Obtaining written representations in an ISA audit

Why is it important?

Written representations are primarily, but not exclusively, addressed in ISA 580. The standard addresses issues such as the need to:

• limit possible over-reliance on representations by auditors;
• establish why auditors require representations;
• establish what evidence representations provide; and
• determine who should provide representations.

ISA 580 includes among the objectives the need to obtain written representations from management. They must state that they believe they have fulfilled their responsibilities for the preparation of the financial statements and for the completeness of the information provided to the auditor [ISA 580.6(a)]. ISA 580.8 clarifies that references to “management” should be read as “management and, where appropriate, those charged with governance".

In addition to the objective regarding management responsibilities, further objectives are:

• to support other audit evidence relevant to the financial statements or specific assertions in the financial statements by means of written representations if determined necessary by the auditor or required by other ISAs; and
• to respond appropriately to written representations provided by management and, where appropriate, those charged with governance, or if management or, where appropriate, those charged with governance do not provide the written representations requested by the auditor [ISA 580.6(b)-(c)].

Requirements and challenges

From whom should written representations be requested?

The auditor is required to request written representations from management with appropriate responsibilities for the financial statements and knowledge of the matters concerned [ISA 580.9].

The application material notes that the person responsible for the preparation of the financial statements (and their job description or title) may vary depending on the governance structure of the entity.

In some cases, written representations may include qualifying language to the effect that they are made to the best of the knowledge and belief of those making them. The application material confirms that it is reasonable for the auditor to accept such wording if satisfied that the representations are being made by those with appropriate responsibilities and knowledge of the matters included in the representations [ISA 580.A5].

In practice, to have value as audit evidence, the written representations obtained by the auditor need to be informed representations and not mere statements by persons with little or no knowledge of or interest in the subject matter.

Why obtain representations about management’s responsibilities?

The auditor is required to obtain written representations regarding management’s responsibilities for:

• the preparation of the financial statements; and
• the information provided to the auditor and the completeness of transactions in the financial statements [ISA 580.10-11].

Management responsibilities dealt with in written representations are required to be set out in the same way as they are described in the terms of engagement.

It is important to note that evidence obtained during the course of the audit that management has fulfilled its responsibilities – for the preparation of the financial statements, the provision of information to the auditor and the completeness of the transactions reflected in the financial statements – is not sufficient of itself without written confirmation from management that it believes that it has fulfilled those responsibilities [ISA 580.A7].

What other written representations are needed?

Other ISAs, such as ISA 240 The auditor’s responsibilities relating to fraud in an audit of financial statements, ISA 540 Auditing accounting estimates, including fair value accounting estimates, and related disclosures and ISA 550 Related parties, require the auditor to request written representations.

ISA 580 includes as an appendix a list of the ISAs requiring written representations. If the auditor determines that it is necessary to obtain one or more written representations (in addition to those specifically required by ISAs) to support other audit evidence, they are required to request such other written representations as necessary. Examples include representations on:

• the appropriateness of the selection and application of accounting policies;
• recognition, measurement or disclosure issues relating to the applicable accounting framework;
• the communication of all significant deficiencies in internal control of which management is aware; and
• specific assertions in the financial statements.

What is a threshold amount?

The application material to ISA 580 notes that the auditor may consider determining and communicating to management a threshold for the purposes of written representations.

The material uses the example of the threshold required by ISA 450 Evaluation of misstatements identified during the audit in which the threshold is determined as the level above which misstatements cannot be regarded as clearly trivial [ISA 580.A14].

Complications with written representations

The auditor may have concerns about the competence, integrity, ethical values or diligence of management, or about its commitment to or enforcement of these. In such cases the auditor is required to determine the effect these concerns may have on the reliability of written (or oral) representations, and audit evidence in general [ISA 580.16].

If written representations are inconsistent with other audit evidence, the auditor will need to perform additional procedures to resolve this. If an issue remains unresolved, the auditor is required to reconsider the assessment of management and the reliability of any representations received or evidence obtained. If the conclusion is that written representations are indeed not reliable, the auditor is required to take appropriate actions including determining the possible effect on the audit opinion [ISA 580.18].

If management does not provide one or more of the requested written representations (whether required by ISAs or by the auditor) then the auditor is required to:

• discuss the matter with management;
• re-evaluate management’s integrity and evaluate the effect that this may have on the reliability of representations (oral or written) and audit evidence in general; and
• take appropriate actions, including determining the possible effect on the audit opinion.

The auditor may be required by ISA 705 (Revised) Modifications to opinions in the independent auditor’s report to disclaim the audit opinion. This is the case if there is sufficient doubt about the integrity of management such that the representations required by ISA 580.10-11 relating to management’s responsibility for the preparation of the financial statements, the information provided to the auditor and the completeness of the transactions reflected in the financial statements, are not considered reliable. It also applies if those written representations are not provided by management [ISA 580.20].

When should written representations be dated?

The date of the written representations is required to be as near as practicable to, but not after, the date of the auditor’s report. Written representations are required to be obtained for all financial statements and period(s) referred to in the auditor’s report.

Do written representations need to be in a letter?

Written representations are required in a representation letter addressed to the auditor. Law or regulation may require management to make written public statements about its responsibilities. Further, the auditor may determine that such statements provide some or all of the representations specifically required by ISA 580.10-11. In such cases, the relevant matters covered by such statements need not be repeated in the representation letter.

The application material notes factors that may influence this determination. These include whether the legal or regulatory statement has been given or approved by those from whom the auditor requested the relevant written representations, and whether a copy of the statement was provided to the auditor as near as practicable to, but not after, the date of their report.

ISA 580 includes an illustrative representation letter as an appendix. This needs to be tailored to local requirements.