Internatinal Auditing and Assurance Standards Bard Expsure Draft December 2006 Cmments are requested by April 30, 2007 Prpsed Revised and Redrafted Internatinal Standard n Auditing ISA 580, Written Representatins
REQUEST FOR COMMENTS The Internatinal Auditing and Assurance Standards Bard (IAASB), an independent standardsetting bdy within the Internatinal Federatin f Accuntants (IFAC), apprved the expsure draft, prpsed Internatinal Standard n Auditing (ISA) 580 (Revised and Redrafted), Written Representatins, fr publicatin in December 2006. The prpsed ISA may be mdified in light f cmments received befre being issued in final frm. Please submit yur cmments, preferably by e-mail, s that they will be received by April 30, 2007. All cmments will be cnsidered a matter f public recrd. Cmments shuld be addressed t: Executive Directr, Prfessinal Standards Internatinal Auditing and Assurance Standards Bard Internatinal Federatin f Accuntants 545 Fifth Avenue, 14 th Flr New Yrk, New Yrk 10017 USA Email respnses shuld be sent t: Edcmments@ifac.rg Cpies f the expsure drafts may be dwnladed free-f-charge frm the IFAC website at http://www.ifac.rg. Cpyright December 2006 by the Internatinal Federatin f Accuntants. All rights reserved. Permissin is granted t make cpies f this wrk t achieve maximum expsure and feedback prvided that each cpy bears the fllwing credit line: Cpyright December 2006 by the Internatinal Federatin f Accuntants. All rights reserved. Used with permissin. 2
CONTENTS Page Explanatry Memrandum... 4 Intrductin... 4 Backgrund... 4 Significant Prpsals... 4 Effective Date... 6 Guide fr Respndents... 6 Expsure Draft Prpsed Internatinal Standard n Auditing (ISA) 580 (Revised and Redrafted), Written Representatins... 9 Prpsed Cnfrming Amendments... 24 3
Intrductin EXPLANATORY MEMORANDUM This memrandum prvides backgrund t, and an explanatin f, the prpsed Internatinal Standard n Auditing (ISA) 580 (Revised and Redrafted), Written Representatins, apprved fr expsure by the Internatinal Auditing and Assurance Standards Bard (IAASB) in December 2006. Backgrund The IAASB cmmenced this prject in April 2004 in respnse t develpments that indicated a need t revise extant ISA 580, Management Representatins. These included cncerns that auditrs may be ver relying n written representatins. During the prject, the IAASB cnsidered matters such as the reasns fr btaining written representatins, the evidence that they prvide, and frm whm they shuld be requested. The IAASB believes that the prpsed revised ISA will enhance auditr perfrmance in an audit f financial statements thrugh mre stringent requirements and expanded guidance. Significant Prpsals Relevant Parties Diversity f the authrity r respnsibility f management and thse charged with gvernance acrss jurisdictins makes it difficult t establish universal identificatin f the persns frm whm the auditr shuld request written representatins. Furthermre, individuals ther than management r thse charged with gvernance may have specialized knwledge abut specific assertins in the financial statements. The prpsed revised ISA therefre requires the auditr t determine relevant parties frm whm written representatins (bth general and specific, see belw) shuld be requested. Relevant parties are t be requested t prvide the written representatins based n their knwledge and belief, having made apprpriate inquiries t be able t prvide such representatins. General Written Representatins The IAASB is f the view that an audit f financial statements in accrdance with the ISAs is based n the fundamental premises that management is respnsible fr (a) preparing and presenting the financial statements in accrdance with the applicable financial reprting framewrk; (b) designing, implementing and maintaining internal cntrl relevant t preparing and presenting financial statements that are free frm material misstatement, whether due t fraud r errr; and (c) the cmpleteness f infrmatin made available t the auditr. The IAASB acknwledges that legislatin, the applicable financial reprting framewrk, r custm may establish management s specific respnsibilities fr preparing and presenting the financial statements. Hwever, the extent f thse respnsibilities may differ acrss jurisdictins. The IAASB therefre prpses that ISA 200, Objective and General Principles Gverning an Audit f Financial Statements be amended t explain that ISAs are written, and audits are cnducted, based n the abvementined premises. 4
EXPLANATORY MEMORANDUM There is a risk that the premises may nt be understd by management r, where apprpriate, thse charged with gvernance. T avid misunderstanding, a prpsed cnfrming amendment t ISA 210, Terms f Audit Engagements requires the auditr t btain the acknwledgement and agreement f management and, where apprpriate, thse charged with gvernance that they understand the respnsibilities. The prpsed revised ISA requires the auditr t request relevant parties t prvide general written representatins abut the premises (see paragraphs 8-10.) Audit evidence btained during the audit may supprt r cntradict the validity f the premises; hwever, such evidence is nt sufficient withut btaining the general written representatins. This is because the auditr may nt be able t judge management s knwledge, judgments r intentins slely n ther audit evidence. When relevant parties d nt prvide the general representatins requested by the auditr, r where the auditr cncludes that such representatins are nt reliable, the IAASB is f the view that the auditr is unable t btain sufficient apprpriate audit evidence, and that the pssible effects n the financial statements f such inability are pervasive. The auditr therefre is required t disclaim an pinin n the financial statements in such circumstances. The prpsed revised ISA, hwever, explains that a general written representatin that has been mdified frm that requested by the auditr des nt necessarily mean that relevant parties did nt prvide the representatin. The reasn fr the mdificatin nevertheless may affect the pinin in the auditr s reprt. (See paragraph A19.) Specific Written Representatins Extant ISA 580 