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.
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.
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.
Appendix B, Additional Illustrative Representations, includes a list of other representations that practitioners may find appropriate in certain situations. 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.
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.
The illustrative management representation letter includes a sample paragraph containing a qualitative discussion of materiality.