Written representations are formal statements provided by management to confirm key aspects of financial reporting. While they play an essential role in supporting the auditor’s evidence-gathering process, situations may arise where the auditor has doubts about their reliability. Such doubts may stem from inconsistencies between written representations and other audit evidence, concerns about management’s integrity, or insufficient detail in the representations themselves. Auditors are required to exercise professional skepticism and take additional steps to resolve these doubts, which may include obtaining further evidence, engaging in discussions with those charged with governance, or modifying the audit opinion. This article explores the factors that can lead to doubts about the reliability of written representations, how auditors should address these concerns, and best practices to ensure audit integrity.
1. Importance of Evaluating the Reliability of Written Representations
Assessing the reliability of written representations is crucial for ensuring that audit conclusions are based on credible evidence and that the financial statements accurately reflect the entity’s financial position.
A. Supporting the Integrity of the Audit Process
- Ensuring Credible Evidence: Doubts about written representations can undermine the credibility of audit evidence, potentially leading to incorrect audit conclusions.
- Maintaining Professional Skepticism: Evaluating the reliability of representations ensures that auditors maintain professional skepticism, a core principle of auditing standards.
B. Protecting Stakeholders’ Interests
- Accurate Financial Reporting: Ensuring the reliability of written representations helps prevent material misstatements and protects stakeholders who rely on accurate financial information.
- Mitigating Audit Risks: Identifying and addressing doubts about written representations reduces the risk of audit failures and potential legal or regulatory consequences.
C. Ensuring Compliance with Auditing Standards
- Adherence to ISA 580 and GAAS: Auditing standards require auditors to assess the sufficiency and appropriateness of audit evidence, including written representations.
- Regulatory Compliance: Proper evaluation of written representations ensures compliance with legal and regulatory requirements, reducing audit liability.
2. Factors Leading to Doubt About the Reliability of Written Representations
Several factors can lead auditors to question the reliability of written representations, ranging from inconsistencies in audit evidence to concerns about management’s integrity.
A. Inconsistencies with Other Audit Evidence
- Contradictory Evidence: Written representations that conflict with evidence obtained through substantive testing, analytical procedures, or external confirmations raise immediate concerns.
- Unresolved Discrepancies: Persistent discrepancies between written representations and other audit findings suggest potential issues with the accuracy of management’s assertions.
B. Concerns About Management’s Integrity
- History of Misstatements or Fraud: A history of financial misstatements, fraud, or unethical behavior by management raises significant doubts about the reliability of their representations.
- Bias or Conflict of Interest: Management may have incentives to misrepresent financial information, such as performance-based compensation or pressure to meet financial targets.
C. Insufficient or Vague Representations
- Lack of Specificity: Generic or vague language in written representations, without sufficient detail, reduces their reliability as audit evidence.
- Omission of Key Information: Failure to address critical areas, such as related party transactions, contingent liabilities, or going concern risks, undermines the credibility of the representations.
D. Refusal to Provide Written Representations
- Unwillingness to Confirm Information: Management’s refusal to provide written representations, or their reluctance to sign the representation letter, suggests potential issues with the validity of the information provided.
- Delays in Submission: Delays in providing written representations without reasonable justification can indicate underlying concerns about the accuracy of the information.
3. Auditor’s Response to Doubts About the Reliability of Written Representations
When doubts arise about the reliability of written representations, auditors must take proactive steps to resolve these concerns and ensure the integrity of the audit process.
A. Obtaining Additional Audit Evidence
- Performing Additional Substantive Procedures: Conduct further testing or analysis to corroborate the information provided in the written representations.
- Seeking External Confirmations: Obtain confirmations from third parties, such as banks, legal counsel, or customers, to verify management’s assertions.
B. Engaging in Discussions with Management and Governance
- Clarifying Discrepancies: Discuss any inconsistencies or concerns with management to obtain clarification and additional supporting evidence.
