AU 333: Management Representations1
AU-C 580: Written Representations
AU EFFECTIVE DATE AND APPLICABILITY
| Original Pronouncement | Statements on Auditing Standards (SASs) 85, 89, and 99. |
| Effective Date | These statements are now effective. |
| Applicability | Audits of financial statements in accordance with generally accepted auditing standards (GAAS). |
AU-C EFFECTIVE DATE
SAS No. 122, Codification of Auditing Standards and Procedures, is effective for audits of financial statements with periods ending on or after December 15, 2012.
AU-C 580 does not change extant requirements in any significant respect.
AU DEFINITIONS OF TERMS
Representation letter. Written representations obtained from management to confirm oral representations explicitly or implicitly given to the auditor, to indicate and document the continuing appropriateness of such representations, and to reduce the possibility of misunderstanding concerning the matters that are the subject of the representations. It has the following characteristics:
1. Presented in writing and covers all periods addressed in audit report.
2. Addressed to the auditor.
3. Dated no earlier than the date of the auditor’s report.
4. Signed by management on client letterhead.
5. Acknowledges management’s responsibility for the financial statements and management’s belief that the financial statements are presented in accordance with generally accepted accounting principles (GAAP).
6. Confirms management’s oral and written representations to the auditor during the course of the audit.
7. Tailored to the entity’s circumstances.
AU-C DEFINITIONS OF TERMS
Source: AU-C 580.07
Written representation. A written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. Written representations in this context do not include financial statements, the assertions therein, or supporting books and records.
OBJECTIVES OF AU SECTION 333
SAS 19, Client Representations, was issued in June 1977 and needed updating to reflect changes in accounting standards and auditing practice. As a result, SAS 85, Management Representations, superseded SAS 19. SAS 85 accomplishes a number of objectives. The significant changes are as follows:
1. Clarifies the requirement for an auditor to obtain written representations for all periods covered by the audit report.
2. Adds a required representation in which management states its belief that the financial statements are fairly presented in accordance with generally accepted accounting principles or other comprehensive basis of accounting (footnote 3 of SAS 85 requires that a representation letter be obtained for other comprehensive basis of accounting [OCBOA] financial statements).
3. Expands the list of specific representations to be obtained that are consistent with practice and that reflect new standards (e.g., Statement of Position [SOP] 94-6, Disclosure of Certain Significant Risks and Uncertainties).
4. States that the representation letter should be tailored to cover representations unique to entity’s business and industry (see the “Illustrations” section for additional representations that may be needed).
5. Requires that auditor investigate and consider the reliability of representations that are contradicted by other evidence.
6. Includes guidance about explicit materiality levels that may be included in the representation letter (see the illustrative representation letter in “Illustrations” that includes a materiality discussion).
7. Requires that a predecessor auditor obtain an updated representation letter from the client when requested by a former client to reissue the audit report on prior period financial statements (see “AU Illustrations” for an illustrative updating management representation letter).
SAS 89, Audit Adjustments, was issued in 1999 to require management to acknowledge its responsibility for any uncorrected misstatements that management deems to be immaterial.
The representation letter is valid corroborative evidence. It is competent evidence; however, it is not sufficient evidence. It complements other auditing procedures, but it is not a substitute for these procedures.
In 2002, SAS 99, Consideration of Fraud in a Financial Statement Audit, amended this section to require that the auditor obtain management representations concerning fraud and the risk of fraud.
OBJECTIVES OF AU-C SECTION 580
AU-C section 580.06 states that:
. . . the objectives of the auditor are to
a. obtain written representations from management and, when appropriate, those charged with governance that they believe that they have fulfilled their responsibility for the preparation and fair presentation of the financial statements and for the completeness of the information provided to the auditor;
b. support other audit evidence relevant to the financial statements or specific assertions in the financial statements by means of written representations if determined necessary by the auditor or required by other AU-C sections; and
c. respond appropriately to written representations provided by management and, when appropriate, those charged with governance or if management or, when appropriate, those charged with governance do not provide the written representations requested by the auditor.
FUNDAMENTAL REQUIREMENTS
Reliance on Management Representations
Management representation letters represent evidential matter and they serve to:
1. Establish and remind management that they are primarily responsible for the financial statements
2. Document representations explicitly or implicitly given to the auditor
3. Reduce the possibility of misunderstanding
Representation letters complement other auditing procedures and are not a substitute for those auditing procedures needed to support an opinion on the financial statements.
According to AU 333.04, if a representation made by management is contradicted by other audit evidence, the auditor should investigate the circumstances and consider the reliability of the representations made. In this situation, the auditor should consider whether reliance on other representations made by management is appropriate and justified.
Obtaining Written Representations
The auditor should obtain written representations from management should be obtained for all financial statements and periods covered by his or her report. If comparative financial statements are reported on, the representation letter should address all periods reported on.
