Introduction
Companies Act 2013 has increased the responsibility of the auditor to manifold. The auditor has to take into consideration many factors while issuing report to the members of the company.
As per section 143 (2) of Companies Act, 2013 it is the duty of auditor to make a report addressing to the members of the company on the accounts examined by him and every financial statement which are laid before the company in the general meeting and the report shall take into account the accounting and auditing standards. Section 143 (9) stated that every auditor shall comply with the auditing standards.
As per section 143 (3) (a) the auditor’s report shall also state whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements.
Thus the audit evidence and audit documentation plays an important role to ensure that auditor has complied with the requirements of Companies Act 2013.
The management of the company is well informed about the internal environment and day to day activities of the company as compared to the auditor who visits the company for a comparative short duration to conduct the audit. In such situation, the auditor has to discuss with the management and in certain cases rely on the management’s view / discussion while forming opinion on the financial statement. Thus, as important audit evidence regarding the information provided by management, a written representation should be taken from the management of the company.
What is written representation?
A written representation letter is a form letter written by a company's outside auditor and signed by the management of the client company. The letter attests to the accuracy of the financial statements supplied by the company to the auditor, and that all information relevant to the financial statements has been disclosed to the auditor. The letter is signed following the completion of audit fieldwork, and before the financial statements is issued along with the auditor's opinion.
As per Auditing standard 500 – Audit evidence, para A25, written representation forms important audit evidence to the auditor.
The Institute of Chartered Accountant of India has provided adequate guidance regarding in Auditing Standard 580 Written Representation regarding auditor’s responsibility to obtain written representations from management and, where appropriate, those charged with governance. The objectives of the auditor as per the standard are [1]
a. To obtain written representations from management and, where appropriate, those charged with governance that they believe that they have fulfilled their responsibility for the preparation of the financial statements and for the completeness of the information provided to the auditors.
b. To support other audit evidence relevant to the financial statements or specific assertions in the financial statements by means of written representation, if determined necessary by the auditor or required by other SAs; and
c. To respond appropriately to written representations provided by management and, where appropriate, those charged with governance, or if management or, where appropriate, those charged with governance do not provide the written representations requested by the auditor.
Written Representation as audit evidence
Audit evidence is the information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Written representations are necessary information that the auditor requires in connection with the audit of entity’s financial statements. Accordingly, similar to responses to inquiries, written representations are audit evidence.[2]
Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. Furthermore, the fact that management has provided reliable written representations does not affect the nature or the extent of other audit evidence that the auditor obtains about the fulfilment of management’s responsibilities or about specific assertions.[2]
Although written representations provide necessary audit evidence they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. In case the audit evidence contradicts with other audit evidences, the auditor should investigate the circumstances and consider the reliability of representation made by the management. Written representations from management are a valuable source of evidence, but like any other evidence, they have to be corroborated.
Who would provide written representation?
Barings Futures Singapore Vs. Deloitte &Touche Singapore [2002] All ER (D) Mar
A decision in the preliminary hearing concerning the audit by Deloitte &Touche (D&T) of Barings Futures (Singapore) Pte Ltd. (BFS) has identified some key points in relation to management representations, and the protection they afford to auditors.
It was noted in the course of the Barings hearing that the BFS director who signed the representation letters in question had little knowledge or understanding of the activities, despite being nominally his boss. However, the director made written statements to the effect that there had been no irregularities involving management or having a material effect on the financial systems, and that the financial statements were free of material errors and omissions.
On this basis, Deloitte claimed that the representations by the BFS director were recklessly fraudulent, and therefore gave them an absolute defence of circuity against the claim in damages which they faced. Deloitte’s claim failed, however, because they did not establish to the judge’s satisfaction that the BFS director signed the representation letters:
a. Knowing that the statements in the letters were untrue, without an honest belief in their truth, or indifferent as to whether or not they were true;
b. Knowing that he had no reasonable grounds for making the statements, without an honest belief that he had such grounds, or indifferent as to whether he had or not.
The judge did, however, address the issue of the result if Deloitte had proved that, in signing the representation letters, the director was reckless of their truth or falsity. He concluded that, had such a case for fraudulent misrepresentation been established, he would have held that the BFS was vicariously liable for the director’s action, and thus Deloitte would have succeeded in their claim.
Written representations are generally requested from those responsible for the preparation and presentation of financial statements. Those responsible may vary depending on the governance structure of the entity or management or those charged with governance. Ordinarily, those charged with governance are accountable for ensuring that the entity achieves its objectives, and for the quality of its financial reporting and reporting to interested parties.
Management from whom it is requested are:
a. Entity’s chief executive officer and chief financial officer
b. Individuals who have specialized knowledge relating to the matters
c. Internal counsel especially in the case of significant litigations.
Written representation may also be taken from person who have specialized knowledge relating to the matters about which written representations are requested who may include:
i. An actuary responsible for actuarially determining the accounting measurements.
ii. Staff engineers who may have responsibility for and specialized knowledge about environmental liability measurements
iii. Internal counsel who may provide information essential to provisions for legal claims.
Liability of auditor if the requested representation is not provided[1]
If the management does not provide one or more written representations, the auditor shall:
a. Discuss the matter with management
b. Re-evaluate the integrity of management and evaluate the effect that this may have on the reliability of representations (oral or written) and audit evidence in general; and
c. Take appropriate actions, including determining the possible effect on the opinion in the auditor’s report in accordance with SA 705.
When should written representation be dated?
The date of written representation should be as near to the date of auditor’s report on financial statements. It should not be dated after the auditor’s report on the financial statement.
List of Auditing Standards containing requirements of Written Representations
• SA 240 – The Auditor’s Responsibilities relating to fraud in an Audit of Financial Statements
• SA 250 – Consideration of Laws and Regulations in an Audit of Financial Statements
• SA 450 – Evaluation of Misstatements Identified During the Audit
• SA 501 – Audit Evidence – Specific Considerations for Selected items
• SA 540 – Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related disclosures
• SA 550 – Related Parties
• SA 570 – Going Concern
References
1. SA 580 – Written representation issued by ICAI
2. International Standard on Auditing 580 – Written representation.
Profile of Author:
Amrita Chattopadhyay is a member of Institute of Chartered Accountant of India. She has wide experience in internal audits & management audits of various industries including information technology ITES, banking sector, mining and steel industry.
She is presently working as quality manager in a reputational firm in New Delhi.
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