What type of opinion should be expressed if the clients management refuses to provide a representation that the auditor considers necessary?

The Institutes guidance on client representations had a good 20-year run, but its been replaced by a new model with a few changes and even some custom features. The new SAS no. 85, Management Representations , supersedes SAS no. 19, Client Representations , and its interpretation no. 2, Management Representations When Current Management Was Not Present During the Period Under Audit . The new SAS acknowledges the changes in auditing practice and the audit environment over the past two decades.

Reliance On Management Representations
Both the old and new statements explain that management will make various representations to the auditor throughout the course of an audit, mainly as a response to specific questions or through the financial statements themselves. Both also say such management representations, while part of the evidential matter obtained during an audit, are not substitutes for appropriate auditing procedures necessary to afford a reasonable basis for an opinion regarding the financial statements under audit.

However, SAS no. 85 includes new guidance requiring the auditor to investigate the circumstances and consider the reliability of a representation made if other audit evidence contradicts that representation. In such a case, an auditor should consider whether the reliance placed on other management representations is appropriate and justified.

Obtaining Written Representations
SAS no. 85 says an auditor should obtain written representations for all financial statements and periods covered by the auditors reporta concept originally appearing in an appendix to SAS no. 19. The ASB, to reduce misunderstandings and misapplications, placed the guidance into the main body of SAS no. 85.

The new statement includes a list of specific management representations that are consistent with representations auditors are obtaining in current practice. These include information concerning fraud as referred to in SAS no. 82, Consideration of Fraud in a Financial Statement Audit , and significant estimates and material concentrations required under SOP 94-6, Disclosure of Certain Significant Risks and Uncertainties .

Also required now is a management representation stating it is managements belief that the financial statements are fairly presented in conformity with GAAP (or a comprehensive basis of accounting other than GAAP). An illustrative management representation letter provides an example of how management could present this.

Small, privately owned companies with no accounting staff and limited knowledge of GAAP may place a certain level of reliance on the auditors for the fair presentation of the financial statements. Such clients often are reluctant to make representations regarding GAAP without mentioning their reliance on the auditors. In such a case, an auditor may suggest that the client include wording in the representation letter similar to the following: I am responsible for the fair presentation in the financial statements of financial position, results of operations, and changes in financial position in conformity with generally accepted accounting principles. Because of my limited expertise with generally accepted accounting principles, including financial statement disclosure, I have engaged you to advise me in fulfilling that responsibility.

Tailoring
The new statement encourages representation letters tailored for individual businesses or industries. Appendix B, Additional Illustrative Representations, includes a list of other representations that practitioners may find appropriate in certain situations. The appendix is not all-inclusive, however, and auditors and management should review pronouncements issued subsequent to SAS no. 85 for inclusion in the representation letter. Also, certain AICPA audit guides recommend obtaining representations unique to particular industries.

Materiality
SAS no. 85, like SAS no. 19, discusses materiality. The new SAS provides guidance on materiality levels that may be stated explicitly, either qualitatively or quantitatively, in the representation letter. When considering materiality, the client and the auditor should realize that certain representations not directly related to amounts included in the financial statements should not be subject to materiality limits. Such representations include managements acknowledgment of its responsibility for the fair presentation of the financial statements, the availability of all financial records and information concerning fraud with respect to management or employees who have significant roles in internal control. The illustrative management representation letter includes a sample paragraph containing a qualitative discussion of materiality. The auditor and the client also can agree to a quantitative amount of materiality to be stated in the representation letter.

Dating

The ASB noted a wide diversity in practice for dating the letter, so it added language in SAS no. 85 as guidance when the client signs the letter after the date of the auditors report. Since the auditor is concerned with events that have occurred through the date of the reportwhich may require adjustment to or disclosure in the financial statementsthe managements representations should be made as of a date no earlier than the date of the report. The illustrative management representation letter includes the following wording management could use when dating the representations: We confirm, to the best of our knowledge and belief, [as of (date of auditors report),] the following representations made to you during your audit(s). This wording is appropriate when the letter is dated subsequent to the date of the auditors report.

Also, if the audit report is dual dated, the auditor should consider whether a representation regarding the subsequent event is appropriate. The auditor is referred to the guidance found in paragraph .05 of AU section 530, Dating of the Independent Auditors Report, in AICPA Professional Standards .

Updating Representations Letters
SAS No. 85 includes guidance on when an auditor should obtain an updated representation letter from management:

• When a predecessor auditor is requested by a former audit client to reissue (or consent to the reuse of) his or her report on the financial statements of a prior period and those financial statements are to be presented on a comparative basis with audited financial statements of a subsequent period.
• When performing subsequent events procedures in connection with filings under the Securities Act of 1933, in accordance with SAS no. 37, Filings Under Federal Securities Statutes .

SAS no. 85 also describes the matters to include in an updating management representation letter. The letter should say whether

• Any information has come to managements attention that would cause it to believe that any of the previous representations should be modified.
• Any events have occurred subsequent to the balance sheet date of the latest financial statements reported on by the auditor that would require adjustment to or disclosure in those financial statements.

SAS no. 85 includes an illustrative updating management representation letter in Appendix C. Appendix D, Amendment to SAS No. 58, Reports on Audited Financial Statements includes a revision to AU sec. 508.71 which reflects the above guidance now found in SAS no. 85.

Scope Limitations
A scope limitation occurs if management refuses to provide the auditor with a representation letter; this is sufficient to preclude issuing an unqualified opinion. In fact, this refusal is ordinarily sufficient to cause the auditor to disclaim an opinion or withdraw from the engagement. However, based on certain factors, such as the type of representations not obtained or the circumstances of the refusal, the auditor may believe that disclaiming or withdrawing is not necessary and issuing a qualified opinion is the best course.

If management does not allow the auditor to perform necessary procedures during the audit, even if management provides a representation regarding the matter, the auditor should consider this a scope limitation and either issue a qualified opinion or disclaim an opinion.

Effective Date
SAS no. 85, Management Representations , is effective for audits for periods ending on or after June 30, 1998.

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