INTERNATIONAL STANDARD ON AUDITING
(UK AND IRELAND) 580
MANAGEMENT REPRESENTATIONS
CONTENTS
Paragraph
Introduction............................................................................................
1 - 2-1
Acknowledgment by Management of its Responsibility for the Financial
Statements .............................................................................................
3 - 3-3
Representations by Management as Audit Evidence ............................
4 - 9-1
Documentation of Representations by Management ............................ 10 - 14-1
Action if Management Refuses to Provide Representations .................
15
Effective Date ........................................................................................
15-1
Appendix:
Example of a Management Representation Letter
Appendix 2: Specific Management Representations the Auditor is Required by
Other ISAs (UK and Ireland) to Obtain
International Standard on Auditing (UK and Ireland) (ISA (UK and Ireland))
580 “Management Representations” should be read in the context of the
Auditing Practices Board’s Statement “The Auditing Practices Board - Scope
and Authority of Pronouncements (Revised)” which sets out the application
and authority of ISAs (UK and Ireland).
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ISA (UK and Ireland) 580
Introduction
1.
The purpose of this International Standard on Auditing (UK and Ireland)
(ISA (UK and Ireland)) is to establish standards and provide guidance on
the use of management representations as audit evidence, the procedures to
be applied in evaluating and documenting management representations and
the action to be taken if management refuses to provide appropriate
representations.
1-1.
This ISA (UK and Ireland) uses the terms ‘those charged with governance’
and ‘management’. The term ‘governance’ describes the role of persons
entrusted with the supervision, control and direction of an entity.
Ordinarily, those charged with governance are accountable for ensuring that
the entity achieves its objectives, and for the quality of its financial
reporting and reporting to interested parties. Those charged with
governance include management only when they perform such functions.
1-2.
In the UK and Ireland, those charged with governance include the directors
(executive and non-executive) of a company or other body, the members of
an audit committee where one exists, the partners, proprietors, committee of
management or trustees of other forms of entity, or equivalent persons
responsible for directing the entity’s affairs and preparing its financial
statements.
1-3.
‘Management’ comprises officers those persons who perform senior
managerial functions.
1-4.
In the UK and Ireland, depending on the nature and circumstances of the
entity, management may include some or all of those charged with
governance (e.g. executive directors). Management will not normally
include non-executive directors.
2.
The auditor should obtain appropriate representations from
management.
2-1.
Written confirmation of appropriate representations from
management, as required by paragraph 4 below, should be obtained
before the audit report is issued.
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ISA (UK and Ireland) 580
Acknowledgment by Management of its Responsibility for the
Financial Statements
3.
The auditor should obtain audit evidence that management1a
acknowledges its responsibility for the fair presentation of the financial
statements in accordance with the applicable financial reporting
framework, and has approved the financial statements. The auditor can
obtain audit evidence of management’s acknowledgment of such
responsibility and approval from relevant minutes of meetings of those
charged with governance or by obtaining a written representation from
management or a signed copy of the financial statements.
3-1.
In the UK and Ireland, the auditor should obtain evidence that those
charged with governance acknowledge their collective responsibility for
the preparation of the financial statements and have approved the
financial statements.
3-2.
In the UK and Ireland, the directors of a company have a legal collective
responsibility to prepare company and, where appropriate, group financial
statements that give a true and fair view.
3-3.
When the auditor has responsibility for reporting on the financial statements
of a group of companies, acknowledgement by the directors of their
responsibility for the financial statements applies to both the group financial
statements and the financial statements of the parent undertaking.
Representations by Management as Audit Evidence
4.
The auditor should obtain written representations from management
on matters material to the financial statements when other sufficient
appropriate audit evidence cannot reasonably be expected to exist. The
possibility of misunderstandings between the auditor and management is
reduced when oral representations are confirmed by management in
writing. Matters which might be included in a letter from management or
in a confirmatory letter to management are contained in the example of a
management representation letter in the Appendix to this ISA (UK and
Ireland)1b.
1a
In the UK and Ireland, those charged with governance are responsible for the preparation of the
financial statements.
1b
The example letter does not include all management representations that ISAs (UK and Ireland) require
the auditor to obtain. Appendix 2 gives a summary of the management representations the auditor is
required by other ISAs (UK and Ireland) to obtain as at 15 December 2004.
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ISA (UK and Ireland) 580
4-1.
It is advisable for the auditor to discuss the relevant matters with those
responsible for giving written representations before they sign them to
ensure that they understand what it is that they are being asked to confirm.
5.
Written representations requested from management may be limited to
matters that are considered either individually or collectively material to the
financial statements. Regarding certain items it may be necessary to inform
management of the auditor’s understanding of materiality.
5.a.