requires the auditr t btain written representatins n matters material t the financial statements when ther sufficient apprpriate audit evidence cannt reasnably be expected t exist. T avid ver reliance n written representatins, the prpsed revised ISA requires the auditr t btain written representatins regarding specific assertins in the financial statements ( specific written representatins ) when the auditr cnsiders it necessary t crrbrate ther audit evidence. These specific written representatins are in additin t thse required in accrdance with the ther ISAs. Specific written representatins are particularly relevant in relatin t assertins that invlve judgment r intent, r that may nt be cmplete. They d nt cnstitute sufficient apprpriate audit evidence by themselves and, accrdingly, they d nt relieve the auditr f the respnsibility t btain ther audit evidence. When relevant parties d nt prvide specific written representatins requested by the auditr, the IAASB is f the view that it cnstitutes a scpe limitatin. Where this is the case, the auditr is required t cnsider the effect theref n the pinin in the auditr s reprt. Threshld Amunt The IAASB is f the view that, in sme circumstances, the auditr may decide that it wuld be mre effective if the written representatins were limited t matters abve threshld amunts established by the auditr fr the purpses f such representatins, having given effect t the pssibility f immaterial matters aggregating t becme material. The prpsed revised ISA therefre prvides guidance in this regard, indicating that the auditr may cnsider agreeing the threshld amunts with relevant parties. (See paragraph A16.) 5
EXPLANATORY MEMORANDUM Effective Date The IAASB will determine the effective date f the final ISA after cnsidering the cmments received n expsure. It is nt envisaged that this date will be earlier than December 15, 2008. Guide fr Respndents The IAASB welcmes cmments n the prpsed revised ISA. Apart frm the request fr specific cmments set ut belw, the IAASB is seeking cmments n all matters addressed in the expsure draft. Cmments are mst helpful when they refer t specific paragraphs, include the reasns fr the cmments and, where apprpriate, make specific suggestins fr any prpsed changes t wrding. When a respndent agrees with prpsals in this expsure draft (especially thse calling fr change in current practice), it will be helpful fr the IAASB t be made aware f this view. Request fr Specific Cmments General Written Representatins Regarding the Financial Statements and Internal Cntrl In apprving the prpsed revised ISA fr public cmment, sme IAASB members were cncerned abut the details f the general written representatins regarding the financial statements. In particular, they were cncerned abut the third bullet f paragraph 8, which requires relevant parties t state whether specific matters, where relevant in view f the applicable financial reprting framewrk, have been recgnized, measured r disclsed in accrdance with that framewrk. They suggested that the sub-bullets be mved t the applicatin material. The majrity f the IAASB tk the view that the detailed elements f the representatin were required in rder t reinfrce the implicatins f the verall representatin abut the preparatin f the financial statements in accrdance with the applicable financial reprting framewrk. Retaining these details wuld help t avid misunderstanding, and thereby imprve the quality f the representatin received. Questin 1: Respndents are asked fr their views n this matter. All IAASB members agreed that relevant parties shuld be requested t cnfirm that they acknwledge and understand their respnsibility fr designing, implementing and maintaining internal cntrl relevant t preparing and presenting financial statements that are free frm material misstatement (see paragraph 9). Sme IAASB members, hwever, were cncerned abut requesting relevant parties t cnfirm whether they believe that the internal cntrl they have maintained is adequate fr that purpse (see paragraph 9). They were f the view that the requirement will be interpreted as requiring relevant parties t assess the effectiveness f internal cntrl. The majrity f IAASB members, hwever, argued that it is imprtant that relevant parties nt nly acknwledge and understand their respnsibility fr internal cntrl, but als cnfirm whether they believe that the internal cntrl is adequate t supprt the preparatin and presentatin f the financial statements. Withut this, there wuld be the pssibility that thse respnsible might acknwledge their respnsibilities but be aware f shrtcmings in the internal cntrl that may be relevant t the financial statements withut infrming the auditr. The representatin is based n relevant parties knwledge and belief, having made apprpriate inquiries t be able t prvide such representatin (see paragraph 6). It is nt envisaged that such inquiries will entail a cmprehensive assessment f the effectiveness f internal cntrl. 6
EXPLANATORY MEMORANDUM Questin 2: Respndents are asked t cmment n the requirement fr the auditr t request relevant parties t cnfirm whether they believe that the internal cntrl they have maintained is adequate fr preparing and presenting financial statements that are free frm material misstatement. Disclaimer f Opinin when General Written Representatins are Nt Obtained Sme IAASB members were cncerned abut the requirement in paragraph 19 fr the auditr t disclaim an pinin n the financial statements when relevant parties d nt prvide the general written representatins abut the premises, relating t management s respnsibilities, n which an audit is cnducted (see paragraph 8-10). Their cncern was that this did nt give scpe fr the auditr t judge the seriusness f the matter, particularly as the requirement wuld be triggered by a failure t prvide ne f the detailed elements f the representatin (see questin 1 abve). The majrity f IAASB members, hwever, were f the view that a failure t prvide a specific element f the written representatin wuld undermine the validity f the general written representatin itself. If relevant persns had a cncern abut ne r mre aspects f the requested