-
806 Management Representation Letter
806.1 SAS No. 85 (AU 333.01), Management Representations, requires the auditor to obtain written representations from client officials.
- A management representation letter, among other things, confirms oral
- representations about specific matters given to the auditor during the
- audit. The letter is part of the evidential matter the auditor obtains;
- however, it is not a substitute for other necessary audit procedures to
- corroborate information about matters for which written representations
- are obtained. For example, the auditor should not simply accept
- management's representations as the only necessary audit evidence for
- significant matters. If the auditor cannot verify a representation using
- another form of evidence, such as management's intent to hold
- investment securities to maturity, the auditor should evaluate whether
- the representation is feasible considering past history with the client
- and the current economic conditions. In addition, if other audit
- evidence contradicts a representation made by management, the auditor
- should investigate the circumstances and consider the reliability of the
- representation. Depending on the circumstances, the auditor may need to
- consider whether reliance on management's representations relating to
- other aspects of the financial statements is appropriate. SAS No. 85 is
- clear that management's refusal to furnish written representations is a
- limitation on the audit scope sufficient to preclude an unqualified
- opinion.
-
Content of the Letter
806.2 In the representation
letter, CIRA officials acknowledge their primary responsibility for the
financial statements and provide other representations that are
“ordinarily” obtained
- according to SAS No. 85, for
- example, representations that all financial records were made available
- to the auditor. In addition to items specified in SAS No. 85, the letter
- should include any other matters relevant to CIRAs or to the specific
- engagement
-
806.3 For example, CIRAs
frequently use managing agents, and there is often a lack of auditor
interaction with the CIRA's board of directors and officers.
- In those circumstances, it is
- particularly important to remind the CIRA's officers and, if applicable,
- the managing agent of their responsibility for the financial statements
- as well as their responsibility to provide the auditors with complete
- and accurate information.
-
806.4 In addition, the AICPA guide at Paragraph 7.108
states that auditors should consider obtaining representations from
management and the board of directors about the following matters in
addition to those made in audits of the financial statements of other
kinds of reporting entities:
- • Disclosures based on a study of future major repairs and replacements
- • The association's policy for funding future major repairs and replacements
- • The association's policy for disposing of the excess of revenues over expenses, if any
- Not
- all of those additional representations would be appropriate for every
- CIRA engagement. In addition, the representation letter should state
- that management is responsible for the presentation of supplementary
- information about future major repairs and replacements required by the
- AICPA.
-
806.5 Unique CIRA Representations
Representations obtained in CIRA engagements are similar to those
obtained in engagements for commercial businesses. Auditors should
consider obtaining additional representations in certain areas, however,
as discussed below. An illustrative representation letter when
reporting on audited financial statements is presented at HOA-CL-3.1. HOA-CL-3.3
presents an example representation letter when the current year
financial statements have been audited and the prior year financial
statements have been reviewed.
- a. Funds for Major Repairs and Replacements. Auditors
- should ordinarily obtain representations regarding the CIRA's funding
- for major repairs and replacements. The representations should include
- the following items:td dl { margin-top: 0px; margin-bottom: 0px; }
- • Whether the CIRA has complied with its
- policy for funding future major repairs and replacements including
- requirements, if any, for outside studies to estimate future costs.
- •
- If the CIRA is accumulating funds for future major repairs and
- replacements, whether the board of directors believes they will be
- adequate.
- b. Allocation of Expenses against Membership and Nonmembership Income (or against Exempt and Nonexempt Function Income).
- The authors recommend that auditors obtain the CIRA's representation
- that the CIRA's allocations conform with IRS rules, which state that
- such allocations be made “on a reasonable and consistently applied
- basis.” (Chapter 5
- discusses allocations of expense against membership and nonmembership
- income for Form 1120 filers and allocations of expense against exempt
- and nonexempt function income for Form 1120-H filers.)
- c. Excess Revenues over Expenses. As discussed in Chapter 5,
- CIRAs have some options that will allow them to exempt the excess of
- assessments over operating expenses from federal taxation. The CIRAs may
- elect to—td dl { margin-top: 0px; margin-bottom: 0px; }
- • apply the excess against the next year's assessments, or
- • refund the excess to members.
