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Is a confirmation that the entity has complied with contractual agreements likely would be included in a management representation letter?
yes - The auditor should obtain written representations in the form of a management representation letter to complement other auditing procedures. In addition to certain required written representations, the auditor may decide that requesting certain other representations is necessary. These may include aspects of contracts that may affect the statements, including noncompliance (AU-C 580).
Would materiality limits apply to instances of fraud involving management when obtaining written client representations?
no -- Management’s representations may be limited to matters that are considered individually or collectively material if management and the auditor have reached an understanding about the limits of materiality. Such limitations do not apply to certain representations not directly related to amounts in the financial statements, e.g., acknowledgment of responsibility for fair presentation, availability of records, and knowledge of fraud or suspected fraud affecting the entity involving (1) management, (2) employees with significant roles in internal control, or (3) others if the fraud could materially affect the statements (AU-C 580).
Key Co. plans to present comparative financial statements for the years ended December 31, Year 1 and Year 2, respectively. Smith, CPA, audited Key’s financial statements for both years and plans to report on the comparative financial statements on May 1, Year 3. Key’s current management team was not present until January 1, Year 2. What period of time should be covered by Key’s management representation letter?
January 1, Year 1, through May 1, Year 3.
The auditor is concerned with events occurring through the date of his/her report that may require adjustment of, or disclosure in, the financial statements. Thus, the representations should be made (1) as of a date no earlier than the date of the auditor’s report and (2) for all periods referred to in the report. Moreover, 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 for all such periods (AU-C 580).
If management refuses to provide certain written representations that the auditor believes are essential, what is appropriate?
The refusal constitutes a scope limitation that is often sufficient to preclude an unmodified opinion and may cause the auditor to disclaim an opinion or withdraw from the engagement. The auditor should also consider the effects of the refusal on his/her ability to rely on management’s other representations (AU-C 580).
T/F ---A written management representation letter is most likely to be an auditor’s best source of corroborative information of a client’s intention to discontinue a line of business.
true -- Written management representations complement, but do not substitute for, other auditing procedures. However, the plan for discontinuing a line of business is an example of a matter about which other procedures may provide little evidence. Accordingly, the written representation may be necessary as confirmation of management’s intent.