NOTE: If the auditor is reporting on consolidated financial statements, the representation letter should relate to those statements. If the auditor is reporting on the separate financial statements of a component of a consolidated group, including the parent company, the representation letter should also relate to the separate statements.
According to AU 333.06, specific representations in a representation letter for financial statements presented in accordance with GAAP should cover the following (see “Illustrations” for an illustrative management representation letter):
Financial Statements
1. Management’s acknowledgement 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
Completeness of Information
3. Availability of all financial records and related data
4. Completeness and availability of all minutes of meetings of stockholders, directors, and committees of directors
5. Communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices
6. Absence of unrecorded transactions
Recognition, Measurement, and Disclosure
7. Management’s belief that any uncorrected misstatements (a summary of which is included in or attached to the letter) are immaterial, both individually and in the aggregate
8. Management’s acknowledgement of its responsibility for designing and implementing programs and controls to prevent and detect fraud
9. Knowledge of actual or suspected fraud involving (1) management, (2) employees who have significant roles in internal control, or (3) others where the fraud could have a material effect on the financial statements
10. Knowledge of any allegations of actual or suspected fraud made by current or former employees, analysts, regulators, short sellers, or others
11. Plans or intentions that may affect the carrying value or classification of assets or liabilities
12. Information concerning related-party transactions and amounts receivable from, or payable to, related parties
13. Guarantees, whether written or oral, under which the entity is contingently liable
14. Significant estimates and material concentrations known to management that are required to be disclosed in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties
15. Violations or possible violations of laws and regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency
16. Unasserted claims or assessments that the entity’s lawyer has advised are probable of assertion and must be disclosed in accordance with the Financial Accounting Standards Board (FASB) Statement 5, Accounting for Contingencies
17. Other liabilities or loss contingencies that are required to be accrued or disclosed by FASB Statement 5
18. Satisfactory title to assets, liens or encumbrances on assets, and assets pledged as collateral
19. Compliance with aspects of contractual agreements that may affect the financial statements
Subsequent Events
20. Information concerning subsequent events
Tailoring the Representation Letter
Ordinarily, the representation letter should also be modified to include additional representations from management covering matters specific to the entity’s business or industry.
NOTE: Consult relevant AICPA industry audit and accounting guides for additional representations that are unique to a particular industry.
Materiality Considerations
Management’s representations may be limited to material matters, provided management and the auditor have reached an understanding on materiality. Materiality may be different for different representations. Materiality may be addressed explicitly in the representation letter, in either qualitative or quantitative terms. Materiality considerations do not apply to items that are not directly related to amounts included in the financial statements—for example, items 1, 3, 4, and 5 under “Obtaining Written Representations.” Likewise, materiality does not apply to item 9 for management and employees who have significant roles in internal control.
Addressing and Dating the Letter
The representation letter should be addressed to the auditor and should be dated no earlier than the date of the auditor’s report. If the report is dual dated, the auditor should consider whether to obtain additional representations for subsequent events.
Signing the Letter
The management representation letter should be signed by those in management with overall financial and operating responsibility whom the auditor believes are responsible for, and knowledgeable about, directly or through others in the organization, the matters covered by the representations. Normally this includes the chief executive officer and chief financial officer or others with equivalent positions in the entity.
The auditor should obtain a representation letter from current management for all periods covered by the auditor’s report, even if current management was not present during all such periods.
The auditor may also want to have other individuals provide written representations. For example, the auditor could obtain from the person responsible for keeping minutes of stockholders, directors, and committees of directors, a written representation stating that such minutes are complete.
Updating Letters
As discussed in Section 508, Reports on Audited Financial Statements, a predecessor auditor in certain circumstances is required to obtain an updating representation letter. Also, auditors should obtain updated written representations from management when performing subsequent events procedures in connection with Securities Act of 1933 filings. The updated letter should state whether previous representations should be modified or whether subsequent events necessitate adjustment or disclosures in the financial statements.
Scope Limitations
If management refuses to furnish a representation letter, the auditor should ordinarily issue a disclaimer of opinion because of the limitation on audit scope or withdraw from the engagement. If the auditor concludes that a qualified opinion is appropriate, he or she should consider the effects of the refusal in relying on other management representations.
If the auditor is precluded from performing necessary procedures on a matter that is material to the financial statements, even though management has given representations on the matter, the auditor should qualify the opinion or disclaim an opinion because of the scope limitation.
INTERPRETATIONS
Management Representations on Violations and Possible Violations of Laws and Regulations (March 1979; Revised June 2009)
One of the required representations in a management letter is “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.” The reference to “possible violations” does not change or go beyond the guidance in FASB ASC 450, Accounting for Contingencies, or Section 317, Illegal Acts by Clients.
