Lecture discusses the final stages of an audit, specifically focusing on obtaining management representations (or a letter of representation).
This is a critical piece of evidence required before auditors can sign off on an audit report.
Management Representations
Definition: A letter from the company to the auditors, written on company letterhead.
Signatories: Typically signed by the CEO, possibly the company secretary or finance director.
Purpose of Management Representations
Not a Substitute for Audit Evidence: They do not replace other forms of audit evidence.
Focus on Specific Matters: Used for specific matters determined by the auditor.
Evidence Where Other Evidence is Insufficient: Needed where knowledge is confined to management or where judgments and opinions are heavily relied upon.
Situations Requiring Management Representations
Knowledge Confined to Management
Example: Plans to close a factory may not be documented but should affect asset valuation and liabilities (e.g., redundancy pay).
Management must confirm no undisclosed plans affecting financial statements.
Judgment and Opinion
Valuation of stock or recoverability of debts requires scrutiny and management assertion.
Letter acts as a documentary evidence and focuses attention on management's statements.
Contents of a Letter of Representation
Material Irregularities: Assurance of no undisclosed frauds.
Disclosure of Liabilities: All liabilities must be disclosed, even if documentation is slow (e.g., late invoices).
Subsequent Events: Management to confirm no knowledge of customer liquidations not evident to auditors.
Operations Continuity: No planned shutdowns of operations.
Inventory Valuation: Inventory valued at more than net realizable value.
Debt Recovery and Asset Charges: All debts believed recoverable; all asset mortgages disclosed.
Mortgages might be to entities other than banks, such as suppliers.
Importance
Ensures management has thoroughly reviewed and confirmed accuracy of financial statements.
Provides auditors with additional corroborative evidence to support their audit findings.
A vital part of the audit process before the audit report can be completed and a clean audit opinion issued.