PAB/ICAJ JOINT SEMINAR
International Standards on Auditing
REPORTS
October 10, 2009
KPMG in Jamaica
Rochelle Minto
Senior Manager, Audit
KPMG in Jamaica
Course Outline (1)
•Types of engagements and reports
– International Standards on Review Engagements (ISRE 2400 & 2410)
– Assurance engagements other than audits or reviews of historical financial
information (ISAE 3000)
– The Auditor's Report on Special Purpose Audit Engagements (ISA 800)
– Engagements to Perform Agreed-upon Procedures Regarding Financial
Information (ISRS 4400)
– Engagements to compile financial information (ISRS 4410)
– Audit engagement (ISA 700)
•
Content of the Independent Auditor’s Report
• Dating of audit reports
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are registered trademarks of KPMG International, a Swiss cooperative.
Course Outline (2)
• ISA 701 Modification to the auditor’s report
– Matters that do not affect the audit opinion
– Matters that affect the audit opinion
• Representation letter: ISA 580 Management Representations
• Questions and answers
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are registered trademarks of KPMG International, a Swiss cooperative.
Types of Engagements and Reports
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are registered trademarks of KPMG International, a Swiss cooperative.
3
Types of Engagements & Reports
• Review engagements (ISRE 2400 & 2410)
• Assurance engagements (ISAE 3000)
• Special Purpose Audit engagements (ISA 800)
• Agreed-upon procedures regarding Financial Information (ISRS 4400)
• Compilation of financial information (ISRS 4410)
• Audit engagements (ISA 700)
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are registered trademarks of KPMG International, a Swiss cooperative.
International Standards on Review Engagements 2400:
Engagements to review Financial Statements
•
Requires a Practitioner to state whether anything has come to the Practitioner's
attention that causes the Practitioner to believe that the financial statements are
not prepared, in all material respects. The procedures do not provide all the
evidence that would be required in an audit.
•
The review report should contain a clear written expression of negative
assurance. The Practitioner should review and assess the conclusions drawn
from the evidence obtained as the basis for the expression of negative
assurance.
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are registered trademarks of KPMG International, a Swiss cooperative.
ISRE 2410 - Review of Interim Financial Information
Performed by the Independent Auditor of the Entity
Conforming Amendments
•
Requires the auditor to express a conclusion whether, on the basis of the
review, anything has come to the auditor's attention that causes the auditor to
believe that the interim financial information is not prepared, in all material
respects, in accordance with an applicable financial reporting framework.
•
A review, in contrast to an audit, is not designed to obtain reasonable
assurance that the interim financial information is free from material
misstatement. A review consists of making inquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and
other review procedures. It does not provide all of the evidence that would be
required in an audit.
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are registered trademarks of KPMG International, a Swiss cooperative.
ISAE 3000 - Assurance engagements other than audits or
reviews of historical financial information
•
This ISAE uses the terms ‘reasonable assurance engagement’ and ‘limited
assurance engagement’ to distinguish between the two types of assurance
engagement a practitioner is permitted to perform.
•
The objective of a reasonable assurance engagement is a reduction in
assurance engagement risk to an acceptably low level in the circumstances of
the engagement as the basis for a positive form of expression of the
practitioner's conclusion.
•
The objective of a limited assurance engagement is a reduction in assurance
engagement risk to a level that is acceptable in the circumstances of the
engagement, but where that risk is greater than for a reasonable assurance
engagement, as the basis for a negative form of expression of the practitioner's
conclusion.
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are registered trademarks of KPMG International, a Swiss cooperative.
ISAE 3000 – Conclusion expressed in the positive versus
negative form
• In a reasonable assurance engagement, the conclusion should be
expressed in the positive form: for example: "In our opinion internal
control is effective, in all material respects, based on XYZ criteria" or "In
our opinion the responsible party's assertion that internal control is
effective, in all material respects, based on XYZ criteria, is fairly stated."
• In a limited assurance engagement, the conclusion should be
expressed in the negative form: for example: "Based on our work
described in this report, nothing has come to our attention that causes
us to believe that internal control is not effective, in all material
respects, based on XYZ criteria" or "Based on our work described in
this report, nothing has come to our attention that causes us to believe
that the responsible party's assertion that internal control is effective, in
all material respects, based on XYZ criteria, is not fairly stated."
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are registered trademarks of KPMG International, a Swiss cooperative.