TECHNIQUES FOR APPLICATION
Auditor’s Relationship with a Small Nonpublic Client
The independent auditor’s relationship with a small or nonpublic client usually is closer than the relationship with a large or publicly held client. In these circumstances, the independent auditor may significantly influence client decisions, such as the following:
1. Depreciation methods
2. Accounting for start-up and similar costs
3. Accounting for revenues
4. Accounting for leases
5. Inventory valuation methods
Even though the auditor’s influence may be significant, it is management’s responsibility to decide whether to accept the auditor’s recommendations. The client representation letter is management’s acknowledgment of this responsibility.
To avoid problems at the date of completion of fieldwork, when the auditor asks management to sign the client representation letter, he or she should consider some or all of the following approaches:
1. Describe management’s responsibilities in the engagement letter.
2. Discuss accounting policies and choices with management during the year and at the end of the year.
3. Define technical terms that appear in the representation letter.
Engagement Letter
The engagement letter is a written agreement signed by both the client and the auditor. It establishes the nature and terms of the engagement.
Because the engagement letter formalizes the terms of retention, it is suggested that a paragraph such as the following be added to the letter:
We may prepare or help prepare the financial statements of XYZ Corp., but these financial statements are solely the representations of management. We may advise as to which accounting principles should be applied to the financial statements and the method of application, but the selection and the method of application are determinations made solely by management.
When the engagement letter is signed, it is advisable to tell the client what the paragraph means and that at the end of the fieldwork management must sign a representation letter in which it acknowledges its responsibility.
Although it is important to agree about management responsibility at the beginning of the engagement, it is equally important to remind management of its responsibility during the year.
Procedures during the Year
For the audit of a nonpublic client, the auditor usually is involved throughout the year. Decisions about accounting principles and methods are made during the year. For example, depreciation methods are determined, decisions are made to capitalize start-up costs and similar expenditures, and the method of accounting for various revenue streams may be established. In these circumstances, it is recommended that the auditor do the following:
1. Review the decision with management
2. Explain financial statements effect of the decision to management
3. Document the decision
NOTE: Include name of person who made the decision.
Procedures at End of Year
At the end of the year, the auditor should review with management the accounting principles applied during the year. The auditor should prepare a list of the accounting principles and explain their financial statement effect.
Before asking management to sign the representation letter, the auditor should review with them the draft of the financial statements, including the notes and the auditor’s report. If the auditor has not prepared the notes and the report, he or she should tell management about their content.
Date of Representation Letter
The auditor is concerned with material events and transactions that occur to the date of completion of fieldwork. This is the date of the auditor’s report and the date to which he or she wants information from client lawyers and management. For this reason, the subsequent events review extends to this date. Also, the management representation letter should be signed as of the date the fieldwork is completed. (For more information about dating representation letters and reports, see Section 560, Subsequent Events.)
Explicitly Addressing Materiality in the Representation Letter
The auditor is permitted to reach an understanding with management on materiality and then management representations may be limited to material matters, except for certain items. Materiality may be addressed in quantitative or qualitative terms. An example of a quantitative expression would be 3% of before-tax income. A qualitative expression would be, for example, a significant change in the trend of earnings or revenue. The FASB’s definition of materiality from Concepts Statement 2 is applicable to both quantitative and qualitative aspects of materiality. The conceptual description used alone, if read literally, would permit management to omit items larger than would be quantitatively material based on qualitative considerations. The authors do not recommend using it for that reason. The authors recommend that a quantitative expression of materiality, well below the planning materiality amount, be used, in conjunction with the FASB’s conceptual definition. A common rule of thumb is one-sixth of planning materiality for the quantitative expression.
AU ILLUSTRATIONS2
The following items presented in this section are from Section 333, Management Representations.
1. Illustrative Management Representation Letter for GAAP Financial Statements
2. Additional Illustrative Representations
3. Illustrative Updating Management Representation Letter
Illustration 1. Illustrative Management Representation Letter for GAAP Financial Statements (From AU 333.16)
The following representation letter, which is based on GAAP financial statements, is presented for illustrative purposes only.
If matters exist that should be disclosed to the auditor, they should be indicated by modifying the related representation. For example, if an event subsequent to the date of the balance sheet has been disclosed in the financial statements, the final paragraph could be modified as follows: “To the best of our knowledge and belief, except as discussed in Note X to the financial statements, no events have occurred . . .” In appropriate circumstances, item 9 could be modified as follows: “The company has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities, except for its plans to dispose of segment A, as disclosed in Note X to the financial statements, which are discussed in the minutes of the December 7, 20X6, meetings of the board of directors.” Similarly, if management has received a communication regarding an allegation of fraud or suspected fraud, item 8 could be modified as follows: “Except for the allegation discussed in the minutes of the December 7, 20X6, meeting of the board of directors (or disclosed to you at our meeting on October 15, 20X6), we have no knowledge of any allegations of fraud or suspected fraud affecting the company received in communications from employees, former employees, analysts, regulators, short sellers, or others.”