- If
- certain strict criteria are met, CIRAs may elect to transfer the excess
- to the fund for major repairs and replacements. Auditors should usually
- obtain representations about the CIRA's policy for the current year.
d. Required Supplementary Information about Future Major Repairs and Replacements. SAS No. 120, Required Supplementary Information, requires auditors to obtain the following representations:td dl { margin-top: 0px; margin-bottom: 0px; }
• That management acknowledges its responsibility for the required supplementary information.
- • Whether the required supplementary information is measured and presented in accordance with prescribed guidelines.
- •
- Whether the methods of measurement and presentation have changed from
- those used in prior periods and, if so, the reasons for such changes
- .•
- Any significant assumptions or interpretations underlying the
- measurement or presentation of the required supplementary information.
- e. Adequacy of Insurance.
- Although not required, some auditors review management's evaluation
- of the adequacy of insurance. In that case, the auditors should consider
- obtaining representations about whether management has reviewed the
- adequacy of insurance and whether they believe it is adequate.
- f. Interfund Transactions.
- The authors recommend that auditors obtain the CIRA's representation
- that there are no unauthorized transfers or designations of fund balance
- or interfund borrowings, or uncollectible interfund loans.
- g. Responsibility for Tax Election.
- The authors recommend that auditors obtain the CIRA's representation
- that management is responsible for the choice of filing either Form 1120
- or 1120-H, as appropriate.
-
806.6 If required communications
are orally reported (as permitted in certain circumstances under SAS No.
114), it is desirable for management to acknowledge in the
representation letter that the matters have been reported
- Also, the letter may include
- management's promise to let the auditor review any subsequently
- published document that includes the auditor's report.
-
Audit Adjustments
806.7 SAS No. 85 (AU 333)
requires an acknowledgment in the representation letter that management
has considered the financial statement misstatements aggregated by the
auditor during the current engagement and pertaining to the latest
period presented, and has concluded that any uncorrected misstatements
are not material, both individually and in the aggregate, to the
financial statements taken as a whole
- A summary of the uncorrected misstatements should be included in, or
- attached to, the representation letter. SAS No. 85 does not provide
- specific guidance for the auditor when there are no uncorrected
- misstatements. In that situation (that is, when either no misstatements
- are noted in the audit or all noted misstatements are corrected), the
- authors believe no representation about uncorrected misstatements is
- required in the management representation letter.
-
806.8 Uncorrected misstatements
that should be communicated in the representation letter include both
misstatements identified by the auditor and misstatements brought to the
auditor's attention by management
- The summary of uncorrected
- misstatements also may include the current year effect of unadjusted
- audit differences from prior years (that is, the turnaround effect).
- Some auditors set an amount below which detected misstatements need not
- be accumulated on the summary of audit differences. Those misstatements
- need not be included in the summary of uncorrected misstatements
- communicated in the management representation letter.
-
806.9 The adjustments included in
the summary may be aggregated. If the auditor chooses to aggregate the
misstatements, they are normally aggregated by financial statement
caption
- If the adjustments are aggregated,
- they should be presented in sufficient detail to provide CIRA management
- and board representatives with an understanding of the nature, amount,
- and effect of the uncorrected misstatements.
-
806.10 HOA-CL-3.3, “Summary of Audit Differences,” provides a drafting form for the summary. Auditors also might consider attaching a copy of HOA-CX-12.2, “Audit Difference Evaluation Form,” to the representation letter to comply with the requirements of SAS No. 85 (AU 333)
- Other approaches for complying with the requirements of SAS No. 85 also
- are acceptable, such as summarizing the uncorrected misstatements within
- the body of management's representation about uncorrected
- misstatements. However, this approach may entail a greater degree of
- summarization than would be presented in a separate schedule.
-
Materiality
806.11 SAS No. 85 (AU 333)
permits, but does not require, limiting representations to matters that
are either individually or collectively material to the financial
statements. That limitation is acceptable, however, only for
representations that directly relate to amounts included in the
financial statements and only if the auditor and management reach an
agreement about what is material for this purpose.
