Written representations - Circumstances where necessary

Learning Outcomes

After reading this article, you will be able to explain when written representations from management are required, describe their purpose and limitations, and identify situations where they must be obtained. You will distinguish when written representations are reliable audit evidence, and know what to do if management refuses to provide them. All content is exam-relevant for ACCA FAU.

ACCA Foundations in Audit (FAU) Syllabus

For ACCA Foundations in Audit (FAU), you are required to understand the role and application of written representations in the audit process. This article addresses:

• The definition and purpose of written representations as audit evidence
• The circumstances that require obtaining written representations
• The limitations of written representations as evidence
• Auditor actions when management refuses or fails to provide necessary written representations
• The implications of written representations for auditor reporting

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following best describes a scenario where a written representation is necessary?
   1. When the auditor cannot obtain sufficient appropriate audit evidence from other sources
   2. When the client requests one
   3. Only if the audit is for a listed entity
   4. When engaged in a non-audit assignment

2. True or false? A written representation can substitute for all other forms of audit evidence when verifying a material balance.

3. What action should the auditor take if management refuses to provide a written representation requested on a significant matter?

4. List two examples of matters that are typically included in a written representation letter.

Introduction

In many audits, there are circumstances where audit evidence is difficult to obtain from third parties or by examining documents. In such cases, auditors may rely on written statements from management, known as written representations. Understanding when these representations are necessary, and their limits, is a key skill for the ACCA Foundations in Audit exam.

Key Term: Written representation
A written statement issued by management to confirm certain facts or to support information relevant to the audit.

When Are Written Representations Necessary?

Written representations serve as a key component of audit evidence but are not a substitute for other, more objective evidence. International Standard on Auditing (ISA) 580 requires written representations in certain cases, notably for confirming management responsibilities and for matters where other evidence is unavailable.

Auditors typically request written representations:

• When sufficient appropriate audit evidence cannot be obtained through other procedures
• For matters involving management’s judgement or intentions (e.g. plans to discontinue an operation)
• Where knowledge about a particular issue is only held by management
• To confirm that management has fulfilled its responsibility for preparing the financial statements and has disclosed all relevant information

Written representations are also required for areas such as subsequent events, related party transactions, contingent liabilities, or completeness of litigation disclosures, especially when other evidence is limited.

Key Term: Sufficient appropriate audit evidence
Information that is adequate both in quantity and quality for the auditor to draw reasonable conclusions on which to base the audit opinion.

Authority and Content of Written Representations

Written representations are usually documented in a letter, signed by members of management with appropriate responsibility, typically the Chief Executive Officer and Finance Director. The letter normally includes:

• Confirmation that all relevant information has been provided to the auditor
• Assertions about significant estimates and judgements in the financial statements
• Any specific matters where other evidence is unobtainable

If management refuses or fails to provide written representations on required matters, the auditor must consider the impact on the audit opinion.

Key Term: Management
Those with overall responsibility for preparing and presenting the financial statements, typically senior executives or directors.

Reliability and Limitations of Written Representations

While written representations add to the body of audit evidence, they are considered less reliable than independent or external evidence. Auditors must not accept written representations as the sole source of evidence for material items unless all other options for obtaining evidence have been exhausted and found insufficient.

In all circumstances, the auditor must critically assess information provided in written representations and compare it to other evidence. Contradictions or inconsistencies must be investigated.

If audit evidence from other sources is available, the written representation should never be used as a substitute.

Key Term: Audit evidence
Information collected by the auditor in relation to financial statement assertions, forming the basis of the auditor’s opinion.

Situations Requiring Written Representations

The following are common scenarios where written representations are necessary:

• Completeness: To confirm that all transactions and disclosures, including related parties and contingent liabilities, have been fully included in the financial statements.
• Estimate and Judgement: When evidence about assumptions or forecasts (e.g. warranty provisions, litigation outcomes) cannot be corroborated from external sources.
• Subsequent Events: To confirm all significant events after the reporting period have been disclosed and considered.
• Compliance with Laws and Regulations: Where no documentation or third-party confirmation exists, the auditor may require management to confirm compliance via written representation.
• Unusual Transactions: For items that are material but unique or rare, and where documentation is inconclusive.

Worked Example 1.1

Background: You are unable to obtain formal evidence on a legal claim outstanding at the year end. The client’s lawyer has not responded to your request for confirmation.

Question: What should you do to obtain necessary audit evidence?

Answer:

• Request a written representation from management confirming their assessment of the claim, including any estimates, assumptions, and disclosures made.
• Document that external confirmation was sought but was unavailable.
• Decide if the written representation alone is sufficient, considering the risk and materiality of the matter. If not, consider modifying the audit opinion.

Worked Example 1.2

Background: Management is unwilling to sign a representation confirming no significant undisclosed related party transactions.

Question: What are the audit implications?

Answer:

• Absence of the necessary written representation puts doubt on the completeness of disclosures.
• The auditor must consider whether there is a limitation on the scope of the audit.
• If unresolved, this situation may require a qualified audit opinion or a disclaimer of opinion due to insufficient audit evidence.

Exam Warning

A frequent exam mistake is to assume that written representations provide equal assurance to external confirmations or third-party documentation. For the exam, remember they are generally weaker and should only be relied on solely if no better evidence is available.

Summary

Written representations are needed when other evidence is not available for material matters, particularly when information is known only to management, or when required by auditing standards. They support but do not replace independent evidence. Refusal to provide necessary representations can result in a limitation of scope and may affect the auditor’s report.

Key Point Checklist

This article has covered the following key knowledge points:

• Define written representations and their purpose in an audit
• State when written representations are required by auditors
• Recognise that written representations are weaker than other audit evidence
• Identify actions to take if management refuses written representations
• Understand the potential impact on the audit opinion when representations are not provided

Key Terms and Concepts

• Written representation
• Sufficient appropriate audit evidence
• Management
• Audit evidence