The Clarity Project – New Representation Letter

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

[To Auditor]


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)]:

Financial Statements

  • 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.]

Information Provided

  • 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:
    • Management;
    • 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]

Applicability of Attestation Standards

Do you ever receive questions like the following?

Can you provide assurance to my banker that my accounts receivable is aged correctly?

Can you provide my insurance carrier with comfort that my property, plant and equipment is properly stated (without performing a full audit)?

Can you provide an attestation report that addresses my internal controls?

Is yes, then you will turn to the AICPA attestation standards for guidance.

Attestation Standards Primer

The attestation standards are contained in the AICPA’s Statements on Standards for Attestation Engagements (SSAE) and are normally issued by the Auditing Standards Board (although the standards may be issued by the Accounting and Review Services Committee and the Consulting Services Executive Committee).

SSAE No. 10 states the attestation standards apply when the CPA is engaged to issue or does issue an examination, review, or an agreed-upon-procedures report on the subject matter, or an assertion about the subject matter, that is the responsibility of another party. 

There are two parts to this definition:

  1. The report
  2. Subject matter

What is subject matter? It’s what the CPA applies procedures to and it may or may not be numeric. Here are some examples:

  • Internal control over financial reporting
  • Quantity of gallons of wastewater processed
  • Specified financial statement element such as a schedule of sales
  • Specified elements such as a summary of property and equipment
  • Compliance with the terms of a contractual agreement such as a profit sharing arrangement or loan agreement
  • Pro forma financial information such as a business combination

The attestation standards normally come into play when a client desires for the CPA to provide comfort with regard to particular subject matter or an assertion about subject matter. The CPA, using the attestation standards, may issue the following types of reports:

  1. Examination,
  2. Review, or
  3. Agreed-upon-procedures

In performing an examination the CPA offers an opinion; for example the report might read:

In our opinion, the schedule referred to above presents, in all material respects, the investment returns of ABC Company for the year ended December 31, 2012, based on criteria set forth in Note 1.

In performing a review, the report might read:

Based on our review, nothing came to our attention that caused us to believe that management’s assertion referred to above is not fairly stated, in all material respects, based on the criteria referred to in Note 1.

In performing an agreed-upon-procedures engagement, the CPA does not issue an opinion; he simply performs procedures and provides findings.

Procedure: We agreed cash receipts for September 1, 2 and 3 to the daily deposit made in ABC Bank.

Finding: Cash receipts agreed to the daily deposits for all three days.

The attestation standards have no effect upon SASs (the auditing standards) or SSARS (the compilation and review standards) which focus on historical financial statements.

Alternative Professional Standards

CPAs may also use the less stringent consulting standards; these standards provide guidance in assisting clients when no third-party comfort is needed.

AICPA Consulting Standards – The Swiss Army Knife

From time to time I’m asked questions like the following:

My client wants me to perform some test counts of their inventory, but they want to keep the costs minimal. I’m thinking I need to perform an agreed upon procedures engagement. Is there a cheaper alternative?

My client wants me to review his accounts payable internal controls, and he doesn’t need an audit or a formal attest engagement. Is there a low-cost method to provide this service?

My client thinks fraud is occurring in his payroll, and she does not want an audit. What professional standards should I follow?

You will find the answer to these three questions in the AICPA Consulting Standards.

Most CPAs are familiar with compilation and review standards (Statement on Standards for Accounting and Review Services – SSARS) and audit standards (Statement on Auditing Standards – SAS) and even attestation standards (Statement on Standards for Attestation Engagements – SSAEs – commonly used for agreed upon procedures), but many are not familiar with the consulting standards (Statement on Standards for Consulting Services – SSCS).


I’m not really sure, but I seldom see a consulting standards CPE classes. Yet many CPA services fall under these standards.

Consulting Standards Primer

You might call the AICPA Consulting Standards the CPA’s swiss army knife.

What services fall under the consulting standards? 

The consulting standards specifically address six areas:

  1. Consultations – e.g., reviewing a business plan
  2. Advisory services – e.g., assistance with strategic planning
  3. Implementation services – e.g., assistance with a merger
  4. Transaction services – e.g., litigation services
  5. Staff and other support services – e.g., controllership services
  6. Product services – e.g., providing packaged training services

CPAs often provide consulting services such as the following:

  • Consultations with regard to complex transactions
  • Fraud investigation services
  • Internal control services
  • Bankruptcy services
  • Divorce settlement services
  • Controllership services
  • Business plan preparation
  • Cash management
  • Software selection
  • Business disposition planning

When can I use the consulting standards?

I recently posted about when you can use the consulting standards; if there is to be no third-party reliance on the report, consider the consulting option.

Characteristics of a Consulting Engagement

  1. Generally nonrecurring
  2. Usually requires a CPA with specialized knowledge and skills
  3. More interaction with client
  4. Generally done just for the client (usually no third parties seeing the results)

Consulting Workpaper Requirements


The understanding with the client can be oral or in writing (I highly recommend the latter).

Keep in mind, however, that the AICPA Code of Professional Conduct does require the CPA who performs a nonattest service (e.g., consulting) and an attest service (e.g., audit) to follow Interpretation 101-3 of rule 101 (Independence) – the CPA must document his understanding with the client.

The consulting standards do not require the CPA to prepare workpapers, but you should do so anyway – the workpapers are the link between your work and your report. Also the general standards of the profession, contained in Rule 201 of the AICPA Code of Professional Conduct, apply to all services performed by members; they include:

Sufficient relevant data. Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.

Consulting Reports

The report content and format are up to you and your client.

No Opinion or Accountant’s Report

For consulting engagements, the CPA does not issue an opinion or any other attestation report (e.g., accountant’s report on agreed-upon procedures ).

Subject to Peer Review?


Where Can I Find the AICPA Consulting Standards?

You can see the consulting standards here. They are very brief.