Letters of representation

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to understand the need for letters of representation in the context of auditing and to consider other situations where a letter of representation may be useful. To assist members in the preparation of letters of representation, this helpsheet also includes an example letter.

Members may also wish to refer to the following related guidance:

• TECH 04/02 AAF Management representation letters: Explanatory note
• International Standards on Auditing (UK)

A word version of the sample letter of representation wording is available to download and complete.

Written confirmation(s) of representations from management is a requirement of the International Standards on Auditing (UK) (ISAs (UK)) and is therefore required for each and every audit. They are also useful to confirm, in writing with clients, information, assumptions and accounting treatments in non-audit engagements.

A number of ISAs (UK) require written representations to be obtained from management. These must be obtained as near as practicable to, but not after, the date of the auditor’s report (ISA (UK) 580 paragraph 14) in the form of a letter addressed to the auditor (paragraph 15).

Representations are requested from management with appropriate responsibilities for the financial statements and knowledge of the matters concerned. In the UK, those charged with governance are responsible for the preparation of the financial statements.

Letters of representation can be, and often are, signed by more than one member of the audited entity’s staff – the auditor needs to make an assessment as to who is in the best position to provide the representations required.

ISA (UK) 580 requires written representations from management that:

• It has fulfilled its responsibility for the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation, as set out in the terms of the audit engagement (paragraph 10);
• It has provided the auditor with all relevant information and access as agreed in the terms of the audit engagement (paragraph 11(a)); and
• All transactions have been recorded and are reflected in the financial statements (paragraph 11(b)).

As well as the written representations required in ISA (UK) 580, the following ISAs (UK) require subject-matter specific written representations – reference should be made to the particular ISA (UK) for the full text of the requirements:

• ISA (UK) 240 (Revised May 2021) The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements (paragraph 39);
• ISA (UK) 250 (Revised November 2019) Section A – Consideration of Laws and Regulations in an Audit of Financial Statements (paragraph 17);
• ISA (UK) 450 (Revised June 2016) Evaluation of Misstatements Identified during the Audit (paragraph 14);
• ISA (UK) 501 Audit Evidence – Specific Considerations for Selected Items (paragraph 12);
• ISA (UK) 540 (Revised December 2018) Auditing Accounting Estimates and Related Disclosures (paragraph 37);
• ISA (UK) 550 Related Parties (paragraph 26);
• ISA (UK) 560 Subsequent Events (paragraph 9);
• ISA (UK) 570 (Revised September 2019) Going Concern (paragraph 12-2(f));
• ISA (UK) 710 Comparative Information – Corresponding Figures and Comparative Financial Statements (paragraph 9); and
• ISA (UK) 720 (Revised November 2019) The Auditor’s Responsibilities Relating to Other Information (paragraph 13(c)).

In addition, paragraph A25 of ISA (UK) 500 Audit Evidence highlights that the auditor may consider it necessary to obtain written representations from management and, where appropriate, those charged with governance to confirm responses to oral enquiries.

Auditors should be reminded that written representations cannot be used as sole audit evidence in relation to any specific area of the financial statements. Written representations should be used as corroborative evidence in order to support existing audit evidence, rather than as a substitute for the auditor performing specific audit procedures to obtain sufficient appropriate audit evidence.

Accounts production

Members preparing accounts, without carrying out an audit, may also find it useful to obtain written representations from their clients. Obtaining such representations is useful to emphasise the importance placed on information provided by management in order for the member to undertake the work. In particular, where the work involves the preparation of statutory accounts and there are disclosure requirements that rely on information received from management (for example, post-balance sheet events or related party transactions), this would be appropriate.

Where a firm has prepared the accounts for a client and based those accounts on assumptions and decisions made by management then the firm may wish to confirm the treatment of particular transactions or balances in writing in a letter of representation. For example, movements in a directors’ loan account.

Tax compliance

Obtaining written representations could also be appropriate in other circumstances, for example when undertaking tax computations, where information supplied is crucial to the computation and has not been independently corroborated.

The goodwill or value of a block of clients is often based on the fees or profits they can generate. Bases usually start from the fees or profits that can be generated from the current services supplied to the clients and then apply a multiple to them to obtain the value.

Basis of the calculation

The following, non-exhaustive list, may be used as a starting point of the calculation:

• Gross recurring fees
• Turnover
• Future fee income
• Profitability

If multiples are used within the calculation, they will depend on a wide range of factors – there is no one ‘correct’ multiple to be used, it will be for the buyer and seller to determine. Additional considerations may however include:

• Equipment
• Premises
• Staff and
• Work in progress

Due diligence

For a deal to be successful the 'fit' of the fees with the buyer will need to be established. At the outset of negotiations often all that is available is a total fee figure and details of numbers of clients in certain fee brackets with an indication of the services provided and the location of the clients. Far more detail needs to be obtained during the negotiation phase. How this information is obtained varies but at some stage the buyer would expect to see client files, accounts, fee notes etc. and where staff are involved, meet with and talk to them.

The seller will need to ensure that the fundamental principle of confidentiality as discussed in section 114 of the ICAEW Code of Ethics is adhered to and the authority of the client would usually be required prior to disclosing client confidential information. It is normal before detailed information is disclosed that a confidentiality and non-poaching agreement is formally documented between buyer and seller. Such an agreement should also include a 'hold-harmless' clause whereby the buyer agrees not to use any information obtained against the interests of the seller.

The following are some of the matters to be considered when undertaking due diligence information gathering:

• Confirmation of information and detail
• Fee levels and charging structure
• Quality of work and files
• Profitability and overheads

A period of working together, alongside each other or in cooperation or collaboration could be agreed. The arrangements can vary considerably and will be particular to each individual’s circumstances. The arrangements should be able to be terminated without either party suffering substantial loss.

The example in Appendix 1 to this helpsheet deals specifically with those matters that are required to be confirmed by the ISAs (UK), together with other common representations obtained. It is based on the example in Appendix 2 of ISA (UK) 580.

In addition, the letter of representation should include confirmations from management on matters material to the financial statements in order to support other audit evidence obtained. In particular, where amounts are included in the accounts based on management estimates or valuations (such as property or stock values), it would be appropriate to include written confirmations.

It is not current best practice to include a long list of representations about assets and liabilities included in the accounts. Such paragraphs can detract from the impact of the more important matters, and in the case of an audit should be confirmed by adequate audit evidence.

Within the specimen letter of representation, guidance and instruction are shown in italics. None of this italicised text is for inclusion in the letter of representation. Members need to ensure it has been sufficiently tailored and all italicised text has been removed, before it is sent to client’s management for them to print on their own letterhead and sign as appropriate and then return to the firm. In some paragraphs, optional or alternative wording has been provided, shown in [square brackets] and each suggestion requires individual consideration and possible amendment.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.

• Download the sample letter of representation wording