In this video, we walk through 5 AUD practice questions teaching about written representations. These questions are from AUD content area 3 on the AICPA CPA exam blueprints: Performing Further Procedures and Obtaining Evidence
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
Also be sure to watch one of our free webinars on the 6 “key ingredients” to an extremely effective & efficient CPA study process here…
Written Representations
In every audit, one of the required pieces of audit evidence is the written representation letter obtained from management. While it’s not a substitute for audit procedures, this letter reinforces management’s responsibility and confirms important assertions relevant to the financial statements. Here’s a breakdown of what these representations include, why they matter, and what happens when they’re missing.
Purpose and Format of the Representation Letter
The primary purpose of the management representation letter is to clearly document that management accepts its responsibility for the preparation and fair presentation of the financial statements. It also helps reduce misunderstandings between the auditor and management about who is responsible for what.
- The letter is addressed to the auditor.
- It must be dated the same as the auditor’s report date.
- It is usually signed by the CEO and CFO (or equivalents).
- For comparative financial statements, it must cover all years included in the auditor’s report.
Assertions About the Financial Statements and Estimates
The representation letter confirms that management believes the financial statements are presented fairly in accordance with the applicable financial reporting framework (e.g., U.S. GAAP).
Examples of required assertions:
- All transactions have been recorded and properly classified.
- Management has disclosed all relevant information to the auditor.
- Significant assumptions used in making accounting estimates (e.g., fair value or allowance for doubtful accounts) are reasonable.
Completeness, Fraud, and Compliance
The letter requires management to affirm that:
- All known instances of fraud—whether material or immaterial—have been disclosed.
- There have been no violations or possible violations of laws and regulations that should have been disclosed to the auditor.
- Events occurring after the balance sheet date but before the audit report date (i.e., subsequent events) have been properly disclosed or adjusted in the financials.
These items ensure that the auditor has the full picture and isn’t missing anything important due to incomplete information from management.
Uncorrected Misstatements and Materiality Limits
Management must include a specific representation stating that the effects of uncorrected misstatements are immaterial to the financial statements as a whole. The auditor also includes a summary of these misstatements in the audit documentation.
Here’s where materiality gets tricky: materiality is not just about dollar amounts. The auditor and management must also consider the nature of the misstatement. For instance:
- A small misstatement that hides a loan to an executive might be material by nature.
- A minor error in revenue recognition that affects a debt covenant might be material even if the dollar value is low.
The Representation Letter Is Mandatory Audit Evidence
This isn’t optional. The management representation letter is a required audit procedure under generally accepted auditing standards (GAAS). If management refuses to provide it, this is considered a scope limitation.
In practice:
- The auditor cannot issue an unmodified (clean) opinion without the letter.
- A refusal will always result in a modified opinion—either a qualified opinion or a disclaimer of opinion, depending on severity.
Comparative Financial Statements Require Broad Coverage
If the auditor’s report covers multiple years (e.g., 2023 and 2022), the representation letter must include representations about each of those years. This ensures that management stands behind the entire set of financial statements being audited.
Auditors rely on these representations not because they replace audit work, but because they give written confirmation from the people responsible for the financial statements. Without them, the auditor simply doesn’t have a complete basis for issuing an opinion.
Whether you’re prepping for the CPA exam or working on a real audit, understanding the scope and content of the management representation letter is essential. It’s one of those foundational pieces that ties together the audit’s evidence and the client’s responsibility.
