• 30 Marks

AA – May 2023 – L2 – SA – Q1 – Audit Evidence

Explaining objectives and steps in obtaining written representation and handling contradictions in audit evidence.

Promise and Treasure are two good childhood friends. After their secondary education, Promise traveled abroad to further his education and obtained his degrees there. Treasure attended a university in Nigeria and graduated with a second-class lower degree. During his time abroad, Promise met some foreign associates and decided to start a company in Nigeria with Treasure.

The company, named Promise and Treasure Company Nigeria Limited, specializes in importing steel products with future plans to set up a local factory. The first-year accounts were prepared as of December 31, 2020. Your firm has been appointed as auditors for the company. Upon completing the audit, you requested a written representation from management. The Managing Director found this request unusual, as he believed all necessary information and documents had already been provided.

Required:

a. Explain to the Managing Director the objectives of the auditor in obtaining a written representation as per ISA 580. (4 Marks)

b. State the steps the auditor should take if a representation by management is contradicted by other audit evidence. (6 Marks)

c. State THREE matters that are required of management in the letter of representation in line with ISA 580, requiring specific representation from management. (3 Marks)

d. Highlight SEVEN aspects of the form and contents of a letter of representation. (14 Marks)

e. State the steps the auditor should take if management refuses to provide the requested written representation. (3 Marks)

a. Objectives of Written Representation: The auditor seeks written representations as part of the audit evidence for certain assertions in the financial statements, confirming the completeness and accuracy of the information provided by management. This aligns with ISA 580, enhancing reliability and supporting the auditor’s opinion on the statements.

b. Steps if Contradicted by Other Evidence: The auditor should assess the reliability of the management representation in light of the contradictory evidence, perform additional procedures to resolve the contradiction, and consider the impact on the audit report if unresolved.

c. Matters Required in Representation:

  • Management’s acknowledgment of its responsibility for preparing the financial statements.
  • Management’s confirmation of the accuracy and completeness of information provided.
  • Disclosure of any known instances of fraud or errors affecting the statements.

d. Form and Content of Letter of Representation:

  • Addressed to the auditor.
  • Signed by management or those charged with governance.
  • Contains specific representations required by auditing standards.
  • Dated and covering the financial reporting period audited.
  • References any known breaches of laws or regulations.
  • Affirms the recognition, measurement, and disclosure of assets and liabilities.
  • Contains a statement of compliance with financial reporting standards.

e. Steps if Management Refuses:

  • Evaluate the implications of management’s refusal.
  • Assess the impact on the reliability of other audit evidence.
  • Consider issuing a qualified or disclaimer of opinion depending on the significance of the representation to the financial statements.
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