The auditor should obtain written representations from management
that:
6.
7.
4
(a)
It acknowledges its responsibility for the design and
implementation of internal control to prevent and detect error;
and
(b)
It believes the effects of those uncorrected financial statements
misstatements aggregated by the auditor during the audit 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 written representations.
During the course of an audit, management makes many representations to
the auditor, either unsolicited or in response to specific inquiries. When
such representations relate to matters which are material to the financial
statements, the auditor will need to:
(a)
Seek corroborative audit evidence from sources inside or outside the
entity;
(b)
Evaluate whether the representations made by management appear
reasonable and consistent with other audit evidence obtained,
including other representations; and
(c)
Consider whether the individuals making the representations can be
expected to be well informed on the particular matters.
Representations by management cannot be a substitute for other audit
evidence that the auditor could reasonably expect to be available. For
example, a representation by management as to the cost of an asset is not a
substitute for the audit evidence of such cost that an auditor would
ordinarily expect to obtain. If the auditor is unable to obtain sufficient
appropriate audit evidence regarding a matter which has, or may have, a
material effect on the financial statements and such audit evidence is
ISA (UK and Ireland) 580
expected to be available, this will constitute a limitation in the scope of the
audit, even if a representation from management has been received on the
matter.
8.
In certain instances, audit evidence other than that obtained by performing
inquiry may not be reasonably expected to be available; therefore the
auditor obtains a written representation by management. For example, the
auditor may not be able to obtain other audit evidence to corroborate
management’s intention to hold a specific investment for long-term
appreciation.
8-1.
In some exceptional cases, the matter may be of such significance the
auditor refers to the representations in the auditor’s report as being relevant
to an understanding of the basis of the audit opinion.
8-2.
When the auditor has responsibility for reporting on group financial
statements, where appropriate the auditor obtains written confirmation of
representations relating to specific matters regarding both the group
financial statements and the financial statements of the parent undertaking.
The means by which the auditor obtains these representations depends on
the group's methods of delegation of management control and authority.
The auditor may be able to obtain the required representations regarding the
group financial statements from the management of the parent undertaking
because of the level of their involvement in the management of the group.
Alternatively, the auditor may obtain certain representations regarding
matters material to the group financial statements directly from the
management of the subsidiary undertakings, or by seeing relevant
representations by management to the auditors of those subsidiary
undertakings, in addition to those obtained from the management of the
parent undertaking.
9.
If a representation by management is contradicted by other audit
evidence, the auditor should investigate the circumstances and, when
necessary, reconsider the reliability of other representations made by
management.
9-1.
The investigation of apparently contradictory audit evidence regarding a
representation received usually begins with further enquiries of
management, to ascertain whether the representation has been
misunderstood or whether the other audit evidence has been misinterpreted,
followed by corroboration of management's responses. If management is
unable to provide an explanation or if the explanation is not considered
adequate, further audit procedures may be required to resolve the matter.
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ISA (UK and Ireland) 580
Documentation of Representations by Management
10.
The auditor would ordinarily include in audit working papers evidence of
management’s representations in the form of a summary of oral discussions
with management or written representations from management.
11.
A written representation is ordinarily more reliable audit evidence than an
oral representation and can take the form of:
11-1.
(a)
A representation letter from management;
(b)
A letter from the auditor outlining the auditor’s understanding of
management’s representations, duly acknowledged and confirmed by
management; or
(c)
Relevant minutes of meetings of the board of directors or similar
body or a signed copy of the financial statements.
A signed copy of the financial statements for a company may be sufficient
evidence of the directors’ acknowledgement of their collective
responsibility for the preparation of the financial statements where it
incorporates a statement to that effect. A signed copy of the financial
statements, however, is not, by itself, sufficient appropriate evidence to
confirm other representations given to the auditor as it does not, ordinarily,
clearly identify and explain the specific separate representations.
Basic Elements of a Management Representation Letter
12.
When requesting a management representation letter, the auditor would
request that it be addressed to the auditor, contain specified information and
be appropriately dated and signed.
13.
A management representation letter would ordinarily be dated the same date
as the auditor’s report. However, in certain circumstances, a separate
representation letter regarding specific transactions or other events may also
be obtained during the course of the audit or at a date after the date of the
auditor’s report, for example, on the date of a public offering.
13-1.
Written representations required as audit evidence are obtained before the
audit report is issued.
14.
A management representation letter would ordinarily be signed by the
members of management who have primary responsibility for the entity and
its financial aspects (ordinarily the senior executive officer and the senior
financial officer) based on the best of their knowledge and belief. In certain
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ISA (UK and Ireland) 580
circumstances, the auditor may wish to obtain representation letters from
other members of management. For example, the auditor may wish to
obtain a written representation about the completeness of all minutes of the
meetings of shareholders, the board of directors and important committees
from the individual responsible for keeping such minutes.
