A management representation letter is a written statement from a client’s management to its auditor, addressed to the auditor and dated as of the auditor’s report, confirming the representations management has made during the audit. It is required evidence rather than a courtesy, because the auditing standards oblige the auditor to obtain it and an audit cannot be completed cleanly without it.
Practitioners shorten it to the rep letter or the management rep letter. Whatever it is called, it is the last document produced in an engagement and the one whose supporting lists take the longest to build.
What the Standard Requires It to Be
For audits of public companies the governing standard is direct about the letter’s status. It establishes a requirement that the independent auditor obtain written representations from management as a part of an audit of financial statements performed in accordance with the standards of the PCAOB and provides guidance concerning the representations to be obtained (PCAOB, AS 2805, paragraph .01).
The letter has to cover everything the report covers. Written representations from management should be obtained for all financial statements and periods covered by the auditor’s report (PCAOB, AS 2805, paragraph .05). Where comparative statements are reported on, that reaches back into periods the current management team may not have been present for, and the standard still asks for the representation. If current management was not present during all periods covered by the auditor’s report, the auditor should nevertheless obtain written representations from current management on all such periods (PCAOB, AS 2805, paragraph .10).
Two mechanical points decide whether a letter is usable. The written representations should be addressed to the auditor, and because the auditor is concerned with events occurring through the date of his or her report that may require adjustment to or disclosure in the financial statements, the representations should be made as of the date of the auditor’s report (PCAOB, AS 2805, paragraph .09).
Who Signs It
Not whoever is available. The letter should be signed by those members of management with overall responsibility for financial and operating matters whom the auditor believes are responsible for and knowledgeable about, directly or through others in the organization, the matters covered by the representations, and such members of management normally include the chief executive officer and chief financial officer or others with equivalent positions in the entity (PCAOB, AS 2805, paragraph .09).
The test is responsibility and knowledge, so a controller signing alone at a company that has a chief financial officer is a gap the auditor should raise. In a small client without either title, the equivalent positions are whoever actually carries the financial and operating responsibility.
What Goes in It
The content is not boilerplate, though it reads like it. In connection with an audit of financial statements presented in accordance with generally accepted accounting principles, specific representations should relate to the financial statements themselves, the completeness of information, and recognition, measurement and disclosure (PCAOB, AS 2805, paragraph .06).
Under those headings the standard asks for management’s acknowledgment of its responsibility for the fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles, and for the availability of all financial records and related data, including the names of all related parties and all relationships and transactions with related parties. It asks for the absence of unrecorded transactions and of side agreements or other arrangements, written or oral, undisclosed to the auditor. It asks for management’s belief that the effects of any uncorrected financial statement misstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole, with a summary of those items included in or attached to the letter. It asks about knowledge of fraud or suspected fraud, and about knowledge of allegations of fraud received from employees, former employees, analysts, regulators, short sellers or others (PCAOB, AS 2805, paragraph .06).
The list is a floor rather than a template. The representation letter ordinarily should be tailored to include additional appropriate representations from management relating to matters specific to the entity’s business or industry (PCAOB, AS 2805, paragraph .07).
Materiality can be scoped into it, but not everywhere. Management’s representations may be limited to matters considered either individually or collectively material to the financial statements, provided management and the auditor have reached an understanding on materiality for this purpose, and materiality may be different for different representations (PCAOB, AS 2805, paragraph .08). Two carve-outs matter for anyone negotiating that understanding. Materiality considerations would not apply to representations not directly related to amounts included in the financial statements, and because of the possible effects of fraud on other aspects of the audit, materiality would not apply to one of the fraud representations with respect to management or those employees who have significant roles in internal control (PCAOB, AS 2805, paragraph .08).
What the Letter Is Not
It is not a substitute for audit work, and the standard says so before it says anything else about content. Representations from management are part of the evidential matter the independent auditor obtains, but they are not a substitute for the application of those auditing procedures necessary to afford a reasonable basis for an opinion regarding the financial statements under audit (PCAOB, AS 2805, paragraph .02).
That cuts both ways in practice. A signed representation about related parties does not excuse the related-party procedures, and the standard’s own example is exactly that: after performing the related-party procedures, the auditor should obtain a written representation that management has no knowledge of any relationships or transactions with related parties that have not been properly accounted for and adequately disclosed, and should obtain it even where the procedures found nothing wrong (PCAOB, AS 2805, paragraph .03).
It is also not a shield against contradicting evidence. If a representation made by management is contradicted by other audit evidence, the auditor should investigate the circumstances and consider the reliability of the representation made, and should consider whether reliance on management’s representations relating to other aspects of the financial statements is appropriate and justified (PCAOB, AS 2805, paragraph .04).
What Refusing to Sign Costs
This is the part clients underestimate, and it is the reason the letter is not negotiable at the end of a job.
Management’s refusal to furnish written representations constitutes a limitation on the scope of the audit sufficient to preclude an unqualified opinion and is ordinarily sufficient to cause an auditor to disclaim an opinion or withdraw from the engagement (PCAOB, AS 2805, paragraph .13). The standard leaves the auditor some room, since based on the nature of the representations not obtained or the circumstances of the refusal the auditor may conclude that a qualified opinion is appropriate, and it adds that the auditor should consider the effects of the refusal on the ability to rely on other management representations (PCAOB, AS 2805, paragraph .13).
Read that last clause carefully. A refusal on one point does not stay contained to that point, because it puts every other representation in the same letter under question.
Where a US Firm Meets It
On the audit side of a practice the letter is a scheduling problem before it is a documentation problem, since it is dated last and assembled first. The private-company version of the requirement, and the autumn work that keeps a rep letter from stalling a February close, is set out in year-end audit preparation best practices.
On the other side of the engagement, a firm preparing a client’s books meets the letter as a deadline it does not control. The related-party list, the litigation list and the minutes file are the client’s to produce, and the practical answer is to keep them current through the year rather than to reconstruct them in the week the report is due.
Common Questions
Yes, for an audit. The standard establishes a requirement that the independent auditor obtain written representations from management as part of an audit of financial statements performed under PCAOB standards (PCAOB, AS 2805, paragraph .01). Refusal to furnish it is a scope limitation sufficient to preclude an unqualified opinion (PCAOB, AS 2805, paragraph .13).
The date of the auditor’s report. The representations should be made as of that date, because the auditor is concerned with events occurring through it that may require adjustment to or disclosure in the financial statements (PCAOB, AS 2805, paragraph .09).
Sometimes, in addition rather than instead. In certain circumstances the auditor may want written representations from other individuals, and the standard’s examples are the person responsible for keeping the minutes of meetings of stockholders, directors and committees of directors, and, where a subsidiary is audited but the parent is not, management of the parent company on matters that may affect the subsidiary (PCAOB, AS 2805, paragraph .11).
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms under layered review, and a trial task lets a firm’s own reviewer grade a real block of close and workpaper preparation before any client file depends on it.
