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    SA 580 - Written Representations

    Introduction

    As Ronald Regan rightly said, “Trust, but Verify”.The fact that one has to trust beyond oneself is more of a psychological challenge. 

    As per section 143(3)(a) of the Companies Act,2013 the auditor’s report shall also state whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements. 

    Section 143(9) stated every auditor shall comply with the auditing standards. 

    As per Section 147 of Companies Act,2013 If an auditor of a company contravenes any of the provisions of section 139, section 143, section 144 or section 145, the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees. 

    According to SA 200 “Basic Principles Governing an Audit” Audit is the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon. 

    This Standard on Auditing (SA) deals with the auditor’s responsibility to obtain written representations from management and, where appropriate, those charged with governance. 

    List of Auditing Standards Containing requirements of Written Representations 

    SA 230 – Audit Documentation 

    SA 240 – The Auditor’s Responsibility relating to fraud in an Audit of Financial Statements SA 250 – Consideration of Laws and Regulations in an Audit of Financial Statements 

    SA 260 – Communication with the those charged with Governance SA 450 – Evaluation of Misstatements Identified during Audit 

    SA 501 – Audit Evidence- Specific Considerations for Selected Items

    Sa540 –Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures 

    SA 550 – Related Parties

    SA 570 – Going Concern 

    Effective Date: This SA 580 is effective for audits of financial statements for periods beginning on or after 1st April, 2009. 

    Meaning of Written Representation 

    • A written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. 
    • Written representations in this context do not include financial statements, the assertions therein, or 
    • Supporting books and records. 

    Written Representations as a tool of Audit evidence 

    • Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Accordingly, similar to responses to inquiries, written representations are audit evidence. 
    • Written representations provide audit evidence, they do not provide “Sufficient and appropriate Audit evidence”. 
    • Written representations do not dilute auditor’s responsibility to obtain other audit evidence for matters covered by Written representations. 

    When is the Written Representation given? 

    An auditor has to obtain the written representation letter, before completion of the assignment; to ensure he has adequate information before an opinion is formed. i.e. 

    • The date of written representations shall be before the date of auditor’s report on the financial statements. 
    • Written representations should cover for all Financial statements and period’s referred to in the Audit report. 

    Management Responsibilities towards Written representations 

    • That Management has fulfilled its Responsibility towards Preparation and Presentation of Financial Statements. 
    • That It Has Provided the auditor all the information and access to all the records of the entity.
    • Situation that current management were not present during all period’s referred to in the auditor’s report. And they may tell the Auditor that they are not in a position to give the Written representation. This fact however will not diminish the present management of its responsibilities towards the financial statements. 

    From whom written representations to be obtained? 

    • The Auditor shall request written representations from management with appropriate responsibilities for the financial statements and knowledge the matters concerned. 
    • In some cases, Written Representations may also be taken from a person who have specialized knowledge relating to the matters about which the written representations are requested who may include: 
    • Anactuary responsible for actuarially determined accounting measurements.
    • ?Staffengineers who may have responsibility for and specialized knowledge about environmental liability measurements.
    • ?Internalcounsel who may provide information essential to provisions for legal claims. 

    Case Law: 

    Barings Future Singapore Vs Deloitte & Touché Singapore [2002] All ER (D) Mar

    A Decision in the preliminary hearing concerning the audit by Deloitte & Touché (D & T) of Barings Futures Singapore Pvt ltd(BFS).It was noted in the course of the Bearings hearing that the BFS director who signed the Representation letters in question had little knowledge or understanding of the activities. However, the director made written statements to the effect that there had been no irregularities involving management or having material effect on the financial systems, and that the financial statements were free of material errors and omissions. 

    On this basis, Deloitte claimed that the representations by the BFS director were Recklessly fraudulent. Deloitte’s claim failed, however, because they did not establish to the judge’s satisfaction that the BFS director signed the representation letters: 

    • Knowing that the statements in the letters were untrue, without an honest belief in their Truth, or indifferent as to whether or not they were True; 
    • Knowing that he had no reasonable grounds for making statements, without an honest belief that he had reasonable grounds, or indifferent as to whether he had or not. 

    The Judge did, however, address the issue of the result if the Deloitte had proved that, in signing the representation letters, the director was reckless of their truth or falsity. He concluded that, had such a case for fraudulent misrepresentation been established, he would have held that he BFS was vicariously liable for the director’s action, and thus Deloitte would have succeeded in their claim. 

    Is there any format for Written representation letter? 

    Written Representation letter is addressed to the auditor on the entities letter head. 

    If law or regulation requires management to make written public statements about its responsibilities, the relevant matters covered by such statements need not be included in the representation letter. 

    Auditor to consider these Factors for above

    1.Includes the matters covered in terms of audit engagement

    2.That above Written representation is given by the person from whom the auditor wants the Representation. 

    3.Copy provided to auditor before the date of audit report 

    SA 580 gives an illustrative format for the letter, but this may be modified to suit the audit requirements. 

    The idea of the representation letter, is to address the grey areas where information is inadequate and is not known to outsiders. But when information is already available for example, CFO and CEO of a listed company are required to certify that the internal controls are in place is a SEBI requirement as per Clause 49 of the Listing Agreement pertaining to ‘Corporate Governance’, and is also disclosed in the Annual Report, need not be mentioned in the Representation letter.

     

     

    What if representations are not provided?

    1.Discuss the matter with Management 

    1. Re-evaluate integrity of management

    3.Evaluate effect on reliability of representations &audit evidence

    4.Take appropriate actions and determine the possible effect on the opinion in the auditor’s report in accordance with SA 705 

    Doubts as to the reliability of Written Representations

     

    SA - 580

     

    The auditor has concerns about the competence, Integrity, ethical values, or diligence of management

     It may cause the auditor to conclude that the risk of Management Misrepresentation in the financial statements. 

    Withdraw from the engagement, unless Those charged with governance take corrective measures 

    Such measures, may not be sufficient to enable the auditor to issue unmodified audit opinion Written representations are

     Inconsistent with other audit evidence

    Conduct further audit

    procedures to resolve

    inconsistency

    Consider the adequacy of risk

    assessment

     SA 230 requires the auditor to document significant matters like the conclusions reached thereon, professional judgements made in reaching those conclusions 

    Conclusion: 

    “Let every eye negotiate for itself and trust no agent”, so said Shakespeare in Much Ado About Nothing. The management of the company is well informed about the internal environment and day to day activities of the company as compared to the auditor who visits the company for a comparative short duration to conduct the audit. In such situation, the auditor has to discuss with the management and in certain cases relay on the management’s view / discussion while forming opinion on the financial statement. Thus, as important audit evidence regarding the information provided by management, a written representation should be taken from the management of the company. 

    "Don't make excuses for why you can't get it done. Focus on all the reasons why you must make it happen" - Ralph Marstoon

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