14-1.
In the UK and Ireland, it is usually appropriate for the auditor to request
that the management representation letter be discussed and agreed by those
charged with governance and signed on their behalf by the chairman and
secretary, before they approve the financial statements, to ensure that all
those charged with governance are aware of the representations on which
the auditor intends to rely in expressing the auditor’s opinion on those
financial statements. For the audit of statutory financial statements, the
auditor may also wish to consider whether to take the opportunity to remind
the directors that it is an offence to mislead the auditor (UK: Section 389A
of the Companies Act 1985; Ireland: Section 197(i), Companies Act, 1990).
Action if Management Refuses to Provide Representations
15.
If management refuses to provide a representation that the auditor
considers necessary, this constitutes a scope limitation and the auditor
should express a qualified opinion or a disclaimer of opinion. In such
circumstances, the auditor would evaluate any reliance placed on other
representations made by management during the course of the audit and
consider if the other implications of the refusal may have any additional
effect on the auditor’s report.
Effective Date
15-1.
This ISA (UK and Ireland) is effective for audits of financial statements for
periods commencing on or after 15 December 2004.
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ISA (UK and Ireland) 580
Appendix
This example letter does not include all representations that ISAs (UK and Ireland)
require the auditor to obtain. A summary of such representations as at 15 December
2004 is included in Appendix 2. Additionally, in the UK and Ireland representations
from those charged with governance would include acknowledgment of any
responsibilities they may have in law in relation to the preparation of financial
statements and providing information to the auditor. An example of such a
representation for directors of a UK company incorporated under the Companies Act
1985 is:
“We acknowledge as directors our responsibilities under the Companies Act
1985 for preparing financial statements which give a true and fair view and
for making accurate representations to you. All the accounting records have
been made available to you for the purpose of your audit and all the
transactions undertaken by the company have been properly reflected and
recorded in the accounting records. All other records and related information,
including minutes of all management and shareholders meetings, have been
made available to you.”
In the Republic of Ireland reference would be made to the Companies Acts 1963 –
2003.
Example of a Management Representation Letter
The following letter is not intended to be a standard letter. Representations by
management will vary from one entity to another and from one period to the next.
Although seeking representations from management on a variety of matters may
serve to focus management’s attention on those matters, and thus cause management
to specifically address those matters in more detail than would otherwise be the case,
the auditor needs to be cognizant of the limitations of management representations as
audit evidence as set out in this ISA (UK and Ireland).
(Entity Letterhead)
(To Auditor)
(Date)
This representation letter is provided in connection with your audit of the financial
statements of ABC Company for the year ended December 31, 19X1 for the purpose
of expressing an opinion as to whether the financial statements give a true and fair
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ISA (UK and Ireland) 580
view of (present fairly, in all material respects,) the financial position of ABC
Company as of December 31, 19X1 and of the results of its operations and its cash
flows for the year then ended in accordance with (indicate applicable financial
reporting framework).
We acknowledge our responsibility for the fair presentation of the financial
statements in accordance with (indicate applicable financial reporting framework).1
We confirm, to the best of our knowledge and belief, the following representations:
Include here representations relevant to the entity. Such representations may
include:
•
There have been no irregularities involving management or employees who have
a significant role in internal control or that could have a material effect on the
financial statements.
•
We have made available to you all books of account and supporting
documentation and all minutes of meetings of shareholders and the board of
directors (namely those held on March 15, 19X1 and September 30, 19X1,
respectively).
•
We confirm the completeness of the information provided regarding the
identification of related parties.
•
The financial statements are free of material misstatements, including omissions.
•
The Company has complied with all aspects of contractual agreements that
could have a material effect on the financial statements in the event of
noncompliance. There has been no noncompliance with requirements of
regulatory authorities that could have a material effect on the financial
statements in the event of noncompliance.
•
The following have been properly recorded and when appropriate, adequately
disclosed in the financial statements:
(a)
The identity of, and balances and transactions with, related parties.
(b) Losses arising from sale and purchase commitments.
(c)
Agreements and options to buy back assets previously sold.
(d) Assets pledged as collateral.
1
If required add “On behalf of the board of directors (or similar body).”
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ISA (UK and Ireland) 580
•
We have no plans or intentions that may materially alter the carrying value or
classification of assets and liabilities reflected in the financial statements.
•
We have no plans to abandon lines of product or other plans or intentions that
will result in any excess or obsolete inventory, and no inventory is stated at an
amount in excess of net realizable value.
•
The Company has satisfactory title to all assets and there are no liens or
encumbrances on the company’s assets, except for those that are disclosed in
Note X to the financial statements.