- It would not be acceptable, for example, to limit representations about
- the completeness of available financial records or about management's
- responsibility for fair presentation. SAS No. 85 (AU 333)
- notes that materiality may be different for different representations,
- and it permits but does not require including an explicit discussion of
- materiality in the representation letter, in either qualitative or
- quantitative terms. A discussion that includes both qualitative and
- quantitative terms is also acceptable. However, the authors discourage
- using a purely quantitative discussion of materiality because it is
- inappropriate to rely solely on quantitative considerations when
- determining materiality. The sample letters at HOA-CL-3.1 and HOA-CL-3.3 include a discussion of materiality in qualitative terms.
-
Signatures on the Letter
806.12 The representation letter
is obtained from officials who are responsible for and knowledgeable
about, directly or through others, the matters covered by the
representations. For a CIRA, such officials include
- CIRA officers (such as the
- president), board members, and managing agent, if any. If the CIRA has a
- treasurer, that person should also sign the letter.
-
Periods Covered by the Letter
806.13 SAS No. 85 (AU 333.10)
also requires auditors to obtain written representations from current
management on all periods covered in the auditor's report. For example,
if the auditor's report covers the financial statements for the years
ended 20X1 and 20X2, management's representation letter should also
cover both years.
- If management or the managing agent changed during or after the period
- under audit, the current management may be hesitant to provide this
- assurance. That is especially true of managing agents. Auditors may
- point out that the letter limits the confirmants' responses to the best
- of their knowledge and belief. While, in some cases, it may be possible
- to obtain representations from the previous management, it is unlikely,
- and the auditor should obtain representations for all periods covered by
- the auditor's report from current management. In some cases, the
- managing agent may sign the representation letter, but new CIRA
- officials not present during the period under audit may decline because
- they are new to the situation. The authors believe this is acceptable
- and would not result in a scope limitation. However, the auditor should
- make inquiries to determine that the reason for not signing the letter
- is because the official was not responsible for the financial statements
- and not due to other reasons (such as a disagreement about accounting
- matters or knowledge of an actual or suspected material misstatement).
- The authors also recommend that the official be asked to sign a separate
- representation stating that he or she has no knowledge of a material
- matter that was not properly treated in the financial statements.
-
Dating of the Letter and Updating Letters
806.14 The auditor is concerned
with matters occurring through the date of his or her report, not merely
through the balance sheet date. As a result
the management representation letter should be dated as of the date of the auditor's report.
-
806.15 Updating Letters There are circumstances that require auditors to obtain updating representation letters from management.
- SAS No. 85 amended SAS No. 58, Reports on Audited Financial Statements,
- to require a predecessor auditor to obtain a representation letter from
- management, in addition to the previous requirement for a
- representation letter from the successor auditor, before reissuing a
- report on financial statements of a prior period. This requirement
- applies when the prior period financial statements are presented on a
- comparative basis with audited financial statements of a subsequent
- period. The updating management representation letter should address (a)
- whether management is aware of any new information that would cause
- them to believe that any of the previous representations should be
- modified, and (b) whether any events occurring subsequent to the latest
- balance sheet date of the financial statements reported on by the
- predecessor require disclosure in or adjustment to such financial
- statements. HOA-CL-3.4 presents a drafting form of this letter.
-
Receipt of the Letter
806.16 AICPA Technical Practice Aid, The Effect of Obtaining the Management Representation Letter on Dating the Auditor's Report (TIS 9100.06-.07),
indicates that the auditor does not need to physically have
management's representation letter on the date of the auditor's report.
- The requirement can be met if, on or before the date of the auditor's
- report, management has received the final representation letter and
- confirmed to the auditor that they will sign the letter. The auditor
- will need to physically have the signed letter before releasing the
- audit report. Management's refusal to furnish written representations
- constitutes a limitation on the scope of the audit sufficient to
- preclude an unqualified opinion.
-
Illustrative Letter
806.17 HOA-CL-3.1 and HOA-CL-3.3 illustrate management representation letters appropriate for a CIRA.
The letters include the matters discussed in the preceding paragraphs.
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