During an audit engagement, a CPA firm performs tests to determine whether a local auditee’s financial statements are fairly stated, in all material respects, and issues an opinion based on those tests.
In order to perform the audit and to be able to provide a clean or unmodified opinion on the financial statements, the CPA firm must gather evidence supporting the amounts and disclosures that are included in the local auditee’s financial statements.
One of the most important pieces of audit evidence the CPA obtains from the local auditee are certain statements or representations from management regarding the local auditee’s financial statements and other information that will be audited.
The CPA firm requires the local auditee to make these and other written representations to them during an audit:
- That the financial statements and other information provided to the auditor are correct and represent all of the financial transactions entered into by the local auditee during the year
- That the local auditee is aware that the local auditee is responsible for their agency’s financial statements, internal controls, and the prevention and detection of fraud
- That the local auditee has complied with all laws, regulations, and terms of contracts and grant agreements that are material or important for the local auditee to follow
- That the local auditee has disclosed to the auditor any actual or suspected instances of fraud or misappropriations that occurred during the year
These representations are given to the CPA firm in a document called the management representation letter. The CPA firm provides the local auditee with a sample letter containing all the representations they need from the local auditee. The local auditee puts the sample letter on their letterhead, and gives the signed letter to the CPA at the end of the audit.
Alternatively, the CPA firm may ask the local auditee to sign the management representation letter both at the beginning and at the end of the audit.
- Since the CPA firm that performed my agency’s audit also prepared the financial statements, wouldn’t it be more appropriate for the CPA firm to take responsibility for them?
- The CPA who is performing my agency’s audit also asked me to obtain a representation letter from my agency’s legal counsel regarding any litigation my agency is involved in. Is this a normal request?
- I am the chief executive officer of a local auditee. I don’t want to sign the management representation letter because I was not employed by the local auditee during the period under audit. Is there something else I can do so that my agency receives a clean opinion on its audit report?
- I am the chief executive officer of a local auditee. I am comfortable signing some parts of the management representation letter, but not all of it. What should I do?
- Is a local auditee required to sign a management representation letter for a review/attestation or compilation engagement?
- The CPA firm that performed my audit never requested the management representation letter you are describing. Is this something I should be concerned about?