- Involving Those Charged with Governance: If doubts persist, escalate the issue to those charged with governance, such as the audit committee or board of directors, for further investigation.
C. Reevaluating the Audit Risk Assessment
- Reassessing Audit Risks: Consider whether doubts about written representations indicate broader risks of material misstatement or fraud.
- Adjusting the Audit Approach: Modify the audit strategy and scope to address increased risks, including expanding testing or focusing on specific high-risk areas.
D. Considering the Impact on the Auditor’s Report
- Modifying the Audit Opinion: If doubts about the reliability of written representations cannot be resolved, the auditor may need to issue a qualified opinion, adverse opinion, or disclaimer of opinion.
- Including an Emphasis of Matter or Other Paragraph: In cases where specific issues are identified but do not affect the overall opinion, include additional paragraphs in the auditor’s report to highlight these concerns.
4. Implications of Doubt About Written Representations on the Audit Process
Doubts about the reliability of written representations have significant implications for the audit process, affecting audit conclusions, risk assessments, and reporting obligations.
A. Increased Audit Risk and Scope
- Higher Risk of Material Misstatement: Doubts about written representations may indicate an increased risk of material misstatement, requiring additional audit procedures.
- Expanded Audit Scope: Auditors may need to expand the scope of the audit to address areas where representations are unreliable, increasing the time and resources required for the audit.
B. Potential for Modified Audit Opinions
- Qualified or Adverse Opinions: If written representations are unreliable and other sufficient evidence cannot be obtained, auditors may issue a qualified or adverse opinion.
- Disclaimer of Opinion: In cases where the scope limitation is pervasive, and the auditor cannot obtain sufficient appropriate evidence, a disclaimer of opinion may be necessary.
C. Impact on Auditor-Client Relationships
- Strained Relationships: Raising concerns about the reliability of written representations may strain relationships with management, particularly if disagreements arise.
- Reputation and Legal Implications: Failure to address doubts about written representations can damage the auditor’s reputation and expose them to legal or regulatory action.
5. Best Practices for Addressing Doubts About Written Representations
Adopting best practices helps auditors effectively address doubts about written representations, ensuring the integrity and reliability of the audit process.
A. Maintaining Professional Skepticism
- Questioning Management’s Assertions: Consistently apply professional skepticism when evaluating written representations, especially in areas involving judgment or estimates.
- Challenging Inconsistencies: Do not accept written representations at face value if they conflict with other audit evidence or raise concerns.
B. Enhancing Communication with Management and Governance
- Clarifying Expectations Early: Communicate the importance and role of written representations early in the audit process to ensure management’s understanding and cooperation.
- Escalating Issues When Necessary: Engage with those charged with governance when significant doubts arise, ensuring that concerns are addressed at the appropriate level.
C. Corroborating Representations with Substantive Evidence
- Obtaining External Confirmations: Use third-party confirmations to verify key assertions in written representations, enhancing their reliability.
- Performing Additional Testing: Conduct additional substantive procedures to corroborate management’s assertions and resolve doubts.
D. Documenting and Reporting Concerns
- Comprehensive Documentation: Document all concerns, discussions, and additional procedures related to doubts about written representations in the audit file.
- Transparent Reporting: Clearly disclose any unresolved issues in the auditor’s report, using appropriate modifications or additional paragraphs to inform stakeholders.
6. Ensuring Audit Integrity Through Vigilant Evaluation of Written Representations
Written representations are a critical part of the audit process, but their reliability must be carefully evaluated to ensure the integrity of financial reporting. When doubts arise, auditors must exercise professional skepticism, obtain additional evidence, and engage with management and governance to resolve concerns. By following best practices, including corroborating representations with substantive evidence and maintaining transparent communication, auditors can address potential risks and ensure that their conclusions are based on credible, reliable information. This approach not only ensures compliance with auditing standards but also reinforces the trust of stakeholders in the financial statements and the audit process.