AA – Mar 2025 – L2 – Q4 – Letter of Representation

Explain letter of representation, its contents, and actions if management refuses to provide it.

Question

a) During the audit of Abako Manufacturing LTD, the audit team from Henne Frema & Associates is awaiting written representations from management. One of the key areas of concern is the completeness of the financial records provided due to high turnover of staff especially at the finance department.

Required:

i) Explain letter of representation. (2 marks)

ii) Identify EIGHT statements/issues that may form part of a letter of representation. (4 marks)

iii) Discuss TWO actions that the auditor would take if management refuse to provide the letter of representation.

b) You are part of the team auditing a client who is part of a large multinational group. During the audit, your team noted that the company is reporting adverse liquidity and solvency ratios. Also, the company was in breach of its loan covenants and recently lost a major customer.

Your team has requested that management provide forecast of financial results showing that the company will be liquid and solvent in the foreseeable future, at least 12 months from the date of reporting to support management use of the going concern assumption in the preparation of the financial statements. Your team has also requested a letter of financial support from the company’s parent company.

The team has assessed that a material uncertainty exists and the use of the going concern assumption is inappropriate in the absence of the requested mitigation information.

Required:

i) State the type of audit report to be issued should management fail to provide the requested mitigation information. (4 marks)

ii) Assess the impact of the evidence provided on the audit report. Assume a material uncertainty still exists even after providing the needed evidence but the use of the going concern is appropriate. (6 marks)

Answer

a)i) A letter of representation is a written statement by management provided to confirm certain matters or to support audit evidence.
(2 marks)

ii) Issues that may form part of a letter of representation
A letter of representation may include the following statements:

The letter of representation relates to the audit of the client company
The management of the entity have fulfilled their responsibilities for the preparation of the financial statements and the financial statement give a true and fair view and are free from material misstatement
The assumptions made by management to make accounting estimates are reasonable
Related party relationships and transactions have been disclosed
All events after the reporting period have either been adjusted or disclosed
The effect of any uncorrected misstatements (a list of which must be attached to the letter) is immaterial
The auditors have been provided with all relevant material, including the books of account and unrestricted access to individuals within the entity
All transactions have been recorded and are included in the financial statements
Management have disclosed to the auditors all information that is relevant to fraud or suspected fraud.
(Any 8 relevant points @ 0.5 mark each = 4 marks)

iii) Actions that the auditor would take if management refuses to provide the letter of representation
If management refuses to provide requested letter of representation, the auditor is required to:

Discuss the matter with management;
Re-evaluate the integrity of management and reconsider the impact on other representations and audit evidence; and
Take appropriate action, including considering the effect on the auditor’s report.
(Any 2 points at 2 marks each = 4 marks)

b).i) A disclaimer of opinion is appropriate this circumstance because, the audit team is unable to obtain sufficient appropriate audit evidence about multiple elements of the financial statements. Possible effects can be assessed to be material and pervasive to the financial statement.
(4 marks)

ii) An unmodified opinion will be issued with an emphasis of matter paragraph on going concern. The emphasis of matter paragraph should point users of the company’s financial statements to the notes included in the financial statement describing the material uncertainty in the use of the going concern assumption.
(6 marks)

Tags: Audit opinion, Audit report, Financial Statements, Going Concern, Material Uncertainty
Level: Level 2

Topic: Audit Reports
Series: MAR 2025

Uploader: Samuel Duah