ISRS 4400 - Engagements to Perform Agreed-upon
Procedures Regarding Financial Information
• The objective of an agreed-upon procedures engagement is for
the auditor to carry out procedures of an audit nature to which the
auditor and the entity and any appropriate third parties have
agreed and to report on factual findings.
• Users of the report assess for themselves the procedures and findings
reported by the auditor and draw their own conclusions from the
auditor's work.
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are registered trademarks of KPMG International, a Swiss cooperative.
ISRS 4410 - Engagements to compile financial
information
• The objective of a compilation engagement is for the accountant
to use accounting expertise, as opposed to auditing expertise, to
collect, classify and summarize financial information.
This ordinarily entails reducing detailed data to a manageable and
understandable form without a requirement to test the assertions
underlying that information. The procedures employed are not designed
and do not enable the accountant to express any assurance on the
financial information.
The financial information compiled by the accountant should
contain a reference such as "Unaudited," "Compiled without Audit
or Review" or "Refer to Compilation Report" on each page
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QUIZ (1)
• The financial information should include the reference “Unaudited”
when the following engagement is performed:
(a) agreed-upon procedures
(b) assurance engagements
(c) review engagements
(d) compilation engagement
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are registered trademarks of KPMG International, a Swiss cooperative.
QUIZ (2)
• This engagement provides a report on factual findings:
(a) review engagement
(b) compilation
(c) agreed upon procedures
(d) assurance engagement
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are registered trademarks of KPMG International, a Swiss cooperative.
ISA 700: The Independent Auditor’s Report
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are registered trademarks of KPMG International, a Swiss cooperative.
Content of Audit Reports
• Title
• Addressee
• Introductory paragraph
• Management's responsibility for the financial statements
• Auditor's responsibility
• Auditor's opinion
• Other reporting responsibilities
• Auditor's signature
• Date of the auditor's report
• Auditor's address
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are registered trademarks of KPMG International, a Swiss cooperative.
What should be included in the Audit Report?
•
Title
Clearly indicates that it is the report of an independent auditor
•
Addressee
Those for whom the report is prepared
• Introductory paragraph
State the entity whose financial statements have been audited and should state that the financial
statements have been audited. The introductory paragraph should also:
(a) Identify the title of each of the financial statements that comprise the complete set of financial
statements;
(b) Refer to the summary of significant accounting policies and other explanatory notes; and
(c) Specify the date and period covered by the financial statements.
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are registered trademarks of KPMG International, a Swiss cooperative.
What should be included in the Auditor’s report?
Management & Auditor responsibilities
Management responsibility
Auditor responsibility
•
•
To express an opinion on the financial
statements based on the audit
•
The auditor's report should state that the
audit was conducted in accordance with
International Standards on Auditing. The
auditor's report should also explain that
those standards require that the auditor
comply with ethical requirements and
that the auditor plan and perform the
audit to obtain reasonable assurance
whether the financial statements are free
from material misstatement.
For the preparation and the fair
presentation of the financial statements
in accordance with the applicable
financial reporting framework and that
this responsibility includes:
•
(a) Designing, implementing and
maintaining internal control relevant to
the preparation and fair presentation of
financial statements that are free from
material misstatement, whether due to
fraud or error;
•
(b) Selecting and applying appropriate
accounting policies; and
•
(c) Making accounting estimates that are
reasonable in the circumstances.
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are registered trademarks of KPMG International, a Swiss cooperative.
What should be included in the Auditor’s report?
Auditor’s responsibilities (2)
The auditor's report should describe an audit by stating that:
• An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial statements;
• The procedures selected depend on the auditor's judgment,
including the assessment of the risks of material misstatement of
the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control
relevant to the entity's preparation and fair presentation of the
financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity's internal
control.
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are registered trademarks of KPMG International, a Swiss cooperative.
What should be included in the Auditor’s report?
Auditor’s responsibilities (3)
•
In circumstances when the auditor also has a responsibility to express an
opinion on the effectiveness of internal control in conjunction with the
audit of the financial statements, the auditor should omit the phrase that
the auditor's consideration of internal control is not for the purpose of
expressing an opinion on the effectiveness of internal control; and
•
An audit also includes evaluating the appropriateness of the accounting
policies used, the reasonableness of accounting estimates made by
management, as well as the overall presentation of the financial
statements.
•
The auditor's report should state that the auditor believes that the audit
evidence the auditor has obtained is sufficient and appropriate to provide
a basis for the auditor's opinion.
