The Clarified Auditing Standards will require new audit-representation-letter language (see AU-C Section 580), effective for December 31, 2012 year-end clients.
As in the past, the representation letter should be tailored to your client’s particular facts and circumstances.
There are new representations (bolded in the illustration below).
Also some of the prior representation letter language has been deleted; the auditor is still free to include the deleted language if he/she prefers. Deleted items include:
• The completeness and availability of minutes.
• Communications with regulatory agencies.
• Plans or intentions that might affect carrying values.
• Guarantees on which the entity is contingently liable.
• Other liabilities or gain or loss contingencies.
• Disclosure of significant estimates and concentrations.
• Satisfactory title to assets.
• Compliance with contractual agreements.
Illustrative Management Representation Letter
This representation letter is provided in connection with your audit of the financial statements of ABC Company, which comprise the balance sheet as of December 31, 20XX, 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 whether the financial statements are presented fairly, in all material respects, in accordance with accounting principles generally accepted in the United States (U.S. 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, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement.
Except where otherwise stated below, immaterial matters less than $ [Amount] collectively are not considered to be exceptions that require disclosure for the purpose of the following representations. This amount is not necessarily indicative of amounts that would require adjustment to or disclosure in the financial statements.
We confirm that [, to the best of our knowledge and belief, having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves] [as of (date of auditor’s report)]:
- We have fulfilled our responsibilities, as set out in the terms of the audit engagement dated [Date], for the preparation and fair presentation of the financial statements in accordance with U.S. GAAP.
- We acknowledge our responsibility for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
- We acknowledge our responsibility for the design, implementation, and maintenance of internal control to prevent and detect fraud.
- Significant assumptions used by us in making accounting estimates, including those measured at fair value, are reasonable.
- Related-party relationships and transactions have been appropriately accounted for and disclosed in accordance with the requirements of U.S. GAAP.
- All events subsequent to the date of the financial statements and for which U.S. GAAP requires adjustment or disclosure have been adjusted or disclosed.
- 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 the representation letter.
- The effects of all known actual or possible litigation and claims have been accounted for and disclosed in accordance with U.S. GAAP.
- [Any other matters that the auditor may consider appropriate.]
- 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; and
- Unrestricted access to persons within the entity from whom you determined it necessary to obtain audit evidence.
- All transactions have been recorded in the accounting records and are reflected in the financial statements.
- 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.
- We have [no knowledge of any OR disclosed to you all information that we are aware of regarding] fraud or suspected fraud that affects the entity and involves:
- Employees who have significant roles in internal control; or
- Others when the fraud could have a material effect on the financial statements.
- We have [no knowledge of any OR disclosed to you all information that we are aware of regarding] allegations of fraud, or suspected fraud, affecting the entity’s financial statements communicated by employees, former employees, analysts, regulators or others.
- 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.
- We [have disclosed to you all known actual or possible OR are not aware of any pending or threatened] litigation and claims whose effects should be considered when preparing the financial statements [and we have not consulted legal counsel concerning litigation or claims].
- 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.
- [Any other matters that the auditor may consider necessary.]
[Name of Chief Executive Officer and Title]
[Name of Chief Financial Officer and Title]