At the end of every audit, management signs a Letter of Representation, a formal letter to the auditor confirming various matters about the financial statements. It looks bureaucratic but every line has consequences.
What you'll learn
→ What the letter contains → Subsequent events → Specific assertions → Signing protocolsWhat the letter contains
Standard sections: management's responsibility for the financial statements; completeness of information provided to the auditor; existence and ownership of assets; completeness of liabilities; subsequent events disclosed; related party transactions disclosed; and (for audited entities) compliance with laws and regulations.
Each line is a representation by management that the corresponding fact is true. The auditor relies on these representations as audit evidence. False or misleading representations can result in legal and professional consequences.
Subsequent events
Events between year-end and the date of audit sign-off: significant new contracts, major customer losses, key staff departures, regulatory issues, asset impairments, lawsuits filed or threatened, financing changes. All material events must be disclosed.
The Letter of Representation typically asks management to confirm that all subsequent events have been disclosed. If something material happens between sign-off and filing, particularly between year-end and now, bring it to the auditor proactively.
Specific assertions
Common specific assertions: revenue is properly recognised in accordance with policy; inventory is stated at lower of cost and NRV; receivables are collectible to the amounts stated; provisions are adequate. The auditor adds custom assertions for specific risk areas.
Read each assertion before signing. If any assertion is not entirely true, raise it with the auditor, they may modify the assertion or perform additional procedures. Signing a false assertion is a personal liability for the signatory.
Signing protocols
Letters of Representation are signed by the most senior officers, typically the CEO and CFO, or the chairperson and managing director. The signatories must have personal knowledge of the assertions, not just signed because they are at the top.
Legal counsel sometimes review high-risk assertions before signing. For first-year audits or materially complex audits, this review is sensible. The cost is minor relative to the risk of an unconsidered signature.
This guide is general information, not professional advice. For situations that involve specific facts, talk to your accountant, or hire one of ours from the marketplace.