What is a letter of representation in an audit?

Near the end of a statutory audit, your auditor will usually ask you to sign a letter of representation. If you have never seen one before, you may wonder why it is needed, what it says and what happens if you do not sign it.

A letter of representation is a routine part of most statutory audits. It confirms certain matters that only management can verify and forms part of the audit evidence.

What is a letter of representation?

A letter of representation is a written confirmation from a company’s management to its auditor.

It confirms that the directors have provided all the relevant information needed for the audit and that certain statements made during the audit remain true to the best of their knowledge.

The letter does not replace the auditor’s own work. Auditors still gather evidence by testing transactions, reviewing documents and making enquiries. Instead, the letter supports that evidence by confirming matters that management is responsible for.

The requirement for written representations forms part of ISA (UK) 580: Written Representations, published by the Financial Reporting Council.

What does a letter of representation include?

Although the letter comes from management, the auditor will normally prepare a draft and send it to the company for review and signature. Many companies also record approval of the letter in the board minutes before it added to the company’s letterhead and signed.

The exact wording varies, but a letter of representation typically confirms that management has:

• Provided all relevant accounting records and information
• Disclosed all known liabilities and commitments
• Disclosed any litigation or claims that could affect the financial statements
• Identified related party transactions
• Disclosed any known or suspected fraud involving the business
• Informed the auditor about events after the year-end that could affect the financial statements

Who signs a letter of representation?

The letter is normally signed by those responsible for preparing the financial statements.

For many owner-managed businesses, that will be one or more directors. In larger organisations, other members of senior management may also sign it, depending on the circumstances.

Your auditor will advise who should sign the letter before the audit is completed.

When is the letter signed?

A letter of representation is usually signed towards the end of the audit, after the auditor has completed most of their testing and resolved any significant queries.

The letter should be dated as near as practicable to, but not after, the date of the auditor’s report. Directors sometimes ask whether they can sign it earlier to complete the paperwork in advance. The difficulty is that the letter needs to cover the position up to the date of the report. Signing it early leaves a gap in which events after the year-end go unconfirmed.

What happens if you refuse to sign it?

Refusing to sign a letter of representation is unusual.

If you have concerns about the wording, discuss them with your auditor first. They can explain why a particular representation is needed and clarify any points you are unsure about.

ISA (UK) 580 requires management to confirm in writing that it has met its responsibilities for preparing the financial statements and providing information to the auditor. If management will not do so, the auditor cannot obtain sufficient appropriate audit evidence. In those circumstances, the auditing standard requires the auditor to disclaim an opinion. In other words, the auditor cannot express an opinion on the financial statements.

Does signing the letter increase directors’ legal responsibilities?

No. Signing a letter of representation does not create new legal responsibilities for directors.

However, auditors rely on the representations it contains as part of the audit evidence. Directors should therefore read the letter carefully and ensure each statement is accurate before signing.

Frequently asked questions

Can we sign a letter of representation electronically?

Yes. Many auditors accept electronic signatures, provided they meet relevant legal and professional standards.

Can the wording be changed?

Sometimes. If a statement does not reflect your circumstances, discuss it with your auditor. The wording may be amended where appropriate, but the auditor must still obtain the written representations required by the auditing standards.

Is a letter of representation the same as a management letter?

No.

A letter of representation is issued by the company’s management to the auditor. A management letter goes the other way. It is prepared by the auditor after the audit and sets out recommendations or observations, such as weaknesses in internal controls or opportunities for improvement.

Need help with a statutory audit?

Receiving a letter of representation is a normal part of the audit process. If you are unsure why your auditor has asked you to sign one, they should be happy to explain the wording before you do so.

If you are preparing for a statutory audit or considering changing auditors, THP’s Audit Services team can help you through every stage of the process.