Becker Professional Education | CPA Exam Review Auditing 5
C o n t e n t o f t h e " o l d " r e p r e s e n tat i o n l e t t e r
The AICPA has stated that it will test both the Clarified SASs and the "old" SASs on the Auditing exam starting on July 1, 2013. The AICPA has not given a definitive time period for this dual-testing, but has stated that it will continue until the Clarified SASs fully replace the old SASs (most likely at the end of 2014). The good news is that Becker is well-positioned to prepare you for the Auditing exam during this period of transition from the old SASs to the Clarified SASs. This Audit B textbook (Clarified SASs), is essentially the Audit A textbook (old SASs) with enhancements to cover the new/clarified provisions of the Clarified SASs. This new section has been added to your Audit 5 lecture to cover the wording of the representation letter under the old SASs. The wording of the representation letter was revised under the Clarified SASs. However, given that both the Clarified SASs and the old SASs are testable, you may still see questions related to the wording of the old representation letter on your Audit exam. If you would like to print out this new topic, please go to 2013
Edition course updates for the Audit B textbook available at http://beckerkb.custhelp.com.
I. Contents of ManageMent RepResentatIon LetteR a. financial statements
1. Management's acknowledgment of its responsibility for the fair presentation in the financial statements of financial position, results of operations, and cash flows in conformity with GAAP.
2. Management's belief that the financial statements are fairly presented in conformity with GAAP.
B. Completeness of Information
1. Availability of all financial records and related data.
2. Completeness and availability of all minutes of the meetings of stockholders, directors, and committees of directors.
3. Communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices.
4. Absence of unrecorded transactions.
C. Recognition, Measurement, and Disclosure
1. Management's belief that the effects of any uncorrected 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. (A summary of such items should be included in or attached to the letter.)
2. Management's acknowledgment of its responsibility for the design and implementation of programs and controls to prevent and detect fraud.
3. Knowledge of fraud or suspected fraud affecting the entity involving (a) management,
(b) employees who have significant roles in internal control, or (c) others, when the fraud could have a material effect on the financial statements.
4. Knowledge of any allegations of fraud or suspected fraud affecting the entity received in communications from employees, former employees, analysts, regulators, short sellers, or others.
5. Plans or intentions that may affect the carrying value or classification of assets and liabilities.
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Auditing 5 Becker Professional Education | CPA Exam Review
6. Information concerning related-party transactions and amounts receivable from or payable to related parties.
7. Guarantees, whether written or oral, under which the company is contingently liable.
8. Significant estimates and material concentrations known to management that are required to be disclosed in accordance with Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 275, Risks and Uncertainties .
9. Violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency.
10. Unasserted claims or assessments that the entity's lawyer has advised are probable of assertion and must be disclosed in accordance with FASB ASC 450, Contingencies .
11. Other liabilities and gain or loss contingencies that are required to be accrued or disclosed by FASB ASC 450.
12. Satisfactory title to assets, liens, or encumbrances on assets, and assets pledged as collateral.
13. Compliance with aspects of contractual agreements that may affect the financial statements.
D. subsequent events
Information concerning subsequent events.
e. additional Representations
The auditor should obtain additional representations from management regarding issues specific to the entity's financial statements. Possible topics include the impact of a new accounting principle, impairment of assets, intent to hold debt securities to maturity, obsolescence of inventory, restrictions on cash, plans to discontinue a line of business, etc.
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Becker Professional Education | CPA Exam Review Auditing 5
[ Date ]
To [ Independent Auditor ]
We are providing this letter in connection with your audit(s) of the [ identification of financial statements ] of [ name of entity ] as of [ dates ] and for the [ periods ] for the purpose of expressing an opinion as to whether the
[ consolidated ] financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of [ name of entity ] in conformity with accounting principles generally accepted in the
United States of America. We confirm that we are responsible for the fair presentation in the [ consolidated ] financial statements of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles.
Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement.
We confirm, to the best of our knowledge and belief, [ as of (date of auditor's report) ] the following representations made to you during your audit(s).
1. The financial statements referred to above are fairly presented in conformity with accounting principles generally accepted in the United States of America.
2. We have made available to you all— a. Financial records and related data.
b. Minutes of the meetings of stockholders, directors, and committees of directors, or summaries of actions of recent meetings for which minutes have not yet been prepared. 3. There have been no communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices.
4. There are no material transactions that have not been properly recorded in the accounting records underlying the financial statements.
5. We believe that the effects of the uncorrected financial statement misstatements summarized in the accompanying schedule are immaterial, both individually and in the aggregate, to the financial statements taken as a whole.
6. We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud.
7. We have no knowledge of any fraud or suspected fraud affecting the entity involving— a. Management, b. Employees who have significant roles in internal control, or c. Others where the fraud could have a material effect on the financial statements.
8. We have no knowledge of any allegations of fraud or suspected fraud affecting the entity received in communications from employees, former employees, analysts, regulators, short sellers, or others.
9. The company has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.
(continued)
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Auditing 5 Becker Professional Education | CPA Exam Review
(continued)
10. The following have been properly recorded or disclosed in the financial statements: a. Related-party transactions, including sales, purchases, loans, transfers, leasing arrangements, and guarantees, and amounts receivable from or payable to related parties.
b. Guarantees, whether written or oral, under which the company is contingently liable.
c. Significant estimates and material concentrations known to management that are required to be disclosed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) 275, Risks and Uncertainties . [ Significant estimates are estimates at the balance sheet date that could change materially within the next year. Concentrations refer to volumes of business, revenues, available sources of supply, or markets or geographic areas for which events could occur that would significantly disrupt normal finances within the next year.
]
11. There are no— a. Violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency.
b. Unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed in accordance with FASBASC 450, Contingencies .
c. Other liabilities or gain or loss contingencies that are required to be accrued or disclosed by
FASB ASC 450.
12. The company has satisfactory title to all owned assets, and there are no liens or encumbrances on such assets nor has any asset been pledged as collateral.
13. The company has complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance.
[ Add additional representations that are unique to the entity's business or industry.
]
To the best of our knowledge and belief, no events have occurred subsequent to the balance-sheet date and through the date of this letter that would require adjustment to or disclosure in the aforementioned financial statements.
[ Name of Chief Executive Officer and Title ]
[ Name of Chief Financial Officer and Title ] p a s s K e y
Remember that the management representation letter is required. Management's refusal to furnish written representations will generally result in either a disclaimer of opinion or in withdrawal from the engagement.
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