Written representations: what AU-C 580 requires in the letter

• List the representations AU-C 580 requires in every audit
• Date the representation letter and set the periods it covers
• Determine the consequence when management will not sign
• Explain why representations do not replace other audit evidence

Who represents and what they cover

AU-C 580.09 requires you to request written representations from management with appropriate responsibilities for the financial statements and knowledge of the matters concerned. In most private companies that means the chief executive and the chief financial officer or the controller. AU-C 580.21 requires the form: a representation letter addressed to the auditor.

The letter is evidence, but weak evidence on its own. It supports other procedures; it does not substitute for them.

The required representations

AU-C 580 builds the letter in layers.

Management's responsibilities (AU-C 580.10 and .11). Management has fulfilled its responsibility for the preparation and fair presentation of the financial statements and for internal control relevant to them, has given you all relevant information and access agreed in the engagement terms, and all transactions are recorded and reflected in the statements.

Specific matters (AU-C 580.12 through .18):

• Fraud: responsibility for controls to prevent and detect fraud, disclosure of the results of management's fraud risk assessment, knowledge of fraud or suspected fraud involving management, employees with significant roles in internal control, or others where the effect could be material, and knowledge of allegations from employees, former employees, regulators or others.
• Laws and regulations: all identified or suspected noncompliance whose effects should be considered has been disclosed.
• Uncorrected misstatements: management believes their effects are immaterial, individually and in the aggregate. A summary of the items is included in or attached to the letter (AU-C 580.14).
• Litigation and claims: all known actual or possible litigation and claims have been disclosed to you and accounted for and disclosed under the framework.
• Estimates: whether the methods, significant assumptions and data are appropriate (AU-C 580.16, as amended by SAS 143).
• Related parties: identity of all related parties and transactions disclosed, and appropriately accounted for and disclosed.
• Subsequent events: all events requiring adjustment or disclosure have been adjusted or disclosed.

Other sections add their own. AU-C 570.18 adds going concern representations when substantial doubt exists before considering plans, and AU-C 720.13c adds one when the annual report will be available only after the report date. AU-C 580.19 lets you add specific representations to support other evidence. The management representation letter template carries these items.

Date and periods

AU-C 580.20: the representations are dated as of the date of the auditor's report and cover all financial statements and periods referred to in the report. When your opinion covers comparative years, the letter covers both years. When you dual date a report for a revision, AU-C 560.13b requires an additional representation as of the dual date.

Never date the letter at the end of fieldwork and the report later. That leaves a window in which management has represented nothing.

Refusals and doubts

AU-C 580.25 leaves no middle ground on the core representations. If management does not provide the representations in AU-C 580.10 and .11, or you conclude there is enough doubt about management's integrity that those representations are not reliable, you disclaim an opinion under AU-C 705 or withdraw.

For any other requested representation that management refuses, AU-C 580.26 requires you to discuss it with management, reevaluate management's integrity and the reliability of other evidence, and determine the effect on the opinion. A refusal to sign the related party representation, for example, may lead to a qualified opinion or a disclaimer depending on what else you know.

AU-C 580.23 covers inconsistency: if a representation contradicts other evidence, perform procedures to resolve it, and if it remains unresolved, reconsider your assessment of management.

File mistakes reviewers flag

• Letter dated before the report date.
• No summary of uncorrected misstatements attached, or a summary that differs from the final misstatement schedule.
• Boilerplate going concern or estimate representations that do not match the actual matters.
• Signatures from people who lack knowledge of the matters.

See representation letter problems for refusal and dating cases, and the uncorrected misstatements lesson for the attached summary.

Northgate Hardware Supply, Inc.: the date problem