or similar body or by obtaining a written representation from management or a signed copy of the financial statements.

The thing to note is that during the course of the audit the auditor obtains various representations from the management which can be categorised into three types:

a) Not material to the financial statements. Examples being queries on missing documents or errors in book-keeping or

b) Capable of being corroborated by other evidence or

c) Where the knowledge of the facts is confined to the management. For example, the management's intention to close down a major branch and where the matter is principally one of judgement and opinion for example the realizability of obsolete stock.

In (a) and (b), there is no need for the auditor to obtain separate written representations by the management. In (c) however, the auditor should:

i. Ensure that there is no conflicting evidence

ii. If he is unable to obtain corroborating evidence, then the auditor should obtain a written confirmation from the management of any representations made.

iii. The auditor must decide for himself whether the total of other evidence and the management's written representation are sufficient for him to form an unqualified opinion.

The procedures adopted are clearly stated in ISA 580. The letter should not include routine matters but only matters which are material to the financial statements and the auditor cannot obtain independent corroborating evidence. Please note that the letter of representation is simply one more piece of evidence and the auditor should not rely on it rashly but there are times it is the only source of evidence open to the auditor.

If a representation by management is contradicted by other audit evidence, the auditor should investigate the circumstances and, when necessary, reconsider the reliability of other representations made by management.