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Clarified Auditing Standards: Written Representations – Part 2

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Sep 17th 2015
CPA Firm Support Services, LLC
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Part 1 of this article covered the basic requirements of AU-C Section 580. This part contains some additional guidance and an illustrative management representation letter.

Written Representations about Management's Responsibilities

Disclaiming an opinion or withdrawing from the engagement. The auditor should disclaim an opinion on the financial statements in accordance with AU-C Section 705, Modifications to the Opinion in the Independent Auditor's Report, or withdraw from the engagement if the auditor concludes that sufficient doubt exists about the integrity of management such that the written representations required are not reliable or management does not provide the written representations required.

Requested written representations not provided. When management does not provide one or more of the requested written representations, the auditor should:

  • Discuss the matter with management.
  • Re-evaluate the integrity of management and evaluate the effect that this may have on the reliability of representations (oral or written) and audit evidence in general.
  • Take appropriate actions, including determining the possible effect on the opinion in the auditor's report in accordance with AU-C Section 705.

Illustrative Representation Letter

To Largess, Ottiter & Co. CPAs

March 15, 2016

This representation letter is provided in connection with your audit of the financial statements of Always Best Corporation, which includes the balance sheet as of December 31, 2015, and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements, for the purpose of expressing an opinion on the fair presentation of financial statements in accordance with accounting principles generally accepted in the United States (US GAAP).

Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that makes it probable that the judgment of a reasonable person relying on the financial statements would be changed or influenced by the omission or misstatement.

Except where otherwise stated below, immaterial matters less than $10,000 collectively are not considered to be exceptions that require disclosure for the purpose of the following representations. This amount is not necessarily the same threshold as for adjustments to or disclosures in the financial statements.

We confirm that as of December 31, 2015:

Financial Statements:

1. We have fulfilled our responsibilities in the engagement letter dated November 15, 2015, for the preparation and fair presentation of the financial statements in accordance with US GAAP.

2. We acknowledge our responsibility for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements free from material misstatement due to fraud or error.

3. We acknowledge our responsibility for the design, implementation, and maintenance of internal controls for fraud detection and prevention.

4. Significant assumptions used by us in making accounting estimates are reasonable, including fair value estimates.

5. Related party relationships and transactions have been appropriately accounted for and disclosed as required by US GAAP.

6. All events subsequent to the date of the financial statements for which US GAAP requires adjustment or disclosure have been adjusted or disclosed.

7. The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements as a whole. A list of the uncorrected misstatements is attached to this representation letter (an Error Analysis Form or Audit Difference Evaluation Form).

8. The effects of all known actual or possible litigation and claims have been accounted for and disclosed in accordance with US GAAP.

9. Any other matters the auditor may consider appropriate (see illustrations in Exhibit B in AU-C Section 580):

  • Unaudited interim information accompanies the statements.
  • The effect of a new accounting principle is not known.
  • Uncertainties as to the going-concern assumption exist.
  • The value of certain long-lived tangible or intangible assets may be impaired.
  • The Corporation has a variable interest in another entity.
  • The work of a specialist has been used by management.
  • Other assets, liabilities, or equity issues (detailed in Exhibit B of AU-C Section 580).

Information Provided:

1. We have provided you with:

  • Access to all information, of which we are aware, that is relevant to the preparation and fair presentation of the financial statements, such as records, documentation, and other matters.
  • Additional information that you have requested from us for the purpose of the audit.
  • Unrestricted access to persons within the entity from whom you determined it necessary to obtain audit evidence.

2. All transactions have been recorded in the accounting records and are reflected in the financial statements.

3. We have disclosed to you the results of our assessment of the risk that the financial statements may be materially misstated as a result of fraud.

4. We have no knowledge of any fraud or suspected fraud that affects the entity and involves management, employees who have significant roles in internal control, or others when the fraud could have a material effect on the financial statements.

5. We have no knowledge of any allegations of fraud, or suspected fraud, affecting the entity's financial statements communicated by employees, former employees, analysts, regulators, or others.

6. We have disclosed to you all known instances of noncompliance or suspected noncompliance with laws and regulations whose effects should be considered when preparing financial statements.

7. We have disclosed to you all known actual or possible litigation, claims, and assessments whose effects should be considered when preparing the financial statements.

8. We have disclosed to you the identity of the entity's related parties and all the related party relationships and transactions of which we are aware.

9. Other matters: (From Exhibit B of AU-C Section 580).

Don West

Don West, President

Wilbur Smith

Wilbur Smith, Chairman of the Board

Illustrative Updating Representation Letter

May 1, 2016

To Largess, Ottiter & Co. CPAs

In connection with your audit of the financial statements of Always Best Corporation as of December 31, 2015, and for the period then ending for the purpose of expressing an opinion as to whether the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of Always Best Corporation in accordance with accounting principles generally accepted in the United States, you were previously provided with a representation letter as of March 15, 2016.

No information has come to our attention that would cause us to believe that any of those previous representations should be modified. To the best of our knowledge and belief, no events have occurred subsequent to December 31, 2015, and through the date of this letter that would require adjustment to or disclosure in the aforementioned financial statements.

Don West

Don West, President

Wilbur Smith

Wilbur Smith, Chairman of the Board

More Information
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Related article:

Clarified Auditing Standards: Written Representations – Part 1

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