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are registered trademarks of KPMG International, a Swiss cooperative.
What should be included in the Auditor’s report?
Audit opinion
•
An unqualified opinion should be expressed when the auditor concludes
that the financial statements give a true and fair view or are presented
fairly, in all material respects, in accordance with the applicable financial
reporting framework.
•
When expressing an unqualified opinion, the opinion paragraph of the
auditor's report should state the auditor's opinion that the financial
statements give a true and fair view or present fairly, in all material
respects, in accordance with the applicable financial reporting framework.
•
When International Financial Reporting Standards or International Public
Sector Accounting Standards are not used as the financial reporting
framework, the reference to the financial reporting framework in the
wording of the opinion should identify the jurisdiction or country of origin
of the financial reporting framework
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are registered trademarks of KPMG International, a Swiss cooperative.
What should be included in the Auditor’s report?
• Other reporting responsibilities
When the auditor addresses other reporting responsibilities within the auditor's
report on the financial statements, these other reporting responsibilities should
be addressed in a separate section in the auditor's report that follows the
opinion paragraph
• Auditor's signature
Either the name of the audit firm, the personal name of the auditor or
both
• Auditor's address
The report should name the location in the country or jurisdiction where the
auditor practices.
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are registered trademarks of KPMG International, a Swiss cooperative.
Quiz (1)
• Which of the following is not included in the Auditor’s report”
(a) Title
(b) Management responsibilities
(c) Addressee
(d) Management representations
(e) Introductory paragraph
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are registered trademarks of KPMG International, a Swiss cooperative.
Quiz (2)
• To whom may the audit report be addressed for the following:
(a) Statutory audit
(b) Non-statutory audit
(c) Partnership
(d) Proprietor
(e) Pension plan
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are registered trademarks of KPMG International, a Swiss cooperative.
Dating of Audit Reports
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are registered trademarks of KPMG International, a Swiss cooperative.
23
Dating of Audit Reports
•
The auditor should date the report on the financial statements no earlier than
the date on which the auditor has obtained sufficient appropriate audit evidence
on which to base the opinion on the financial statements. Sufficient appropriate
audit evidence should include evidence that the entity's complete set of
financial statements has been prepared and that those with the recognized
authority have asserted that they have taken responsibility for them.
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are registered trademarks of KPMG International, a Swiss cooperative.
ISA 701 - Modifications to the independent auditor's report:
Types of Audit Report
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are registered trademarks of KPMG International, a Swiss cooperative.
25
Modification to Audit Reports
•
This ISA describes how the auditor's report wording is modified in the following
situations:
• Matters that Do Not Affect the Auditor's Opinion
- Emphasis of matter
• Matters that Do Affect the Auditor's Opinion
- Qualified opinion
- Disclaimer of opinion
- Adverse opinion.
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are registered trademarks of KPMG International, a Swiss cooperative.
Matters that do not affect the Auditor’s Opinion
Emphasis of matter
•
Paragraph added to highlight a matter affecting the financial statements which
is included in a note to the financial statements that more extensively discusses
the matter
•
Modify the auditor's report by adding a paragraph to highlight a material matter
regarding a going concern problem.
•
Modify the auditor's report by adding a paragraph if there is a significant
uncertainty (other than a going concern problem), the resolution of which is
dependent upon future events and which may affect the financial statements.
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are registered trademarks of KPMG International, a Swiss cooperative.
Matters that affect the Auditor’s Opinion (1)
Accounts show a true and
fair view
Material item(s) in the
accounts does not show a
true and fair view
A true and fair view is not
shown because
disagreements are
pervasive to the accounts
Unable to tell whether a
true and fair view is given
in respect of material
item(s) due to limitation
in scope
Unable to tell whether a
true and fair view is given
at all due to a limitation in
scope
Unqualified audit opinion
Modified audit opinion
Accounts show a true and
fair view
‘except for …’
A significant number of
material disagreement
might result in true and
fair view not being shown
at all
Adverse opinion
Qualified audit opinion.
Accounts show a true and
fair view
‘except for …’
Disclaimer of opinion
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are registered trademarks of KPMG International, a Swiss cooperative.