written representatins it wuld be pen t them t mdify such representatins apprpriately t reflect this. In thse circumstances the auditr wuld be required t use judgment t evaluate the effect f the mdified written representatins. Paragraph A19 was added t explain hw written representatins that have been mdified frm thse requested by the auditr may affect the audit and the audit pinin. Questin 3: Respndents are asked t cmment n the requirement in paragraph 19 fr the auditr t disclaim an pinin n the financial statements when relevant parties d nt prvide the general written representatins abut the premises, relating t management s respnsibilities, n which an audit is cnducted. Date f the Written Representatins In accrdance with paragraph 11, the general written representatins shuld be as f the same date as the auditr s reprt n the financial statements. Paragraph 13 requires the auditr t determine whether it is necessary t request relevant parties t prvide an updated specific written representatin when the specific written representatin is as f a date earlier than that f the auditr s reprt n the financial statements. An IAASB member is f the view that the requirement in paragraph 11 may nt be practical and that the date f the general written representatins shuld be the same date as the apprval f the financial statements. Questin 4: Respndents are asked t cmment n the date f the general written representatins. Objective and Requirements The prpsed revised ISA has been drafted in accrdance with the clarity drafting cnventins. Questin 5: Respndents are asked t cnsider whether the bjective fr the prpsed revised ISA is apprpriate, and whether the prpsed requirements are apprpriate respnses t that bjective. 7
EXPLANATORY MEMORANDUM Cmments n Other Matters Recgnizing that the prpsed revised ISA will apply t audits f all sizes and in all sectrs f the ecnmy, the IAASB is als interested in cmments n matters set ut belw. Special Cnsideratins in the Audit f Small Entities Respndents are asked t cmment n whether, in their pinin, cnsideratins in the audit f small entities have been dealt with apprpriately in the prpsed revised ISA. Reasns shuld be prvided if nt in agreement, as well as suggestins fr alternative r additinal guidance. Special Cnsideratins in the Audit f Public Sectr Entities A representative f the Financial Audit Guidelines Subcmmittee f the Internatinal Organizatin f Supreme Audit Institutins participated in the develpment f the expsure draft. Respndents are asked t cmment n whether, in their pinin, special cnsideratins in the audit f public sectr entities have been dealt with apprpriately in the prpsed revised ISA. Reasns shuld be prvided if nt in agreement, as well as suggestins fr alternative r additinal guidance. Develping Natins Recgnizing that many develping natins have adpted r are in the prcess f adpting the ISAs, the IAASB invites respndents frm these natins t cmment, in particular, n any freseeable difficulties in applying the prpsed revised ISA in a develping natin envirnment. Reasns shuld be prvided, as well as suggestins fr alternative r additinal guidance. Translatins The IAASB welcmes cmment frm respndents n ptential translatin issues nted in reviewing the prpsed revised ISA. 8
PROPOSED INTERNATIONAL STANDARD ON AUDITING 580 (REVISED AND REDRAFTED) WRITTEN REPRESENTATIONS (Effective fr audits f financial statements fr perids beginning n r after [date]) CONTENTS Paragraph Intrductin Scpe f this ISA... 1 Effective Date... 2 Objective... 3 Definitins... 4 Requirements Relevant Parties... 5-6 General Written Representatins... 7-11 Specific Written Representatins... 12-13 Evaluating the Reliability f Written Representatins... 14-17 When Relevant Parties D Nt Prvide Requested Written Representatins... 18-20 Dcumentatin... 21 Applicatin and Other Explanatry Material Relevant Parties... A1-A3 General Written Representatins... A4-A11 Specific Written Representatins... A12-A14 Date f Written Representatins... A15 Threshld Amunts... A16 Evaluating the Reliability f Written Representatins... A17-A19 Appendix 1: List f ISAs Cntaining Requirements fr Written Representatins Appendix 2: Illustrative Representatin Letter See ftnte 1. 9
Internatinal Standard n Auditing (ISA) 580 (Revised and Redrafted), Written Representatins shuld be read in the cntext f the Preface t the Internatinal Standards n Quality Cntrl, Auditing, Review, Other Assurance and Related Services, which sets ut the authrity f ISAs. 10
Intrductin Scpe f this ISA 1. This Internatinal Standard n Auditing (ISA) deals with the auditr s respnsibility t request written representatins, and the auditr s actins when relevant parties d nt prvide the requested written representatins, r when the auditr cncludes that such written representatins are nt reliable. Appendix 1 lists ther ISAs cntaining requirements and guidance fr written representatins. Thse requirements d nt limit the applicatin f this ISA. Effective Date 2. This ISA is effective fr audits f financial statements fr perids beginning n r after [date]. 1 Objective 3. The bjective f the auditr is t crrbrate, by means f written representatins: (a) The validity f the premises, relating t management s respnsibilities, n which an audit is cnducted; 2 and (b) Other audit evidence btained with regard t specific assertins in the financial statements. Definitins 4. Fr purpses f the ISAs, the fllwing terms have the meanings attributed belw: (a) Written representatins Written statements prvided by relevant parties frm within the entity t the auditr at the auditr s request. Written representatins are either general r specific. Written representatins in the cntext f this ISA d nt include financial statements, the assertins therein, and supprting bks and recrds. (b) General written representatins Written representatins regarding the premises, relating t management s respnsibilities, n which an audit is cnducted. (c) Specific written representatins Written representatins regarding specific assertins in the financial statements. (d) Relevant parties Parties respnsible fr preparing and presenting the financial statements and assertins therein. Regarding specific assertins, relevant parties may als include individuals wh have specialized knwledge abut thse specific 1 2 This effective date will nt be earlier than December 15, 2008. The term management has been used in this ISA t describe thse respnsible fr preparing and presenting the financial statements. Other terms may be apprpriate depending n the legal framewrk in the particular jurisdictin. 11
