Management representation letters Barrett Jennings, CPA, has prepared a letter of representation for the president and controller to sign. The following items are contained in it: (a) Inventory is fairly stated at the lower of cost or market and

Question

includes no obsolete items. (b) All actual and contingent liabilities are properly included in the financial statements. (c) All subsequent events, relevant to the financial statements, have been disclosed. Required: (1) Why is it desirable to have a letter of management representation letter from the client concerning these matters when the evidence accumulated during the course of the audit is meant to verify the same information? (2) How is the letter of management representation useful as audit evidence? (3) What are several other types of information commonly included in the management representation letter?

Answer 1

(1) It is desirable to have a management representation letter in addition to the accumulated audit evidence to impress upon management its responsibility for the representations in the financial statements and to formally document the responses from the client to auditor inquiries about various aspects of the audit. It also helps reduce the possibility of misunderstanding concerning matters that are the subject of representations.
(2) The management representation letter is not very useful as audit evidence since it is a written statement from a nonindependent source. In effect, the client being audited makes certain representations related to the audit.
(3) Other types of information include:
1 . Financial statements
- Management's acknowledgment of its responsibility for the fair presentation in the financial statements of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles (GAAP).
- Management's belief that the financial statements are fairly presented in conformity with generally accepted accounting principles (GAAP).
2 . Completeness of information
- Availability of all financial records and related data
- Completeness and availability of all minutes or meetings of stockholders, directors, and committees of directors
- Absence of unrecorded transactions
3 . Recognition, measurement, and disclosure
- Management's belief that the effects of any uncorrected financial statement misstatements are immaterial to the financial statements
- Information concerning fraud involving (1) management, (2) employees who have significant roles in internal control, or (3) others where the fraud could have a material effect on the financial statements
- Information concerning related party transactions and amounts receivable from or payable to related parties
- Unasserted claims or assessments that the entity's lawyer has advised are probable of assertion and must be disclosed in accordance with FASB standards
- Satisfactory title to assets, liens or encumbrances on assets, and assets pledged as collateral
- Compliance with aspects of contractual agreements that may affect the financial statements
4 . Subsequent events
- Bankruptcy of a major customer with an outstanding account receivable at the balance sheet date
- A merger or acquisition after the balance sheet date
5 . Internal controls
- Management's acknowledgement of its responsibility for establishing and maintaining effective internal controls over financial reporting.
- Management's conclusion about the effectiveness of internal control over financial reporting as of the end of the fiscal period.
- Disclosure to the auditor of all deficiencies in the design or operation of internal control over financial reporting identified as part of management's assessment, including separate disclosure of significant deficiencies and material weaknesses.
- Management's knowledge of any material fraud or other involving senior management or other employees who have a significant role in the company's internal control over financial reporting.