Certain terms used in the illustrative letter are described elsewhere in authoritative literature. Examples are fraud (SAS 99, Consideration of Fraud in a Financial Statement Audit), and related parties, (SAS 45, Omnibus Statement on Auditing Standards). The auditor may wish to furnish those definitions to management or request that the definitions be included in the written representations.
[Client Letterhead]
[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 accounting principles generally accepted in the United States of America.
Certain representations in this letter are described as being limited to matters that are material. Items are considered material if they exceed [insert dollar amount] or if they, regardless of size, involve an omission or misstatement of accounting information that, in the light of surrounding circumstance, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatements.
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 uncorrected financial statement misstatements summarized in the accompanying schedule3 are immaterial, both individually and in the aggregate.
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, or
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 entity has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.
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 entity is contingently liable.
c. Significant estimates and material concentrations known to management that are required to be disclosed in accordance with the AICPA’s Statement of Position 94-6, Disclosures of Certain Significant 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 Financial Accounting Standards Board (FASB) Statement 5, Accounting for Contingencies.
12. The entity 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 entity has compiled 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. See Illustration 2.]
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]
Illustration 2. Additional Illustrative Representations (From AU 333.17)
Representation letters ordinarily should be tailored to include additional appropriate representations from management relating to matters specific to the entity’s business or industry. The auditor also should be aware that certain AICPA Audit Guides recommend that the auditor obtain written representations concerning matters that are unique to a particular industry. The following is a list of additional representations that may be appropriate in certain situations. This list is not intended to be all-inclusive.
| Condition | General | Illustrative Example |
| Unaudited interim information accompanies the financial statements. | The unaudited interim financial information accompanying [presented in Note X to] the financial statements for the [identify all related periods] has been prepared and presented in conformity with generally accepted accounting principles applicable to interim financial information [and with Item 302(a) of Regulation S-K]. The accounting principles used to prepare the unaudited interim financial information are consistent with those used to prepare the audited financial statements. | |
| The impact of a new accounting principle is not known. | We have not completed the process of evaluating the impact that will result from adopting Financial Accounting Standards Board (FASB) Statement [XXX, Name], as discussed in Note [X]. The company is therefore unable to disclose the impact that adopting FASB Statement [XXX] will have on its financial position and the results of operations when such Statement is adopted. | |
| There is justification for a change in accounting principles. | We believe that [describe the newly adopted accounting principle] is preferable to [describe the former accounting principle] because [describe management’s justification for the change in accounting principles]. | |
| Financial circumstances are strained, with disclosure of management’s intentions and the entity’s ability to continue as a going concern. | Note [X] to the financial statements discloses all of the matters of which we are aware that are relevant to the company’s ability to continue as a going concern, including significant conditions and events, and management’s plans. | |
| The possibility exists that the value of specific significant long-lived assets or certain identifiable intangibles may be impaired. | We have reviewed long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances have indicated that the carrying amount of its assets might not be recoverable and have appropriately recorded the adjustment. | |
| The entity engages in transactions with variable interest entities | We have evaluated all transactions involving variable interest entities to determine that the accounting for such transactions is in accordance with generally accepted accounting principles. | |
Specifically [indicate appropriate accounting principles]
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| The work of a specialist has been used by the entity. | We agree with the finding of specialists in evaluating the [describe assertion] and have adequately considered the qualifications of the specialist in determining the amounts and disclosures used in the financial statements and underlying accounting records. We did not give or cause any instructions to be given to specialists with respect to the values or amounts derived in an attempt to bias their work, and we are not otherwise aware of any matters that have had an impact on the independence or objectivity of the specialists. |
| Condition | Assets | Illustrative Example |
| Cash | ||
| Disclosure is required of compensating balances or other arrangements involving restrictions on cash balances, line of credit, or similar arrangements. | Arrangements with financial institutions involving compensating balances or other arrangements involving restrictions on cash balances, line of credit, or similar arrangements have been properly disclosed. | |
| Financial Instruments | ||
| Management intends to, and has the ability to, hold to maturity debt securities classified as held-to-maturity. | Debt securities that have been classified as held-to-maturity have been so classified due to the company’s intent to hold such securities to maturity and the company’s ability to do so. All other debt securities have been classified as available-for-sale or trading. | |
| Management considers the decline in value of debt or equity securities to be temporary. | We consider the decline in value of debt or equity securities classified as either available-for-sale or held-to-maturity to be temporary. | |
| Management has determined the fair value of significant financial instruments that do not have readily determinable market values. | The methods and significant assumptions used to determine fair values of financial instruments are as follows: [describe methods and significant assumptions used to determine fair values of financial instruments]. The methods and significant assumptions used result in a measure of fair value appropriate for financial statement measurement and disclosure purposes. | |
| There are financial instruments with off-balance-sheet risk and financial instruments with concentrations of credit risk. | The following information about financial instruments with off-balance-sheet risk and financial instruments with concentrations of credit risk has been properly disclosed in the financial statements: | |
1. The extent, nature, and terms of financial instruments with off-balance-sheet risk.
2. The amount of credit risk of financial instruments with off-balance-sheet risk and information about the collateral supporting such financial instruments.
