External auditors have the responsibility of writing a form letter which is more formally known as the management representation letter. This management representation letter is supposed to be signed by the senior management of the organization.
The accuracy of the financial statements is crucial when it comes to management representation letter because these are the statements that the audit firm submitted to the auditors for analysis.
The senior management team of the company – most likely the CEO or the CFO- has the responsibility of signing this letter and moving ahead with the process.
As soon as the audit work is completed, the process is then followed by the official signing of the management representation letter. The signing of the letter takes place before the issuance of financial statements along with the auditor’s final opinion on the whole audit process.
So what does a management representation letter comprises? To start with, the letter is supposed to state that all the information submitted is completely accurate and there have been no errors in its collection.
It also states the disclosure of all material information to the auditors involved in the project. Audit evidence is the sole purpose in the organization of such a letter so the auditors have a written record of it.
In some cases, the financial statements of the audit do not represent the financial results, so the letter has the chance to take off some blame from the auditors and shift it to lacking on the part of management. Financial position or the cash flows might also not be represented fairly – in which case, the management representation letter comes to rescue.
For these reasons, the letter is crucial as some broad-ranging statements are included by the auditor. The letter is supposed to highlight all the failings or mishaps on the part of the management that can lead to any inaccuracy or small errors in the financial statements.
Following we will discuss all the possible features that can be included in the management representation letter and how to make a successful letter that accomplishes all the purposes.
First of all, the management letter – by following the applicable accounting framework is supposed to list the financial statements in a professional and properly presented manner.
The letter is also supposed to highlight and give a written record of the fact that the financial records are accessible to the auditors working on a project. Furthermore, the letter is supposed to mention that all the minutes associated with the board of directors are finished and finalized.
It is supposed to mention that the management has taken responsibility for making all letters accessible from the regulatory agencies. The management representation letter is supposed to ensure that there are no unrecorded transactions and that every transaction is completely and accurately recorded.
The letter is also supposed to highlight that any net effect of misstatements that were not corrected would be considered immaterial by the authorities.
The system of all financial controls is entirely taken care of by the management team and it’s the responsibility of the management to ensure it runs smoothly without any errors. Disclosure of all party related transactions is also mentioned in the management representation letter and these transactions must be accurately disclosed.
Disclosure of contingent liabilities is also mandatory and it’s mentioned in the management representation letter. Along with the above-mentioned requirements, the disclosure of any claims or assessments that were not asserted is also mentioned in the letter.
The management representation letter also mentions any contingent liabilities and its disclosure is also necessary to be mentioned in the letter.
The recording of any material transactions is also mentioned in the management representation letter and it’s necessary to mention that all these transactions were properly recorded.
Encumbrances and liens on the assets and its proper disclosure should also be mentioned. The systems which are designed to prevent and detect even the slightest trace of any fraud or mishap are the responsibility of the management and all of this should be mentioned in the management representation letter.
The letter should also mention that in case there is any fraud in the audit – the management would not be entirely responsible for it and its outcome. The financial statements and how they conform to the accounting framework can also be a part of the management representation letter.
In typical situations, auditors do not allow the management to make any suggestions or any possible changes to the content of the management representation letter.