(a) Written representation letter – reliability and need for other evidence
Normally, the written representation letter is drafted by the auditor, but it is written on the client’s headed notepaper and signed by the directors. Alternatively, the letter may be written by the directors, but contain matters requested by the auditors.
As audit evidence, it is written evidence (which is better than oral evidence) but it is evidence from within the company and thus it is not as independent a source of evidence as most other evidence obtained by the auditor (e.g. third party evidence and evidence obtained directly by the auditor).
Arguably, evidence from the directors may be less reliable than evidence from the company’s employees, as there may be more pressures and motivation for the directors to mislead the auditor (e.g. because of external pressures on them to produce good results). However, statements from the directors may be more reliable than those from employees, as they will have a better understanding of the situation and, in their position as directors, should be aware of the importance of the statements they make to the auditor. Under most systems of company law, a company director commits an offence if he consciously or recklessly makes a misleading, false or deceptive statement to the auditor. The directors should be aware of such provisions and this should make them cautious of what they say to auditors, particularly when it is later put down in writing.
In some relatively immaterial areas, the auditor may accept the directors’ statements without seeking further evidence. However, in most situations, the auditor should attempt to find alternative evidence to support (or refute) the directors’ representations. Thus, in determining whether all revenue has been recorded in the financial statements, the auditor should obtain other evidence and would probably be negligent if the directors’ representations were relied on entirely.
In addition, the auditor must consider whether the directors’ representations are consistent with the other information he has obtained. If this evidence is consistent, then the directors’ representations will reinforce the evidence obtained by the auditor. However, if the other evidence obtained by the auditor is not consistent with the directors’ representations, the auditor should be extremely careful before accepting what the directors say. The auditor should seek further evidence to either refute or confirm the directors’ statements. If there is a material difference between the other evidence and the directors’ representations, the auditor will probably have to qualify his auditor’s report.

(b) If the directors refuse to sign the written representation
The auditor should ask the directors why they are refusing to sign, and the auditor should explain the following:

• It is a normal procedure for the auditor to draft the written representation letter and ask the directors to sign it.
• The audit opinion will be based mainly on audit work which does not include representations from directors. However, directors’ representations are helpful in providing further evidence that financial statements are free from material misstatement.
  If the directors still refuse to sign, the auditor should consider whether the refusal to sign the letter means that insufficient audit evidence has been obtained, particularly in respect of the completeness of revenue and validity of expenditure.
  In respect of completeness of revenue, the auditor should have carried out sufficient appropriate audit work (e.g. cut-off testing, analytical procedures, tests of controls and substantive tests) to be satisfied that revenue is not materially misstated. If such work has been carried out, the refusal to sign the letter should not, by itself, lead to a qualification of the audit opinion, as sufficient appropriate audit evidence should have been obtained from other sources.
  However, in respect of the statement that expenditure is not for the personal benefit of employees/directors, the auditor may have relied heavily on the directors’ representations, as it may be difficult to obtain other evidence in respect of this matter. If the directors refuse to sign the letter, the auditor may not have sufficient appropriate audit evidence and this may lead to a qualified opinion (on the grounds of inability to obtain sufficient appropriate audit evidence).
  Furthermore, the refusal to sign the letter may indicate that there is a more serious problem – e.g. that the directors are not being completely open with the auditor. This may cause the auditor to doubt other statements made by the directors, and may indicate that there is a fraud or that the financial statements are materially misstated. The auditor should discuss the matter with those charged with governance and consider the need to carry out additional audit procedures. If the matter remains unresolved, the auditor may need to consider whether the audit opinion should be qualified or whether the auditor should resign from the audit.