AS 2805: Core Management Representations

During a financial statement audit, an auditor relies on information from the company’s management. This process is formalized through management representations, which are statements by leadership confirming that information provided to the auditor is accurate and complete. These representations are a foundational piece of audit evidence used to form an opinion on the financial statements.

For public companies in the U.S., the Public Company Accounting Oversight Board (PCAOB) establishes the framework in Auditing Standard (AS) 2805, Management Representations. This standard outlines the requirements for obtaining written confirmations to ensure a documented record of management’s assertions. These statements reinforce management’s responsibility for the financial statements and provide the auditor with documented evidence to corroborate other findings, reducing potential misunderstandings.

Core Required Representations

Financial Statements

A primary representation is management’s acknowledgment of its responsibility for the financial statements. Management must state that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework, such as Generally Accepted Accounting Principles (GAAP). This assertion confirms that management has overseen the preparation of the statements and believes they accurately reflect the company’s financial position.

This representation also encompasses the selection of accounting policies, the reasonableness of accounting estimates, and the adequacy of financial statement disclosures.

Completeness of Information

Auditors must obtain a representation from management that all relevant information has been made available. This comprehensive assertion covers all financial records, supporting documents, and other data that form the basis of the financial statements, confirming nothing has been knowingly withheld.

This extends to the minutes of meetings of stockholders, the board of directors, and important committees. Management must confirm that the copies of minutes provided are complete and authentic for the period under audit.

Recognition, Measurement, and Disclosure

AS 2805 requires specific representations regarding how transactions are recognized, measured, and disclosed. Management must confirm its beliefs on the treatment of items involving significant judgment, such as disclosing all related-party transactions and any associated amounts receivable or payable.

Another area involves subsequent events, which occur after the balance sheet date but before the financial statements are issued. Management must represent that all subsequent events requiring adjustment or disclosure have been properly handled. The representation also covers compliance with aspects of contractual agreements whose violation could affect the financial statements.

Absence of Uncorrected Misstatements

During an audit, the auditor may identify misstatements that management chooses not to correct. A representation is required from management that the effects of any uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements as a whole. The auditor provides management with a summary of these items.

Management’s representation confirms their assessment that these errors would not influence the decisions of a financial statement user.

Information Concerning Fraud

A significant portion of the representations deals with fraud. Management must acknowledge its responsibility for designing, implementing, and maintaining internal control to prevent and detect fraud.

Management is also required to state whether they are aware of any actual, suspected, or alleged fraud affecting the company. This includes fraud involving management, employees with significant roles in internal control, or others where the fraud could materially affect the financial statements.

Preparing the Representation Letter

The representations are formalized in a document known as the management representation letter, prepared on the company’s letterhead and addressed to the auditor. While the responsibility for the content rests with management, the auditor typically drafts the letter to ensure all required representations under PCAOB standards are included. The auditor will tailor the letter to the audit, and management must carefully review the draft to ensure it accurately reflects their beliefs before signing.

Key Signatories

The representation letter must be signed by members of management with primary responsibility for the company’s financial and operating matters, which includes the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO). Their signatures signify that the representations are made on behalf of the company. In some situations, other individuals with detailed knowledge, such as a chief accounting officer, might also be asked to sign.

Dating the Letter

The letter must be dated as of the date of the auditor’s report. This timing is intentional and means that management’s representations cover the entire period of the audit, up to the date the auditor finalizes their report. This requirement ensures that management has considered all events and transactions up to the end of the audit fieldwork, closing any potential gaps.

Auditor Response to Representation Issues

Problems encountered while obtaining management representations have direct consequences for the audit. The auditor’s response is dictated by professional standards. The most significant issues are an outright refusal by management to provide the signed letter or if the auditor obtains evidence that contradicts a representation.

Refusal to Provide Representations

If management refuses to furnish a signed representation letter, it constitutes a scope limitation where the auditor is unable to perform a required procedure. An auditor cannot issue an unqualified, or “clean,” opinion when such a limitation exists. The refusal will lead the auditor to either issue a disclaimer of opinion, stating they do not express an opinion, or withdraw from the audit engagement.

Doubts About Reliability

An auditor may also have reservations about the reliability of representations, even if the letter is signed. This can happen if other audit evidence contradicts what management has asserted. When such doubts arise, the auditor must perform additional procedures to resolve the matter, such as more extensive testing or seeking corroborating evidence. If the doubts are significant and cannot be resolved, it may impact the auditor’s opinion on the financial statements.