(e) assertins and are part f the prcess fllwed in preparing and presenting the financial statements and assertins therein. (Ref: Para. A1-A2) The premises, relating t management s respnsibilities, n which an audit is cnducted Thse respnsibilities f management and, where apprpriate, thse charged with gvernance that are fundamental t the cnduct f an audit in accrdance with the ISAs. They are explained in ISA 200, Objective and General Principles Gverning an Audit f Financial Statements. Requirements Relevant Parties 5. The auditr shall determine the relevant parties frm whm general and specific written representatins shall be requested. (Ref: Para. A1-A3) 6. The auditr shall request that relevant parties prvide written representatins based n relevant parties knwledge and belief, having made apprpriate inquiries fr them t be able t prvide such representatins. General Written Representatins 7. The auditr shall request relevant parties t prvide the general written representatins abut the financial statements, including internal cntrl, and the cmpleteness f infrmatin made available t the auditr set ut in paragraphs 8-10 fr all financial statements and perids cvered by the auditr s reprt. Such general written representatins prvide necessary audit evidence abut the validity f the premises, relating t management s respnsibilities, n which an audit is cnducted. Hwever, by themselves, they d nt cnstitute sufficient apprpriate audit evidence abut the validity f the premises. Accrdingly, they d nt relieve the auditr f the respnsibility t btain ther audit evidence. (Ref: Para. A4-A11, A16) Financial Statements 8. The auditr shall request relevant parties t prvide written representatins that they acknwledge and understand their respnsibility fr preparing and presenting the financial statements, and whether they believe that the financial statements are prepared in accrdance with the applicable financial reprting framewrk (r are fairly presented in accrdance with the applicable financial reprting framewrk, when that framewrk is a fair presentatin framewrk). The representatins shall include: Whether the selectin and applicatin f accunting plicies are apprpriate; Whether all transactins have been recrded; and Whether the fllwing matters, where relevant in view f the applicable financial reprting framewrk, have been recgnized, measured r disclsed in accrdance with that framewrk: Plans r intentins that may affect the carrying value r classificatin f assets and liabilities; 12
Liabilities, bth actual and cntingent; Title t r cntrl ver assets, and the liens r encumbrances n assets, and assets pledged as cllateral; Aspects f cntractual agreements that may affect the financial statements, including nncmpliance; and Events subsequent t the perid end. Internal Cntrl 9. The auditr shall request relevant parties t prvide a written representatin that they acknwledge and understand their respnsibility fr designing, implementing and maintaining internal cntrl relevant t preparing and presenting financial statements that are free frm material misstatement, whether due t fraud r errr, and whether they believe that the internal cntrl they have maintained is adequate fr that purpse. Cmpleteness f Infrmatin 10. The auditr shall request relevant parties t prvide a written representatin whether they believe that all recrds, dcumentatin, unusual matters f which they are aware, and ther infrmatin relevant t the audit have been made available t the auditr. Frm and Date f General Written Representatins 11. The general written representatins shall be in the frm f a representatin letter addressed t the auditr. The general written representatins shall be as f the same date as the auditr s reprt n the financial statements. (Ref: Para. A15) Specific Written Representatins 12. Other ISAs cntain requirements fr specific written representatins. In additin t thse, a specific written representatin may be necessary t crrbrate ther audit evidence, particularly where judgment, intent r cmpleteness is invlved. The auditr shall determine whether specific written representatins relating t specific assertins in the financial statements are necessary. Such specific written representatins d nt cnstitute sufficient apprpriate audit evidence by themselves. Accrdingly, they d nt relieve the auditr f the respnsibility t btain ther audit evidence. (Ref: Para. A12-A14, A16) 13. The auditr shall determine whether it is necessary t request relevant parties t prvide an updated specific written representatin when the specific written representatin is as f a date earlier than that f the auditr s reprt n the financial statements. (Ref: Para. A15) Evaluating the Reliability f Written Representatins 14. Circumstances such as the fllwing may cause the auditr t dubt the reliability f ne r mre written representatins: One r mre written representatins are incnsistent with ther audit evidence; r 13