Matters that affect the Auditor’s Opinion (2)
•
An auditor may not be able to express an unqualified opinion when either of the
following circumstances exist and, in the auditor's judgment, the effect of the
matter is or may be material to the financial statements:
(a) There is a limitation on the scope of the auditor's work (qualified or
disclaimer)
(b) There is a disagreement with management regarding the acceptability of the
accounting policies selected, the method of their application or the adequacy of
financial statement disclosures (qualified or adverse)
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are registered trademarks of KPMG International, a Swiss cooperative.
Matters that affect the Auditor’s Opinion (3)
•
A qualified opinion should be expressed when the auditor concludes that an
unqualified opinion cannot be expressed but that the effect of any disagreement
with management, or limitation on scope is not so material and pervasive as to
require an adverse opinion or a disclaimer of opinion. A qualified opinion should
be expressed as being 'except for' the effects of the matter to which the
qualification relates.
•
A disclaimer of opinion should be expressed when the possible effect of a
limitation on scope is so material and pervasive that the auditor has not been
able to obtain sufficient appropriate audit evidence and accordingly is unable to
express an opinion on the financial statements.
•
An adverse opinion should be expressed when the effect of a disagreement is
so material and pervasive to the financial statements that the auditor concludes
that a qualification of the report is not adequate to disclose the misleading or
incomplete nature of the financial statements.
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are registered trademarks of KPMG International, a Swiss cooperative.
Matters that affect the Auditor’s Opinion:
Limitation on scope
• A scope limitation may be imposed by circumstances
- the timing of the auditor's appointment is such that the auditor is
unable to observe the counting of physical inventories,
- the entity's accounting records are inadequate;
- the auditor is unable to carry out an audit procedure believed to be
desirable.
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are registered trademarks of KPMG International, a Swiss cooperative.
Matters that affect the Auditor’s Opinion:
Disagreement with management
• The auditor may disagree with management about matters such as:
- acceptability of accounting policies selected,
- the method of their application, or
- the adequacy of disclosures in the financial statements.
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are registered trademarks of KPMG International, a Swiss cooperative.
Quiz (1)
•
The company is the defendant in a lawsuit alleging infringement of certain patent rights.
There is significant uncertainly related to an outstanding lawsuit. What is the impact on
the audit report:
(a) emphasis of matter
(b) qualified opinion
(c) disclaimer of opinion
(d) adverse
•
ABC Limited has incurred a loss and had a net working capital deficit. What is the impact
on the audit report:
(a) emphasis of matter
(b) qualified opinion
(c) disclaimer of opinion
(d) adverse
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are registered trademarks of KPMG International, a Swiss cooperative.
Quiz (2) – What is the impact on the Auditor’s Report
•
Why Limited declined to present a cash flow statement for the year ended
December 31, 2008 and December 31, 2007.
•
Heat Incorporated had a fire in a branch office on January 5, 2009 that
destroyed its accounts receivable records. There are no alternative means to
confirm or verify the carrying amount of accounts receivable included in the
financial statements as at March 31, 2009 [balance sheet date].
•
The financing arrangements for Money Worries Limited have expired and the
amount outstanding was payable on May 31, 2009. The Company has been
unable to re-negotiate the arrangements or obtain replacement financing and is
considering filing for bankruptcy. They company may be unable to realize its
assets and discharge its liabilities in the normal course of business.
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are registered trademarks of KPMG International, a Swiss cooperative.
The IAASB’s Clarity project (1)
ISAs (Reporting)
Key revisions
ISA 700 (redrafted) Forming an opinion
and reporting on financial statements
Illustrative auditors reports in appendices have been
updated
ISA 705 (revised and redrafted)
Modifications to the opinion in the
independent auditor’s report
Limitation in scope becomes an ‘inability to obtain
sufficient appropriate audit evidence’.
Disagreement is now
materially misstated’.
‘financial
statements
are
Auditors are required to communicate to those
charged with governance when they expect to modify
the opinion in the audit report regarding the
circumstances that led to the expected modification
and the proposed wording of the modification.
ISA 706 (revised and redrafted) Emphasis
of matter paragraphs and other matter
paragraphs in the independent auditor’s
report
EM or OM paragraphs do not affect the audit opinion
Exact wording of the EM or OM paragraphs must be
communicated with those charged with governance
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are registered trademarks of KPMG International, a Swiss cooperative.
The IAASB’s Clarity project (2)
ISAs (Reporting)
Key revisions
ISA 710 (redrafted) Comparative information –
corresponding figures and comparative financial
statements
Audit procedures similar but audit report differs
for each.
