In prior postings, we discussed the reasons an external independent auditor would request their client to sign a management representation letter as well as who should sign the letter. In this post, we will discuss the typical content of the letter.
The letter itself, including the written representations, should be addressed to the auditor. Because the auditor is concerned with events occurring through the date of his or her report, the representations should be made as of the date of the auditor’s report.
The specific written representations obtained by the auditor will depend on the circumstances of the engagement and the nature and basis of presentation of the financial statements. At a minimum, the following topics are normally addressed in the letter:
A. Financial Statements - management's responsibility for fair presentation and beliefs re: conformity with GAAP.
B. All requested information is complete.
C. Management's responsibility to prevent and detect fraud.
D. Subsequent events.
E. Related party transactions and guarantees
F, Significant estimates and material concentrations known to management
G. Certain Significant Risks and Uncertainties - including violation of laws/regulations; unasserted claims or assessments and litigation.
H. Compliance with contractual agreements
One other concept is that management's representations may be limited to matters that are considered either individually or collectively “material” to the financial statements, provided management and the auditor have reached an understanding on materiality for this purpose. Typically, material items are items such that would cause a reasonable person to have a different assessment of the entity’s financial position if they proved to be different than what is stated in the financial statements.
Please feel free to contact us if you have other questions.