The auditr has identified significant issues related t management s cmmitment t cmpetence, cmmunicatin and enfrcement f integrity and ethical values, r diligence. 15. When a written representatin is incnsistent with ther audit evidence, the auditr shall determine the reasns fr the incnsistency. When the auditr s dubt remains unreslved, the auditr shall recnsider the reliability f ther written representatins and take apprpriate actin. (Ref: Para. A17) 16. When the auditr has identified significant issues related t management s cmmitment t cmpetence, cmmunicatin and enfrcement f integrity and ethical values, r diligence, the auditr shall assess the effect f these issues n the reliability f written representatins and take apprpriate actin. (Ref: Para. A18) 17. When the auditr cncludes that the general written representatins abut the financial statements, including internal cntrl, r the cmpleteness f infrmatin made available t the auditr (see paragraphs 8-10) are nt reliable, the premises, relating t management s respnsibilities, n which an audit is cnducted are nt valid, and the auditr shall fllw the requirement in paragraph 19. When Relevant Parties D Nt Prvide Requested Written Representatins 18. When relevant parties d nt prvide the general r specific written representatins requested by the auditr, the auditr shall (a) ask fr the reasns; (b) recnsider the assessment f the integrity f management and, where apprpriate, thse charged with gvernance; and (c) take apprpriate actins, including determining the pssible effects n the pinin in the auditr s reprt, having regard t the requirements in paragraphs 19-20. (Ref: Para. A19) 19. When relevant parties d nt prvide the general written representatins abut the premises, relating t management s respnsibilities, n which an audit is cnducted (see paragraphs 8-10) (r the auditr cncludes that such general written representatins are unreliable (see paragraph 17)), the auditr is unable t btain sufficient apprpriate audit evidence. The pssible effects n the financial statements f such inability are pervasive. Therefre, in accrdance with ISA 705, Mdificatins t the Opinin in the Independent Auditr s Reprt, the auditr shall disclaim an pinin n the financial statements. 20. When relevant parties d nt prvide specific written representatins requested by the auditr, it cnstitutes a scpe limitatin. Where this is the case, the auditr shall cnsider the effect n the pinin in the auditr s reprt in accrdance with ISA 705. Dcumentatin 21. Where an identified significant issue related t management s cmmitment t cmpetence, cmmunicatin and enfrcement f integrity and ethical values, r diligence exists (see paragraph 16), but the auditr cncludes that a written representatin is nevertheless reliable, the auditr shall dcument the reasns fr the cnclusin. *** 14
Applicatin and Other Explanatry Material Relevant Parties (Ref: Para. 4(d), 5) A1. T identify relevant parties frm whm general written representatins are t be requested, it is imprtant t cnsider the gvernance structure f the entity, relevant legislatin, and circumstances f the engagement. Ordinarily, management is the party respnsible fr preparing and presenting the financial statements and the assertins therein. Relevant parties therefre include the entity s chief executive fficer and chief financial fficer r ther equivalent persns in entities that d nt use such titles. In sme circumstances, hwever, ther individuals r bdies, such as thse charged with gvernance, are als respnsible. A2. The auditr applies prfessinal judgment in identifying relevant parties frm whm specific written representatins are t be requested. The auditr may identify individuals ther than thse described in paragraph A1 wh have specialized knwledge relating t specific assertins in the financial statements and are part f the prcess fllwed in preparing and presenting the financial statements and assertins therein. Fr example: An entity may emply an actuary wh has respnsibility fr and specialized knwledge abut actuarially determined accunting measurements. Staff engineers may have respnsibility fr and specialized knwledge abut envirnmental liability measurements. Internal cunsel may prvide infrmatin essential t prvisins fr legal claims. A3. Where uncertainty exists as t the identity f relevant parties, it may be necessary fr the auditr t agree with the engaging party, prir t accepting the engagement, wh the relevant parties are. This is discussed in ISA 210, Terms f Audit Engagements. General Written Representatins (Ref: Para. 7-11) A4. Legislatin, the applicable financial reprting framewrk, r custm may establish management s respnsibility fr preparing and presenting the financial statements and fr the assertins therein. Hwever, the extent f this respnsibility may differ acrss jurisdictins. Despite these differences, an audit in accrdance with the ISAs is cnducted n the premises that management is respnsible fr: preparing and presenting the financial statements in accrdance with the applicable financial reprting framewrk; designing, implementing and maintaining internal cntrl relevant t preparing and presenting financial statements that are free frm material misstatement, whether due t fraud r errr; and the cmpleteness f infrmatin made available t the auditr. Audit evidence btained during the audit may supprt r cntradict the validity f these premises Hwever, such evidence is nt sufficient withut btaining the general written representatins described in paragraphs 8-10. This is because the auditr may nt be able t judge relevant parties knwledge, judgments r intentins based n ther audit evidence. Fr example, an auditr culd nt cnclude that all relevant infrmatin has been made available withut asking whether all such infrmatin had been made available. 15
A5. The expressin f relevant parties respnsibilities in law and their signing f the financial statements d nt, by themselves, prvide sufficient ther audit evidence, r serve as a substitute fr the written representatins required by the ISAs. A6. Requesting representatins abut imprtant matters is an effective auditing prcedure fr a number f reasns. When relevant parties d nt prvide the representatins requested by the auditr, it may alert the auditr t pssibly significant issues. Further, the requirement t make written, rather than ral, representatins is likely t cause the relevant parties t pay greater attentin t such matters. Having t make the general written representatins reinfrces relevant parties respnsibilities in relatin t the financial statements and the audit, and prmpts them t cnsider specific issues mre thughtfully. Obtaining a representatin letter may be particularly useful where there is a need t clarify the relevant parties understanding f the premises, relating t management s respnsibilities, n which an audit is cnducted. A7. The general written representatins relating t relevant parties respnsibility