ISA 800 (revised and redrafted) Special
consideration audits of financial statements
prepared in accordance with special purpose
frameworks
Audit reports on special purpose financial
statements must include an EOM paragraph
alerting users that the financial statements have
been prepared in accordance with a special
purpose framework and as a result may not be
suitable for another purpose.
ISA 805 (revised and redrafted) Special
considerations – audits of single financial
statements and specific elements, accounts or
items of a financial statement
The standard deals with the audit of specific
elements, accounts or items of a financial
statement.
ISA 810 (revised and redrafted) Engagements to
report on summary financial statements
The auditor will express an opinion that the
summary financial statements are consistent
with the audited financial statements or a dair
summary of them.
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are registered trademarks of KPMG International, a Swiss cooperative.
QUIZ (1)
•
The Clarified ISAs are effective for audits of financial statements:
(a) for periods beginning on or after December 15, 2009
(b) for periods beginning on or after December 15, 2010
(c) for period beginning before December 15, 2009
(d) for periods beginning on or after January 15, 2010
•
What ISA currently provides guidance on modification of audit reports?:
(a) ISA 700
(b) ISA 701
(c) ISA 710
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are registered trademarks of KPMG International, a Swiss cooperative.
Representation letters:
ISA 580 Management Representations
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are registered trademarks of KPMG International, a Swiss cooperative.
38
Management representations
• The auditor should obtain audit evidence that management
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 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.
• Modification to the audit reports should also be included – We
understand that your audit report will contain….
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Management Representations:
Matters which might be included
•
Completion of information re
identification of related parties
•
Company has satisfactory titles to
all assets
•
Financial statements free of material
misstatements
•
All liabilities, actual or contingent
have been recorded, disclosed
•
Properly recorded or disclosed the
capital stock repurchase options
and agreements etc
•
No formal or informal compensating
balance arrangements
•
No events subsequent to period
end, except as disclosed
•
Complied with all aspects of
contractual agreements
•
No irregularities involving
management or employees who
have a significant role in internal
control
•
•
No inventory stated at an amount in
excess of net realizable value
All books of account and supporting
documentation and all minutes of
meetings of shareholders/ the board
of directors made available
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are registered trademarks of KPMG International, a Swiss cooperative.
Management Representations (1)
• The auditor should obtain written representation from
management that:
- It acknowledges its responsibility for the design and implementation of internal
control to prevent and detect error; and
•
- It believes the effects of those uncorrected financial statement misstatements
aggregated by the auditor during the audit are immaterial, both individually and
in the aggregate, to the financial statements taken as a whole.
• If a representation by management is contradicted by other audit
evidence, the auditor should investigate the circumstances
© 2009 KPMG, a Jamaican partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Jamaica. KPMG and the KPMG logo
are registered trademarks of KPMG International, a Swiss cooperative.
Management Representations (2)
• The auditor should obtain written representation from
management that
•
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;
•
It has disclosed to the auditor its knowledge of fraud or suspected fraud
affecting the entity involving:
- Management;
- Employees who have significant roles in internal control; or
- Others where the fraud could have a material effect on the financial
statements; and
- 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
© 2009 KPMG, a Jamaican partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Jamaica. KPMG and the KPMG logo
are registered trademarks of KPMG International, a Swiss cooperative.
Basic Elements of a Management Representation Letter
• ADDRESS:
To be addressed to the auditor
• DATE:
Same date as the auditor's report.
• SIGNATURE:
Should be signed by members of management who have primary responsibility for the
entity and its financial aspects
© 2009 KPMG, a Jamaican partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Jamaica. KPMG and the KPMG logo
are registered trademarks of KPMG International, a Swiss cooperative.
Action if management refuses to provide representations
• The auditor should express a qualified opinion or a disclaimer of
opinion
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
© 2009 KPMG, a Jamaican partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Jamaica. KPMG and the KPMG logo
are registered trademarks of KPMG International, a Swiss cooperative.
Reporting
Questions and Answers
© 2009 KPMG, a Jamaican partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Jamaica. KPMG and the KPMG logo
are registered trademarks of KPMG International, a Swiss cooperative.
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Presenter’s contact details
Rochelle Minto
KPMG in Jamaica
+876 922 6640
rminto@kpmg.com.jm
www.kpmg.com
© 2009 KPMG, a Jamaican partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Jamaica. KPMG and the KPMG logo
are registered trademarks of KPMG International, a Swiss cooperative.