•
We have recorded or disclosed, as appropriate, all liabilities, both actual and
contingent, and have disclosed in Note X to the financial statements all
guarantees that we have given to third parties.
•
Other than . . . described in Note X to the financial statements, there have been
no events subsequent to period end which require adjustment of or disclosure in
the financial statements or Notes thereto.
•
The . . . claim by XYZ Company has been settled for the total sum of XXX
which has been properly accrued in the financial statements. No other claims in
connection with litigation have been or are expected to be received.
•
There are no formal or informal compensating balance arrangements with any of
our cash and investment accounts. Except as disclosed in Note X to the financial
statements, we have no other line of credit arrangements.
•
We have properly recorded or disclosed in the financial statements the capital
stock repurchase options and agreements, and capital stock reserved for options,
warrants, conversions and other requirements.
(Senior Executive Officer)
(Senior Financial Officer)
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ISA (UK and Ireland) 580
Appendix 2
Specific Management Representations the Auditor is Required
by Other ISAs (UK and Ireland) to Obtain
This appendix sets out the specific management representations required by ISAs
(UK and Ireland) in issue at 15 December 2004. It is not a comprehensive list of the
only representations that the auditor needs to obtain. As stated in paragraph 4 of this
ISA (UK and Ireland), the auditor should obtain written representations from
management on matters material to the financial statements when other sufficient
appropriate audit evidence cannot reasonably be expected to exist. Also, as stated in
paragraph 14-1, in the UK and Ireland, it is usually appropriate for the auditor to
request that the management representation letter be discussed and agreed by those
charged with governance and signed on their behalf by the chairman and secretary,
before they approve the financial statements, to ensure that all those charged with
governance are aware of the representations on which the auditor intends to rely in
expressing the auditor’s opinion on those financial statements.
240 - The Auditor’s Responsibility to Consider Fraud in an Audit of
Financial Statements
90.
The auditor should obtain written representations from management2 that:
(a)
It acknowledges its responsibility for the design and implementation of
internal control to prevent and detect fraud;
(b) It has disclosed to the auditor the results of its assessment of the risk
that the financial statements may be materially misstated as a result of
fraud;
(c)
It has disclosed to the auditor its knowledge of fraud or suspected fraud
affecting the entity involving:
(i)
Management3;
(ii)
Employees who have significant roles in internal control; or
(iii) Others where the fraud could have a material effect on the
financial statements; and
2
In the UK and Ireland the auditor obtains written representations from those charged with governance.
3
In the UK and Ireland, and those charged with governance.
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ISA (UK and Ireland) 580
(d) It has disclosed to the auditor its knowledge of any allegations of fraud,
or suspected fraud, affecting the entity’s financial statements
communicated by employees, former employees, analysts, regulators or
others.
250 Section A - Consideration of Laws and Regulations in an Audit of
Financial Statements
23.
The auditor should obtain written representations that management4 has
disclosed to the auditor all known actual or possible noncompliance with laws
and regulations whose effects should be considered when preparing financial
statements.
23-1. Where applicable, the written representations should include the actual or
contingent consequences which may arise from the non-compliance.
260 - Communication of Audit Matters with Those Charged With
governance
11-19. The auditor should seek to obtain a written representation from those charged
with governance that explains their reasons for not correcting misstatements
brought to their attention by the auditor.
545 - Auditing Fair Value Measurements and Disclosures
63.
4
12
The auditor should obtain written representations from management regarding
the reasonableness of significant assumptions, including whether they
appropriately reflect management’s intent and ability to carry out specific
courses of action on behalf of the entity where relevant to the fair value
measurements or disclosures.
In the UK and Ireland the auditor obtains this written representation from those charged with
governance.
ISA (UK and Ireland) 580
550 - Related Parties
15/115. The auditor should obtain a written representation from management5
concerning:
(a) The completeness of information provided regarding the identification of
related parties; and
(b) The adequacy of related party disclosures in the financial statements.
570 - Going Concern
26.
When events or conditions have been identified which may cast significant
doubt on the entity’s ability to continue as a going concern, the auditor should:
….
(c) Seek written representations from management6 regarding its plans for
future action.
26-1.
The auditor should consider the need to obtain written confirmations of
representations from those charged with governance regarding:
(a) The assessment of those charged with governance that the company is
a going concern;
(b) Any relevant disclosures in the financial statements.
5
In the UK and Ireland the auditor obtains written representations from those charged with governance.
6
In the UK and Ireland the auditor obtains written representations from those charged with governance.
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ISA (UK and Ireland) 580
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The ISAs (UK and Ireland) are based on International Standards on Auditing of the
same titles, which have been issued by the International Auditing and Assurance
Standards Board and published by the International Federation of Accountants.
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