3. Significant concentrations of credit risk arising from all financial instruments and information about the collateral supporting such financial instruments.
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| Receivables | ||
| Receivables have been recorded in the financial statements. | Receivables recorded in the financial statements represent valid claims against debtors for sales or other charges arising on or before the balance sheet date and have been appropriately reduced to their estimated net realizable value. | |
| Inventories | ||
| Excess or obsolete inventories exist. | Provision has been made to reduce excess or obsolete inventories to their estimated net realizable value. | |
| Investments | ||
| There are unusual considerations involved in determining the application of equity accounting. | [For investments in common stock that are either nonmarketable or of which the entity has a 20% or greater ownership interest, select the appropriate representation from the following:] | |
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| Deferred Charges | ||
| Material expenditures have been deferred. | We believe that all material expenditures that have been deferred to future periods will be recoverable. | |
| Deferred Tax Assets | ||
| A deferred tax asset exists at the balance sheet date. | The valuation allowance has been determined pursuant to the provisions of FASB Statement 109, Accounting for Income Taxes, including the company’s estimation of future taxable income, if necessary, and is adequate to reduce the total deferred tax asset to an amount that will more likely than not be realized. [Complete with appropriate wording detailing how the entity determined the valuation allowance against the deferred tax asset.] | |
| or | ||
| A valuation allowance against deferred tax assets at the balance sheet date is not considered necessary because it is more likely than not the deferred tax asset will be fully realized. |
| Condition | Liabilities | Illustrative Example |
| Debt | ||
| Short-term debt could be refinanced on a long-term basis and management intends to do so. | The company has excluded short-term obligations totaling $[amount] from current liabilities because it intends to refinance the obligations on a long-term basis. [Complete with appropriate wording detailing how amounts will be refinanced as follows:] | |
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| Tax-exempt bonds have been issued. | Tax-exempt bonds issued have retained their tax-exempt status. | |
| Taxes | ||
| Management intends to reinvest undistributed earnings of a foreign subsidiary. | We intend to reinvest the undistributed earnings of [name of foreign subsidiary]. | |
| Contingencies | ||
| Estimates and disclosures have been made of environmental remediation liabilities and related loss contingencies. | Provision has been made for any material loss that is probable from environmental remediation liabilities associated with [name of site]. We believe that such estimate is reasonable based on available information and that the liabilities and related loss contingencies and the expected outcome of uncertainties have been adequately described in the company’s financial statements. | |
| Agreements may exist to repurchase assets previously sold. | Agreements to repurchase assets previously sold have been properly disclosed. | |
| Pension and Postretirement Benefits | ||
| An actuary has been used to measure pension liabilities and costs. | We believe that the actuarial assumptions and methods used to measure pension liabilities and cost for financial accounting purposes are appropriate in the circumstances. | |
| There is involvement with a multiemployer plan. | We are unable to determine the possibility of a withdrawal liability in a multiemployer benefit plan. | |
| or | ||
| We have determined that there is the possibility of a withdrawal liability in a multiemployer plan in the amount of $[XX]. | ||
| Postretirement benefits have been eliminated. | We do not intend to compensate for the elimination of postretirement benefits by granting an increase in pension benefits. | |
| or | ||
| We plan to compensate for the elimination of postretirement benefits by granting an increase in pension benefits in the amount of $[XX]. | ||
| Employee layoffs that would otherwise lead to a curtailment of a benefit plan are intended to be temporary. | Current employee layoffs are intended to be temporary. | |
| Management intends to either continue to make or not make frequent amendments to its pension or other postretirement benefit plans, which may affect the amortization period of prior service cost, or has expressed a substantive commitment to increase benefit obligations. | We plan to continue to make frequent amendments to its pension or other postretirement benefit plans, which may affect the amortization period of prior service cost. | |
| or | ||
| We do not plan to make frequent amendments to its pension or other postretirement benefit plans. |
| Condition | Equity | Illustrative Example |
| There are capital stock repurchase options or agreements or capital stock reserved for options, warrants, conversions, or other requirements. | Capital stock repurchase options or agreements or capital stock reserved for options, warrants, conversions, or other requirements have been properly disclosed. |
| Condition | Income Statement | Illustrative Example |
| There may be a loss from sales commitments. | Provisions have been made for losses to be sustained in the fulfillment of, or from inability to fulfill, any sales commitments. | |
| There may be losses from purchase commitments. | Provisions have been made for losses to be sustained as a result of purchase commitment for inventory quantities in excess of normal requirements or at prices in excess of prevailing market prices. | |
| Nature of the product or industry indicates the possibility of undisclosed sales terms. | We have fully disclosed to you all sales terms, including all rights of return or price adjustments and all warranty provisions. |
Illustration 3. Illustrative Updating Management Representation Letter (From AU 333.18)
[Client Letterhead]
[Date]
To [Auditor]
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, you were previously provided with a representation letter under the date of [date of previous representation letter]. No information has come to our attention that would cause us to believe that any of those previous representations should be modified.
