AU-C 580 Written Representations: What the Letter Must Cover and When Management Refuses

AU-C section 580, Written Representations, covers the letter, or letters, the auditor of a nonissuer obtains from management and, where appropriate, those charged with governance. The letter is a standard step at the end of every audit, but it is not a formality. It fixes management's acknowledgment of its responsibilities in writing, and certain refusals lead to a disclaimer of opinion.

This page paraphrases the standard. Read AU-C 580 in AICPA Professional Standards before relying on any point here. A starting draft is the management representation letter template.

What is the objective of AU-C 580?

The auditor's objectives are to obtain written representations from management and, where appropriate, those charged with governance that they believe they have fulfilled their responsibility for the preparation of the financial statements and for the completeness of the information provided to the auditor, to support other audit evidence relevant to the financial statements or specific assertions if the auditor determines it necessary or another AU-C section requires it, and to respond appropriately to representations provided or not provided.

Which representations are always required?

Two matters are required in every audit.

1. Responsibility for the financial statements. Management acknowledges its responsibility for the preparation and fair presentation of the financial statements in accordance with the applicable framework, as set out in the terms of the audit engagement. See AU-C 210.
2. Information provided and completeness of transactions. Management has provided the auditor with all relevant information and access agreed in the terms of the engagement, and all transactions have been recorded and are reflected in the financial statements.

Other AU-C sections require further representations in specific areas. Typical topics, each with its own AU-C section, are:

The auditor also considers whether other representations are necessary to support evidence about particular matters, such as the intent to hold an investment, or the classification of debt. The auditor may request additional representations about specific assertions.

Who signs and when is it dated?

The auditor requests representations from those with appropriate responsibilities for the financial statements and knowledge of the matters concerned. For most small and mid-sized entities, that means the chief executive and the chief financial officer, or the equivalent. The auditor may also ask others, such as the controller, about matters in their area.

The letter is addressed to the auditor and dated as of the date of the auditor's report, which is the date AU-C 580 calls for in US GAAS (the international standard allows a date as near as practicable to, but not after, the report date). It covers all financial statements and periods referred to in the report. If the date of the report moves, the representation letter date moves with it. See AU-C 560 and AU-C 700.

If management has changed during the periods covered, the auditor requests representations from current management on matters related to prior periods, since current management is responsible for the financial statements being presented. Where comparative statements are presented, the representations cover all periods.

What are written representations not?

Written representations are audit evidence, but they are not sufficient by themselves.

• They do not provide sufficient appropriate evidence about any matter on their own. Obtaining reliable representations does not affect the nature or extent of other audit evidence about management's fulfillment of its responsibilities, or about specific assertions.
• They cannot replace evidence the auditor expects to be available. If the auditor cannot obtain evidence that is expected to exist, and management says otherwise in a representation, that is a matter that affects the audit and may be a scope limitation. See AU-C 705.
• If a representation is inconsistent with other audit evidence, the auditor performs procedures to resolve the matter. If it cannot be resolved, the auditor reconsiders the assessment of management's competence, integrity, ethical values or diligence, and the reliability of representations and evidence generally.

What if management will not sign, or the representations cannot be relied upon?

The last row is the one that matters most. A refusal to acknowledge responsibility for the financial statements, or to represent that all information was provided and all transactions recorded, is serious enough that the auditor cannot obtain sufficient evidence to form an opinion. The standard does not allow the auditor to issue a qualified opinion in its place.

Practical drafting points

These are practice, not requirements.

• Start from the firm's standard letter and tailor it to the engagement, the framework and the industry.
• Keep the letter specific. A generic letter that lists matters that do not apply to the client, such as inventory held by third parties for a services company, shows nobody read it.
• If a dollar amount threshold is used for materiality in the letter, the amount comes from the firm's policy or the engagement. AU-C 580 does not set one.
• Attach the summary of uncorrected misstatements, or list the items in the letter. See the summary of uncorrected misstatements template.
• Send the draft letter to management well before the report date so that the signing is not the first time they see the wording.
• Do not let management edit representations that the standard requires to remove content. If a requested representation is struck, treat it as not provided.

What must be documented?

The signed representation letter is the primary documentation. The file should also show any discussion of representations that were not provided or that were inconsistent with other evidence, and the effect on the opinion. See AU-C 230 audit documentation.

Common weaknesses in representation letters

Practice checks, not requirements of the standard. Gaps to avoid:

• Letter dated after the report date, or earlier than it
• Letter does not cover all periods presented
• Representations on uncorrected misstatements missing the attached summary
• Representations required by other AU-C sections not included
• Letter signed by someone without responsibility for the matters covered
• Boilerplate letter not tailored, listing matters that are not relevant

Related

• Management representation letter template
• AU-C 450 evaluation of misstatements
• AU-C 560 subsequent events
• AU-C 570 going concern
• AU-C 705 modifications to the opinion
• Audit engagement letter template

Sources

• AICPA, AU-C Section 580, Written Representations
• AICPA, AU-C Sections 210, 240, 250, 450, 501, 540, 550, 560 and 570 (representations required by each)
• AICPA, AU-C Section 705

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error