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. 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.
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.
In such a case, an auditor should consider whether the reliance placed on other management representations is appropriate and justified. 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. The ASB, to reduce misunderstandings and misapplications, placed the guidance into the main body of SAS no. 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. 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).
The illustrative management representation letter includes a sample paragraph containing a qualitative discussion of materiality.
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.
The new statement encourages representation letters tailored for individual businesses or industries. The new SAS provides guidance on materiality levels that may be stated explicitly, either qualitatively or quantitatively, in the representation letter.