To the best of our knowledge and belief, no events have occurred subsequent to [date of latest balance sheet reported on by auditor] 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]
AU-C 580 ILLUSTRATIONS
Illustration 1. Illustrative Representation Letter (From AU-C 580.A35)
The following illustrative letter includes written representations that are required by this and other AU-C sections in effect for audits of financial statements for periods ending on or after December 15, 2012. It is assumed in this illustration that the applicable financial reporting framework is accounting principles generally accepted in the United States, that the requirement in Section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, to obtain a written representation is not relevant, and that no exceptions exist to the requested written representations. If there were exceptions, the representations would need to be modified to reflect the exceptions.
[Entity Letterhead]
[To Auditor]
[Date]
This representation letter is provided in connection with your audit of the financial statements of ABC Company, which comprise the balance sheet as of December 31, 20XX, and the related statements of income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes to the financial statements, for the purpose of expressing an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with accounting principles generally accepted in the United States (US GAAP).
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.
Except where otherwise stated below, immaterial matters less than $[insert amount] collectively are not considered to be exceptions that require disclosure for the purpose of the following representations. This amount is not necessarily indicative of amounts that would require adjustment to or disclosure in the financial statements.
We confirm that, [to the best of our knowledge and belief, having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves] [as of (date of auditor’s report),]:
Financial Statements
- We have fulfilled our responsibilities, as set out in the terms of the audit engagement dated [insert date], for the preparation and fair presentation of the financial statements in accordance with US GAAP.
- We acknowledge our responsibility for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
- We acknowledge our responsibility for the design, implementation, and maintenance of internal control to prevent and detect fraud.
- Significant assumptions used by us in making accounting estimates, including those measured at fair value, are reasonable.
- Related-party relationships and transactions have been appropriately accounted for and disclosed in accordance with the requirements of US GAAP.
- All events subsequent to the date of the financial statements and for which US GAAP requires adjustment or disclosure have been adjusted or disclosed.
- The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements as a whole. A list of the uncorrected misstatements is attached to the representation letter.
- The effects of all known actual or possible litigation and claims have been accounted for and disclosed in accordance with US GAAP.
[Any other matters that the auditor may consider appropriate.]
Information Provided
- We have provided you with:
- Access to all information of which we are aware that is relevant to the preparation and fair presentation of the financial statements such as records, documentation, and other matters
- Additional information that you have requested from us for the purpose of the audit; and
- Unrestricted access to persons within the entity from whom you determined it necessary to obtain audit evidence
- All transactions have been recorded in the accounting records and are reflected in the financial statements.
- We have disclosed to you the results of our assessment of the risk that the financial statements may be materially misstated as a result of fraud.
- We have [no knowledge of any] [disclosed to you all information that we are aware of regarding] fraud or suspected fraud that affects the entity and involves:
- Management
- Employees who have significant roles in internal control; or
- Others when the fraud could have a material effect on the financial statements
- We have [no knowledge of any] [disclosed to you all information that we are aware of regarding] allegations of fraud, or suspected fraud, affecting the entity’s financial statements communicated by employees, former employees, analysts, regulators or others.
- We have disclosed to you all known instances of noncompliance or suspected noncompliance with laws and regulations whose effects should be considered when preparing financial statements.
- We [have disclosed to you all known actual or possible] [are not aware of any pending or threatened] litigation, claims, and assessments whose effects should be considered when preparing the financial statements [and we have not consulted legal counsel concerning litigation, claims, or assessments].
- We have disclosed to you the identity of the entity’s related parties and all the related-party relationships and transactions of which we are aware.
[Any other matters that the auditor may consider necessary.]
__________________________________
[Name of Chief Executive Officer and Title]
__________________________________
[Name of Chief Financial Officer and Title]
[Revised March 2012 to reflect conforming changes necessary due to the issuance of SAS No. 122.]