fr (a) designing, implementing and maintaining internal cntrl relevant t preparing and presenting financial statements that are free frm material misstatement, whether due t fraud r errr, and (b) the cmpleteness f infrmatin made available t the auditr, are relevant fr all audits. Hwever, sme general representatins relating t relevant parties respnsibility fr preparing and presenting the financial statements in accrdance with the applicable financial reprting framewrk may nt always be relevant. Fr example, written representatins relating t liabilities may nt be necessary where the financial statements were prepared and presented n a cash basis in accrdance with the applicable financial reprting framewrk. A8. All perids cvered by the auditr s reprt n the financial statements need t be cvered by the general written representatins and specific written representatins because relevant parties need t reaffirm that the representatins they previusly made with respect t prir perids remain apprpriate. The auditr and relevant parties may agree t a frm f representatin letter that updates previus representatins by addressing whether there are any changes t such representatins and, if s, what they are. A9. Situatins may arise where relevant parties wh were in place during the perid being audited are nt in place at the time the written representatins are requested by the auditr. Relevant parties, wh were nt in place during the perid being audited, may assert that they are nt in a psitin t prvide sme r all f the representatins requested by the auditr; hwever, this fact des nt diminish their respnsibilities. Accrdingly, the auditr s respnsibility t btain written representatins frm them is nt affected. A10. [Prpsed] ISA 260 (Revised and Redrafted), Cmmunicatin with Thse Charged with Gvernance requires the auditr t cmmunicate with thse charged with gvernance the representatins the auditr requested frm relevant parties. In sme circumstances, it may be apprpriate fr the auditr t request that the representatin letter als be agreed by thse charged with gvernance t ensure that all thse charged with gvernance agree with the written representatins that the auditr cnsiders essential t frming an pinin n the financial statements. 16
Cnsideratins Specific t Public Sectr Entities A11. The mandates fr audits f the financial statements f public sectr entities may be brader than thse f ther entities. As a result, the bjectives f an audit f the financial statements f a public sectr entity may give rise t additinal general written representatins. These may include representatins acknwledging ecnmy, efficiency and effectiveness f prgrams, prjects and ther activities, r that transactins and events have been carried ut in accrdance with legislatin r prper authrity. Specific Written Representatins (Ref: Para. 12) A12. A specific written representatin may be necessary t crrbrate ther audit evidence; in particular, where judgment, intent r cmpleteness is invlved. Fr example, when auditing the valuatin f investments where management s intent is crucial t the accunting treatment, it may nt be pssible t btain sufficient apprpriate audit evidence withut a specific written representatin frm relevant parties in relatin t their intentins. A13. Evaluating judgment r intent is inherently subjective, and therefre uncertain. In sme cases, the auditr may btain audit evidence supprting, r which is incnsistent with, relevant parties assertins by cnsidering matters directly r indirectly linked t the assertin. When evaluating relevant parties judgments and intentins the auditr may cnsider ne r mre f the fllwing: The entity s past histry in carrying ut its stated intentins. The entity s reasns fr chsing a particular curse f actin. The entity s ability t pursue a specific curse f actin. The existence r lack f any ther infrmatin that might have been btained during the curse f the audit that may be incnsistent with management s judgment r intent. A14. A specific written representatin des nt prvide sufficient apprpriate audit evidence by itself. Fr example, a written respnse t a specific inquiry in relatin t the cst f an asset is nt a substitute fr the audit evidence in relatin t such cst that the auditr wuld rdinarily expect t btain. Furthermre, audit evidence is influenced by its surce and nature. Fr example, where the surce f a specific written representatin is nt independent frm the entity. Date f Written Representatins (Ref: Para. 11, 13) A15. Because the auditr is cncerned with events ccurring up t the date f the auditr s reprt that may require adjustment t r disclsure in the financial statements, the general written representatins are made as f the date f the auditr s reprt. Hwever, in sme circumstances it may be apprpriate fr the auditr t btain a specific written representatin during the curse f the audit. Where this is the case, it may be necessary t request relevant parties t prvide an updated specific written representatin. 17
Threshld Amunts (Ref: Para. 7, 12) A16. In sme circumstances, the auditr may decide that it wuld be mre effective if general and specific written representatins were limited t matters abve threshld amunts established by the auditr fr the purpses f such representatins, having given effect t the pssibility f immaterial matters aggregating t becme material. Accrdingly, any such threshld amunt will be relatively small in relatin t materiality. Fr this purpse, the auditr may cnsider agreeing n the threshld amunts with relevant parties. Threshld amunts may vary with different written representatins. It may nt be apprpriate t subject sme matters t a threshld amunt. Fr example it may nt be apprpriate t limit representatins t a threshld amunt abut the respnsibilities f relevant parties r matters related t fraud because f qualitative cnsideratins. Evaluating the Reliability f Written Representatins (Ref: Para 15-16) A17. The apprpriate actin t be taken in relatin t identified incnsistencies may include cnsidering whether the auditr s risk assessment remains apprpriate and, if nt, revising the risk assessment and determining the nature, timing and extent f further