A representation letter (also known as a rep letter or LOR) is a requirement of the American Institute of Certified Public Accountants, the governing body for CPAs, for all audit representations and review engagements. The rep letter is management’s statement that the financial information provided by them is accurate and complete.
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Who should sign the representation letter?
Generally speaking, the letter should be signed by those members of management with overall responsibility for financial and operating matters whom the auditor believes are responsible for and knowledgeable about, directly or through others in the organization, the matters covered by the representations. In community associations, this normally means Board members. The guidance provided by the American Institute of Certified Public Accountants indicates that obtaining a representation letter is not a mandatory requirement of an audit engagement, but it is strongly recommended, as it increases the auditor’s confidence in issuing a clean audit report.
The representation letter’s purpose is to assure the auditor that the financial information being examined is accurate and that management has disclosed any potential legal or financial liabilities that could impact the financial statements. The letter also confirms that all transactions have been recorded and reflected in the financial statements. If the representation letter is not received, the auditor may need to change the report to a “qualified” opinion or even disclaim the engagement altogether.
A representation letter is one of multiple documents/supports that the auditor must obtain in order to issue a clean audit report. As a result, the issuance of the representation letter can be very stressful for both the auditor and the audit client. For this reason, the higher management of the audit client prepares this document.
For example, in a governmental audit, the representation letter is typically prepared by a member of the audit department and usually signed by the audit director. In a financial statement audit, the representation letter is normally prepared by senior company managers and signed by the CEO or CFO. In either case, the responsibilities of those signing the letter are clearly spelled out in the letter.
What should be included in the representation letter?
Known also as a rep or management representation letter, the document is one of the most important in the audit process. It is a formal statement from management to auditors confirming that the financial information they have submitted for review is accurate and complete. It also attests that management has disclosed any potential legal or financial liabilities that might impact the organization’s finances.
The letter should be clear and concise. It should begin with a brief introduction that identifies the management team and explains the purpose of the letter. It should then outline the specific representations that management is making. This includes a statement of management’s responsibility for the financial statements, a statement that the information is complete and fairly presented in accordance with accounting standards, and a list of any other significant representations.
Limiting the number of representations to no more than ten is best, as this will help keep the letter manageable and easily digestible for readers. It is also a good idea to include a statement affirming that the company’s systems are in place and functioning properly, ensuring that the system can detect and report even the slightest mishaps.
In addition, management should also acknowledge their responsibility for the fair presentation of supplementary schedules that accompany the financial statements. This includes but is not limited to the Schedule of Assets Held for Investment and the Schedule of Non-exempt Transactions. Management should also state that they have reviewed the supplemental schedules and acknowledged any areas of concern.
A rep letter is also a good opportunity for management to express their appreciation and support for the audit process. It is a chance to show that they recognize the importance of the role of external auditors and the hard work that goes into conducting an effective audit.
The management rep letter is typically signed before an opinion can be issued. The Public Company Accounting Oversight Board (PCAOB) provides considerable detail regarding the content of a rep letter in AU Section 333. The letter should be dated as of the date that the service auditor is about to issue his or her report.
What should not be included in the representation letter?
The representation letter is a document that is provided to auditors by management. It includes a series of statements that confirm certain facts and assurances about the financial information being audited. The representation letter is usually signed by senior management, including the CEO and CFO. It is important for the auditor to obtain a representation letter from management to ensure they receive the most accurate information possible about the company’s finances.
The information included in a representation letter should be tailored to the specific business or industry being audited. It should include representations that management has identified all relevant disclosures and that the financial information being examined is complete. In addition, the representation letter should also include a statement that management has not concealed any material assets or liabilities.
In addition to the representations required by SSAE 18, the auditor should request a statement from management indicating that all transactions have been recorded and that the financial statements are presented per generally accepted accounting principles. Finally, the representation letter should indicate that no pending legal proceedings could affect the financial statements.
It is not current best practice to include confirmations of amounts that are included in the accounts based on management estimates or valuations, such as property and stock values. Rather, these should be confirmed by other audit evidence obtained during the examination process.
The representatives in the representation letter should be limited to those individuals with overall responsibility for and knowledge of, directly or indirectly, the matters addressed. This typically means the CEO and CFO in most organizations, but it may be other senior management team members.
In addition, the representations in the letter should be dated as of the audit report date. This is because the auditor is concerned with events that have occurred through the date of the report that might impact the financial statements being reviewed. In the event that a representation letter cannot be obtained from management, the auditor will likely need to modify the scope of the examination and/or issue a qualified opinion.
How should the representation letter be prepared?
It is important for the auditors to have a management representation letter in place before they begin work on an audit. The letter provides assurance to the auditors that the financial information they are reviewing is accurate and complete. It also confirms that the company has disclosed any potential liabilities that could impact its financial statements.
A representation letter should be signed by members of management who have overall responsibility for and knowledge, directly or indirectly through others in the company, about the matters included in the financial statements under review. This is typically the chief executive officer and the chief financial officer in the United States. However, in some cases, it may be necessary to obtain representations from those charged with governance if they have unique insights and perspectives on the company that are not available to other managers (see ISA 580).
The letter should contain a short introduction that identifies the audited entity’s management and the representation letter’s purpose. Then, it should list the specific representations being made in the letter and provide supporting evidence for each. Finally, a senior member of the audited entity’s management team should sign the management representation letter.
While a representation letter can be prepared at any point during the audit process, it is typically completed and signed before the service auditor issues an opinion on the company’s financial statements. This is required by the AICPA’s attestation standards (Paragraph.54 of SSAE 18).
In addition to a representation letter, some companies may also choose to prepare a management summary of significant items. This is a brief list of the most significant issues that management has identified during the preparation of the financial statements and should be signed by the senior member of management.
Both a representation letter and a management summary of significant items are important components of the audit process. Obtaining these letters ensures that the auditors have all the information they need to conduct a thorough and effective audit. In addition, it helps to reduce the risk that the auditors will find unrecorded transactions or misstatements in the financial statements.
