Written Representation Evaluation by Auditor

(a) Classification of certain items reported in the financial statements is based on the management’s intentions. In such a situation the auditor has to rely on management representations.

Required:

List the factors that the auditor should consider in evaluating the management’s intentions with regard to their future course of action, as stated in their written representations.

(b) Briefly discuss how the auditor would deal with a situation where he is in doubt regarding the reliability of the written representations provided by the management of the company.

Auditor forum has already discussed written representation through Management Written Representation and its Reliability in Auditing (ISA-580) . Here we will discuss evaluation of management written representation.

(a) Factors that the auditor would consider when obtaining evidences about or evaluating the intentions of the management:

  • When obtaining evidence about, or evaluating, judgments and intentions, the auditor may consider one or more of the following:
  • The entity’s past history in carrying out its stated intentions.
  • The entity’s reasons for choosing a particular course of action
  • The entity’s ability to pursue a specific course of action.
  • The existence or lack of any other information obtained during the course of the audit that may be inconsistent with management’s judgment or intent.
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Written Representation and reliability

(b) How the auditor would deal with a situation where he is in doubt as regards the reliability of the written representation provided by the management of the company:

The doubt as regards management’s representation can be on account of several different reasons. Auditor’s response in each situation is described below:

If there is inconsistency between one or more written representations and audit evidence is obtained from another source, the auditor may consider whether the risk assessment remains appropriate and, if not, revise the risk assessment and the nature, timing and extent of further audit procedures to respond to the assessed risk.

If the matters relates to the competence, integrity, ethical values, diligence and commitment of management, the auditor may conclude that the audit cannot be conducted. In such a situation, the auditor may consider withdrawing from the engagement and if withdrawal is not possible, he may disclaim an opinion.

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