audit prcedures t respnd t the assessed risks. It may als include the actins referred t in paragraph A18 belw. A18. In the event that the auditr identifies issues related t management s cmmitment t cmpetence, cmmunicatin and enfrcement f integrity and ethical values, r diligence, apprpriate actin may include discussing the matter with thse charged with gvernance and, where pssible, withdrawing frm the engagement unless thse charged with gvernance put in place apprpriate crrective measures. Such actin may nt be sufficient, hwever, t enable the auditr t issue an unmdified audit pinin. A19. A written representatin that has been mdified frm that requested by the auditr des nt necessarily mean that relevant parties did nt prvide the written representatin. Hwever, such mdificatin may affect the pinin in the auditr s reprt. Fr example: The general written representatin relating t the financial statements may state that relevant parties believe that, except fr material nncmpliance with a particular requirement f the applicable financial reprting framewrk, the financial statements are prepared in accrdance with that framewrk. The requirement in paragraph 19 des nt apply because the auditr cncluded that relevant parties have prvided reliable general written representatins. Hwever, the auditr cnsiders the effect f the nncmpliance n the pinin in the auditr s reprt in accrdance with ISA 705. The general written representatin relating t internal cntrl may state that relevant parties believe that, except fr internal cntrl ver a particular accunt balance, it has maintained internal cntrl adequate fr preparing and presenting financial statements that are free frm material misstatement, whether due t fraud r errr. The requirement in paragraph 19 des nt apply because the auditr cncluded that relevant parties have prvided reliable general written representatins. Furthermre, the auditr may be able t btain sufficient apprpriate ther audit evidence in relatin t that accunt balance and, as a result, the statement in the general representatin may nt affect the pinin in the auditr s reprt. Hwever, the 18
auditr cnsiders whether a material weakness in internal cntrl existed and the effect theref n the audit. The general written representatin relating t cmpleteness f infrmatin made available t the auditr may state that relevant parties believe that, except fr infrmatin destryed in a fire, all recrds, dcumentatin, unusual matters f which they are aware, and ther infrmatin relevant t the audit have been made available t the auditr. The requirement in paragraph 19 des nt apply because the auditr cncluded that relevant parties have prvided reliable general written representatins. The auditr cnsiders the effects f the pervasiveness f the infrmatin destryed in the fire n the financial statements and the effect theref n the pinin in the auditr s reprt in accrdance with ISA 705. Depending n the pervasiveness f the effects, the auditr may disclaim an pinin. 19
Appendix 1 (Ref: Para. 1) List f ISAs Cntaining Requirements fr Written Representatins ISA 240 (Redrafted), The Auditr s Respnsibilities Relating t Fraud in an Audit f Financial Statement paragraph 39 ISA 250, Cnsideratin f Laws and Regulatins paragraph 23 [Prpsed] ISA 450 (Redrafted), Evaluatin f Misstatements Identified during the Audit paragraph 16 [Prpsed] ISA 540 (Revised and Redrafted) (Cmbined ISA 540-545), Auditing Accunting Estimates, Including Fair Value Accunting Estimates, and Related Disclsures paragraph 20 [Prpsed] ISA 550 (Revised and Redrafted), Related Parties paragraph 24 ISA 570, Ging Cncern paragraph 26(c) 20
Appendix 2 Illustrative Representatin Letter The fllwing illustrative letter includes written representatins (sme f which are specific written representatins) that are required by this and ther ISAs in effect as f [date]. It is assumed in this example that the requirement f ISA 570, Ging Cncern t btain a written representatin is nt relevant and that there are n exceptins t the representatins requested by the auditr. If there were exceptins, the representatins wuld need t be mdified t reflect the exceptins as discussed in paragraph A19. Where the auditr determines that ne r mre additinal specific written representatins are sufficiently imprtant, the auditr may cnclude that the inclusin theref in the representatin letter is apprpriate. Althugh such inclusin f specific written representatins n a variety f matters may serve t fcus relevant parties attentin n thse matters, and thus cause the relevant parties t specifically address thse matters in mre detail than wuld therwise be the case, the auditr needs t be aware f the limitatins f specific written representatins as audit evidence as set ut in this ISA. (T Auditr) (Entity Letterhead) (Date) This representatin letter is prvided in cnnectin with yur audit f the financial statements f ABC Cmpany fr the year ended December 31, 20XX 3 fr the purpse f expressing an pinin as t whether the financial statements [give a true and fair view][are presented fairly, in all material respects,] in accrdance with [specify the applicable financial reprting framewrk]. We cnfirm, t the best f ur knwledge and belief, having made apprpriate inquiries t be able t prvide ur representatins, that: Financial Statements We acknwledge and understand ur respnsibility fr preparing and presenting the financial statements and believe that the financial statements are prepared in accrdance with [specify the applicable financial reprting framewrk] (r are fairly presented in accrdance with [specify the applicable financial reprting framewrk]), including the fllwing: Our selectin and applicatin f accunting plicies is apprpriate. All plans r intentins that may materially alter the carrying value r classificatin f assets and liabilities in the financial statements have been accunted fr r disclsed in accrdance with the applicable financial reprting framewrk. 3 Where the auditr reprts n mre than ne perid, the auditr adjusts the date s that the letter pertains t all perids cvered by the auditr s reprt. 21
