#21 Management Representations – Flashcards

b. The belief that misstatements identified by the auditor and not corrected are immaterial. Choice "b" is correct. The representation letter should include management's belief that the effects of any uncorrected financial statement misstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. Choice "c" is incorrect. Management states its belief that the financial statements are fairly presented in conformity with GAAP. Fair presentation does not mean that the financial statements are completely accurate in all respects, but that they are accurate in all material respects.

a. Auditor's report. Choice "a" is correct. Because the auditor is concerned with events occurring through the date of the audit report that may require adjustment to or disclosure in the financial statements, the management representation letter should be dated as of the date of the auditor's report. Choice "c" is incorrect. The management representation letter is dated as of the date of the auditor's report, which is generally after the balance sheet date.

d. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed. Choice "d" is correct. The purpose of the management representation letter is to confirm management's oral evidence supplied during the engagement. Specific written representations obtained by the auditor might include acknowledgment that all compensating balances or other restrictions on cash have been disclosed. Choice "a" is incorrect. Management is responsible for the design and maintenance of internal control of the company, but it is the auditor who must determine whether material weaknesses in internal control exist.

b. Audit tests detect material fraud that was known to management, but not disclosed to the auditor. Choice "b" is correct. Management is required to disclose all material matters to the independent auditor, including information concerning material fraud. This disclosure is so important that it is included in writing, in the management representation letter. Failure of management to disclose material fraud to the auditor would cause the auditor to question management's integrity and perhaps even to withdraw from the engagement. Choice "a" is incorrect. While management's aggressive attitude certainly constitutes a fraud risk, this alone would not necessarily cause the auditor to question management's integrity. It is possible for management to be both aggressive and ethical.

b. Instances of fraud involving management. Choice "b" is correct. Materiality limits do not apply to client representations involving management fraud. The management representation letter generally indicates that "we have no knowledge of fraud or suspected fraud involving management" (without reference to materiality). The only mention of material fraud relates to situations involving parties other than management. Choice "a" is incorrect. Materiality limits do apply to violations of state labor regulations. The management representation letter generally indicates that there are no violations of regulations "whose effects should be considered for financial statement disclosure"−and only material effects would typically be considered for disclosure.

d. Management has the responsibility for the design of controls to detect fraud. Choice "d" is correct. Management acknowledges its responsibility for the design of controls to detect and prevent fraud in its management representation letter. Choice "c" is incorrect. The management representation letter is concerned with representations made by management to the auditors, not representations made by management to the audit committee.

a. Discontinue a line of business. Choice "a" is correct. A written client representation letter should include representations regarding matters that may affect recognition, measurement, and disclosure. Management's plans to discontinue a line of business may affect financial statement disclosure, since the results of operations of a component classified as "held for sale" would be reported separately in the income statement under "discontinued operations." Choice "d" is incorrect. A letter from the client's attorney most likely would be an auditor's best source of corroborative information of a client's plans to settle an outstanding lawsuit for an amount less than the accrued loss contingency.

c. Refuses to furnish a management representation letter to the auditor. Choice "c" is correct. Management's refusal to furnish a written representation letter constitutes a limitation on the scope sufficient to preclude an unmodified opinion. Choice "d" is incorrect. Inability to review the predecessor's prior year audit documentation may cause the successor auditor more work but need not preclude an unmodified opinion in the current year.

b. The possibility of a misunderstanding concerning management's responsibility for the financial statements. Choice "b" is correct. A primary purpose of a management representation letter is to reduce the possibility of a misunderstanding concerning management's responsibility for the financial statements. The first representation made in the letter states "we have fulfilled our responsibilities, as set out by the audit engagement dated [xxx], for the preparation and fair presentation of the financial statements in accordance with U.S. GAAP." Choice "c" is incorrect. The management representation letter confirms oral representations made by management but does not have an effect on audit risk.