Management Representation Letter is issued by the client (Auditee) to the auditor in writing as a part of Audit Evidence. This document during the audit clarifies the separation of responsibilities of the auditor and auditee (management).
ISA 580 (SA580) covers written representations should read in conjunction with ISA (SA) 200, “Overall objective of the Independent Auditor and the conduct of audit in accordance with International Standards of accounting.
As such, The MRL is a part of Audit Evidence and hence should be taken (applicable) for all type of audits like Statutory, Internal, Transfer pricing, tax audit, management audit and so on.
The purpose of MRL is
- To focus the management attention on those matters so that, the management can address matters and issues mentioned in detail with specific attention giving the due weightage about specific management functions, internal controls etc.
- Confirmation from the management about the correctness, fairness of the various financial statements as the management has the primary responsibility for their accuracy.
- Management representations and attestations in the letter provide some assurance that information during examination is reliable in use of audit procedure and to base for any report.
- The MRL is also require as it gives reasonable assurance and details of all the events occur after the last date on which the financial statements are prepared, if any may, and/or may not happen after the date of the financial statement and have a material impact on the financial statements consider for the purpose of audit. Such events are listed in the MRL for more clarity to the reader of the financial statement.
- The MRL is assurance that, the management is upholding & stand by the verbal, written representations made during audit on the matters covers the audit scope.
- Auditing standards require auditor to communicate the management about the material weakness and/or significant deficiencies in internal control during audit, the MRL will help in such communication from both the sides auditor as well as auditee. Significant matters (SA 230).
The contents of the MRL are enumerated as follows:
- Type of audit and period of audit to be covered. Date of the financial statements.
- Management responsibilities w.r.t. financial statements. Preparation, maintenance of the accounting records, internal financial systems, controls, and these controls are effective as to the financial statements are free from material deficiencies, omissions, miss statements. If any list of uncorrected misstatements, if any. (SA450)
- Accounting policies to be adopted. Accounting standards applicable. (SA540)
- Information and documents, representations provided and their authenticity.
- Conflicts of Interest, related party transactions. if any, (SA550)
- Details of Frauds, Misstatements, misappropriations if any. (SA240)
- Assets Title of the fixed assets, records of the fixed assets, record of additions, deletion, depreciation on the fixed assets. Physical verification and reconciliation if any.
- Investments. Investment policy, Investments made during the year. As per the policy document of the auditee. Deviation from the policy if any. And the terms of the investment are beneficial to the auditee.
- Cash Balances, its verification, Balance certificate, whether as per the norms of the company.
- Bank balances, Balance confirmations, Reconciliation, Comments on the items of reconciliation if any.
- Other Current assets and its releasable value, determination of the value as stated in the financial statements.
- Liabilities their adequacy, confirmation, reconciliation of the balances.
- Contingent liabilities, their nature, their impact on the financial statements.
- Capital Commitments if any. Differed commitments, if any.
- Expenses, nature of expenses to the auditee business, their adequacy, and provisions.
- Provision for claims and losses if any, provision for ascertained, known losses, and claims to be occurred after the date of the financial statements.
- The coverage of the main audit report, and the details, statistical data, its correctness, accuracy, analysis if any given in the report for which this representation is given.
- Disclosure in Revenue and Expenditure account, ascertainment, policy adopted for revenue recognition.
- General commitments. About compliance of the various acts, statutory dues, taxation, and provisions for the same, pending assessments, and disputes, litigation, and its position as on the date. (SA250)
- Details of subsequent events affecting the financial statements. (SA560)
- Specific representations applicable to the business of the auditee and covering the scope of audit /assignment.
Signature on the MRL
The MRL should be signed by,
- Those who govern and manage the affairs of the company, branch, profit center,
- The persons responsible for and decision-making authority for the financial statements.
- Head, or in charge of the respective Branch, or office as Regional, zonal Office etc.
Date of MRL
The date of MRL should be before the date of the Audit report when the audit is near completion.
Refusal to Sign the MRL
(SA 705) If management refuses to sign the representation letter, it means that they are not willing to standby their verbal representations when asked to do so in writing. Management refusal to sign the management representation letter is considered a scope limitation which results in disclaimer report. The auditor is required to consider the effect of non-compliance in accordance with SA 705.
MRL being the important part of audit evidence there should be a constructive discussion between auditor and auditee on the MRL. Nevertheless, being part of audit evidence the same must be obtained in all type of audit as per my view.