All liabilities, bth actual and cntingent, have been recrded and, where apprpriate, disclsed in accrdance with the applicable financial reprting framewrk. The entity has satisfactry title t, r cntrl ver, all assets disclsed in the financial statements and, where apprpriate, all liens r encumbrances n these assets have been disclsed in accrdance with the applicable financial reprting framewrk. We have cmplied with the aspects f cntractual agreements that culd have a material effect n the financial statements and instances f nncmpliance have been disclsed in accrdance with the applicable financial reprting framewrk. All transactins have been recrded. Significant assumptins used by us in making accunting estimates, including thse measured at fair value, are reasnable. ([Prpsed] ISA 540 (Revised and Redrafted) (Cmbined ISA 540-545)) All events subsequent t the year end fr which the applicable financial reprting framewrk requires adjustment r disclsure have been adjusted r disclsed. [A written representatin with regard t related party transactins and the effects f related party relatinships will be inserted when prpsed ISA 550 (Revised and Redrafted) is finalized.] [A written representatin with regard t related party disclsures in the financial statements will be inserted when prpsed ISA 550 (Revised and Redrafted) is finalized.] The effects f uncrrected misstatements are immaterial, bth individually and in the aggregate, t the financial statements as a whle. A list f the uncrrected misstatements is attached t the representatin letter. ([Prpsed] ISA 450 (Redrafted)) Internal Cntrl We acknwledge and understand ur respnsibility fr the design, implementatin and maintenance f internal cntrl relevant t the preparatin and presentatin f financial statements that are free frm material misstatement, whether due t fraud r errr, and believe that the internal cntrl we have maintained is adequate fr that purpse. Cmpleteness f Infrmatin All recrds, dcumentatin, unusual matters f which management is aware, and ther infrmatin relevant t the audit have been made available t yu. We have disclsed t yu the results f ur assessment f the risk that the financial statements may be materially misstated as a result f fraud. (ISA 240 (Redrafted)) We have disclsed t yu all infrmatin in relatin t fraud r suspected fraud that we are aware f and that affects the entity and invlves: Management; Emplyees wh have significant rles in internal cntrl; r Others where the fraud culd have a material effect n the financial statements. (ISA 240 (Redrafted)) 22
We have disclsed t yu all infrmatin in relatin t allegatins f fraud, r suspected fraud, affecting the entity s financial statements cmmunicated by emplyees, frmer emplyees, analysts, regulatrs r thers. (ISA 240 (Redrafted)) We have disclsed t yu all knwn actual r pssible nncmpliance with laws and regulatins whse effects shuld be cnsidered when preparing financial statements. (ISA 250) [A written representatin with regard t the cmpleteness f related parties, related party relatinships and related party transactins will be inserted when prpsed ISA 550 (Revised and Redrafted) is finalized.] (Relevant Party) (Relevant Party) 23
PROPOSED CONFORMING AMENDMENTS ISA 200, Objective and General Principles Gverning an Audit f Financial Statements 33a. ISAs are written, and audits are cnducted, n the premises that management and, where apprpriate, thse charged with gvernance: Acknwledge and understand their respnsibility fr preparing and presenting the financial statements in accrdance with the applicable financial reprting framewrk; Acknwledge and understand their respnsibility fr designing, implementing and maintaining internal cntrl relevant t the preparatin and presentatin f financial statements that are free frm material misstatement, whether due t fraud r errr; and Will prvide cmplete infrmatin t the auditr. ISA 210, Terms f Audit Engagements Agreement n Written Representatins 5a. The auditr shuld btain the acknwledgement and agreement f management and, where apprpriate, thse charged with gvernance that they understand their respnsibilities fr: Preparing and presenting the financial statements in accrdance with the applicable financial reprting framewrk; Designing, implementing, and maintaining internal cntrl relevant t the preparatin and presentatin f financial statements that are free frm material misstatement, whether due t fraud r errr; and Prviding cmplete infrmatin t the auditr. 5b. ISA 200, Objective and General Principles Gverning an Audit f Financial Statements explains that audits are cnducted n the premises that these respnsibilities are acknwledged and understd by management and, where apprpriate, thse charged with gvernance. These premises are fundamental t the audit; hwever, there is a risk that they may nt be understd by management r thse charged with gvernance. T avid misunderstanding, agreement is reached with management and, where apprpriate, thse charged with gvernance abut their respnsibilities as part f agreeing the terms f engagement. Since [prpsed] ISA 580 (Revised and Redrafted), Written Representatins requires the auditr t request written representatins abut the validity f these premises, it may als be apprpriate t make management aware that receipt f such representatins frm relevant parties will be expected tgether with specific written representatins. It als may be useful t agree with management, r thse charged with gvernance, wh the relevant parties are. 5c. When management, r thse charged with gvernance, will nt make the necessary acknwledgement and agreement, r will nt prvide the requested general r specific 24
PROPOSED CONFORMING AMENDMENTS written representatins, the auditr will be unable t btain sufficient apprpriate audit evidence. In such circumstances, it may nt be apprpriate fr the auditr t accept the engagement. In sme cases, hwever, law r regulatin prevents the auditr frm refusing an engagement. In these cases, the auditr may need t explain t management and thse charged with gvernance the imprtance f these matters, and the effect that they may have n the pinin in the auditr s reprt. 25
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