IAASB Revises Standard on Management Written Representations to Auditor

As part of its ongoing project to revise and redraft auditing standards, the International Auditing and Assurance Standards Board revised the standard governing written statements that management provides to auditors to confirm certain matters or to support other audit evidence. These statements, referred to as written representations, are necessary information that the auditor requires in connection with the audit of the company’s financial statements. According to IAASB Chair John Kellas, the revised standard focuses on what is really necessary and, in particular, deals with concerns that auditors may over rely on representations at the expense of other evidence.

The revision is part of the Board’s Clarity Project, which involves the complete reengineering of the structure and format for writing international audit standards. As a precursor to converged international audit standards, the IAASB is presently redrafting and sometimes revising its entire body of audit standards.

The revised standard, ISA 560, requires management to provide written representations on two fundamental matters:
· That it has fulfilled its responsibility for the preparation and presentation of the financial statements; and
· That it has provided the auditor with all relevant information and that all transactions have been recorded and are reflected in the financial statements.

The auditor is also free to request other written representations during the course of the audit. The revised standard includes requirements for appropriate action by the auditor when written representations are not provided by management or are considered to be unreliable.

If management does not provide requested written representations, the auditor must discuss the matter with management and reevaluate management’s integrity and the effect this may generally have on the reliability of representations and audit evidence. Further, the standard requires the auditor to disclaim an opinion on the financial statements if it concludes that there is either sufficient doubt about the integrity of management such that the requisite written representations are not reliable or management does not provide the written representations.

ISA 560 also clarifies that, although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any matters. Further, the fact that management has provided written representations does not affect the nature or extent of other audit evidence that the auditor obtains about the fulfillment of management's duties, or about specific assertions.

The revised standard allows management to include in the written representations qualifying language to the effect that the representations are made to the best of its knowledge and belief. It is reasonable for auditors to accept such wording if they are satisfied that the representations are being made by those with appropriate duties and knowledge of the matters included in the representations.