Illustration 2. Illustrative Specific Written Representations (From AU-C 580.A36)
| Condition | Illustrative Specific Written Representation |
| General | |
| Unaudited interim information accompanies the financial statements. | The unaudited interim financial information accompanying [presented in Note X to] the financial statements for the [identify all related periods] has been prepared and fairly presented in conformity with generally accepted accounting principles (GAAP) applicable to interim financial information. The accounting principles used to prepare the unaudited interim financial information are consistent with those used to prepare the audited financial statements. |
| The effect of a new accounting principle is not known. | We have not completed the process of evaluating the effect that will result from adopting the guidance in Financial Accounting Standards Board (FASB) Accounting Standards Update 20YY-XX, as discussed in Note [X]. The company is therefore unable to disclose the effect that adopting the guidance in FASB Accounting Standards Update 20YY-XX will have on its financial position and the results of operations when such guidance is adopted. |
| Financial circumstances are strained, with disclosure of management’s intentions and the entity’s ability to continue as a going concern. | Note [X] to the financial statements discloses all of the matters of which we are aware that are relevant to the company’s ability to continue as a going concern, including significant conditions and events and management’s plans. |
| The possibility exists that the value of specific significant long-lived assets or certain identifiable intangibles may be impaired. | We have reviewed long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances have indicated that the carrying amount of the assets might not be recoverable and have appropriately recorded the adjustment. |
| The entity has a variable interest in another entity. | Variable interest entities (VIEs) and potential VIEs and transactions with VIEs and potential VIEs have been properly recorded and disclosed in the financial statements in accordance with GAAP.
We have considered both implicit and explicit variable interests in (1) determining whether potential VIEs should be considered VIEs, (2) calculating expected losses and residual returns, and (3) determining which party, if any, is the primary beneficiary.
We have provided you with lists of all identified variable interests in (1) VIEs, (2) potential VIEs that we considered but judged not to be VIEs, and (3) entities that were afforded the scope exceptions of Financial Accounting Standards Board (FASB) Accounting Standards Codification™ (ASC) 810, Consolidation.
We have advised you of all transactions with identified VIEs, potential VIEs, or entities afforded the scope exceptions of FASB ASC 810.
We have made available all relevant information about financial interests and contractual arrangements with related parties, de facto agents, and other entities, including but not limited to their governing documents, equity and debt instruments, contracts, leases, guarantee arrangements, and other financial contracts and arrangements.
The information we provided about financial interests and contractual arrangements with related parties, de facto agents and other entities includes information about all transactions, unwritten understandings, agreement modifications, and written and oral side agreements.
Our computations of expected losses and expected residual returns of entities that are VIEs and potential VIEs are based on the best information available and include all reasonably possible outcomes.
Regarding entities in which the company has variable interests (implicit and explicit), we have provided all information about events and changes in circumstances that could potentially cause reconsideration about whether the entities are VIEs or whether the company is the primary beneficiary or has a significant variable interest in the entity.
We have made and continue to make exhaustive efforts to obtain information about entities in which the company has an implicit or explicit interest but that were excluded from complete analysis under FASB ASC 810 due to lack of essential information to determine one or more of the following: whether the entity is a VIE, whether the company is the primary beneficiary, or the accounting required to consolidate the entity. |
| The work of a specialist has been used by the entity. | We agree with the findings of specialists in evaluating the [describe assertion] and have adequately considered the qualifications of the specialist in determining the amounts and disclosures used in the financial statements and underlying accounting records. We did not give or cause any instructions to be given to specialists with respect to the values or amounts derived in an attempt to bias their work, and we are not otherwise aware of any matters that have had an effect on the independence or objectivity of the specialists. |
| Assets | |
| Cash Disclosure is required of compensating balances or other arrangements involving restrictions on cash balances, lines of credit, or similar arrangements. |
Arrangements with financial institutions involving compensating balances or other arrangements involving restrictions on cash balances, line of credit, or similar arrangements have been properly disclosed. |
| Financial Instruments Management intends to and has the ability to hold to maturity debt securities classified as held-to-maturity. |
Debt securities that have been classified as held-to-maturity have been so classified due to the company’s intent to hold such securities to maturity and the company’s ability to do so. All other debt securities have been classified as available-for-sale or trading. |
| Management considers the decline in value of debt or equity securities to be temporary. | We consider the decline in value of debt or equity securities classified as either available-for-sale or held-to-maturity to be temporary. |
| Management has determined the fair value of significant financial instruments that do not have readily determinable market values. | The methods and significant assumptions used to determine fair values of financial instruments are as follows: [describe methods and significant assumptions used to determine fair values of financial instruments]. The methods and significant assumptions used result in a measure of fair value appropriate for financial statement measurement and disclosure purposes. |
| Financial instruments with off-balance-sheet risk and financial instruments with concentrations of credit risk exist. | The following information about financial instruments with off-balance-sheet risk and financial instruments with concentrations of credit risk has been properly disclosed in the financial statements:
1. The extent, nature, and terms of financial instruments with off-balance-sheet risk
2. The amount of credit risk of financial instruments with off-balance-sheet risk and information about the collateral supporting such financial instruments
3. Significant concentrations of credit risk arising from all financial instruments and information about the collateral supporting such financial instruments
|
| Investments Unusual considerations are involved in determining the application of equity accounting. |
[For investments in common stock that are either nonmarketable or of which the entity has a 20% or greater ownership interest, select the appropriate representation from the following:] The equity method is used to account for the company’s investment in the common stock of [investee] because the company has the ability to exercise significant influence over the investee’s operating and financial policies. The cost method is used to account for the company’s investment in the common stock of [investee] because the company does not have the ability to exercise significant influence over the investee’s operating and financial policies. |
| The entity had loans to executive officers, nonaccrued loans or zero interest rate loans. | Loans to executive officers have been properly accounted for and disclosed. |
| Liabilities | |
| Debt Short-term debt could be refinanced on a long-term basis and management intends to do so. |
The company has excluded short-term obligations totaling $[amount] from current liabilities because it intends to refinance the obligations on a long-term basis. [Complete with appropriate wording detailing how amounts will be refinanced as follows:] |
| The company has issued a long-term obligation [debt security] after the date of the balance sheet but prior to the issuance of the financial statements for the purpose of refinancing the short-term obligations on a long-term basis. | |
| The company has the ability to consummate the refinancing, by using the financing agreement referred to in Note [X] to the financial statements. | |
| Tax-exempt bonds have been issued. | Tax-exempt bonds issued have retained their tax-exempt status. |
| Taxes Management intends to reinvest undistributed earnings of a foreign subsidiary. |
We intend to reinvest the undistributed earnings of [name of foreign subsidiary]. |
| Pension and Postretirement Benefits An actuary has been used to measure pension liabilities and costs. |
We believe that the actuarial assumptions and methods used to measure pension liabilities and costs for financial accounting purposes are appropriate in the circumstances. |
| Involvement with a multiemployer plan exists. | We are unable to determine the possibility of a withdrawal liability in a multiemployer benefit plan. or We have determined that there is the possibility of a withdrawal liability in a multiemployer plan in the amount of $[XX]. |
| Postretirement benefits have been eliminated. | We do not intend to compensate for the elimination of postretirement benefits by granting an increase in pension benefits. or We plan to compensate for the elimination of postretirement benefits by granting an increase in pension benefits in the amount of $[XX]. |
| Employee layoffs that would otherwise lead to a curtailment of a benefit plan are intended to be temporary. | Current employee layoffs are intended to be temporary. |
| Management intends to either continue to make or not make frequent amendments to its pension or other postretirement benefit plans, which may affect the amortization period of prior service cost, or has expressed a substantive commitment to increase benefit obligations. | We plan to continue to make frequent amendments to the pension or other postretirement benefit plans, which may affect the amortization period of prior service cost. or We do not plan to make frequent amendments to the pension or other postretirement benefit plans. |
| Equity | |
| Capital stock repurchase options or agreements or capital stock reserved for options, warrants, conversions, or other requirements exist. | Capital stock repurchase options or agreements or capital stock reserved for options, warrants, conversions, or other requirements have been properly disclosed. |
Illustration 3. Illustrative Updating Management Representation Letter (From AU-C 580)
The following letter is presented for illustrative purposes only. It may be used in the circumstances described in paragraph .A17 of this section. Management need not repeat all of the representations made in the previous representation letter.
If matters to be disclosed to the auditor exist, they may be listed following the representation. For example, if an event subsequent to the date of the balance sheet has been disclosed in the financial statements, the final paragraph could be modified as follows: “To the best of our knowledge and belief, except as discussed in Note X to the financial statements, no events have occurred. . . .”
[Date]
To [Auditor]
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 accordance with accounting principles generally accepted in the United States of America, you were previously provided with a representation letter under date of [date of previous representation letter]. No information has come to our attention that would cause us to believe that any of those previous representations should be modified.
To the best of our knowledge and belief, no events have occurred subsequent to [date of latest balance sheet reported on by the auditor] 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]
[Paragraph added, March 2012, to reflect conforming changes necessary due to the issuance of SAS No. 122.]
1 The guidance in this section, including the sample engagement letter included in Illustration 1, is designed for nonissuers (as defined in the Summary of Key Changes provided immediately before Section 100-230). Auditors of issuers should consider changes that would need to be made for the standards of the Public Company Accounting Oversight Board (PCAOB) and other Securities and Exchange Commission (SEC) requirements for public companies, including the changes in the PCAOB’s Auditing Standard, Conforming Amendments to PCAOB Interim Standards Resulting from Adoption of PCAOB Auditing Standard No. 5, An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements.
2 Illustrations 1, 2, and 3, are designed for nonissuers (as defined in the Summary of Key Changes provided immediately before Section 100-230). Auditors of issuers should consider the standards of the PCAOB (see Appendix A) and other SEC requirements for public companies.
3 Schedule not included in this illustration.
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