Audit - Written representations

The proposals set out in an exposure draft of a revised ISA 580 on written representations have raised concerns. Keith Billing explains.

ISA 580, , establishes standards and provides guidance on the use of management representations as audit evidence. In April 2004, the International Auditing and Assurance Standards Board (IAASB) commenced a project to revise the ISA in response to concerns that auditors may be over-relying on written representations. In December 2006, it issued an exposure draft of proposed revised ISA 580, Written Representations, with a comment period ending on 30 April 2007.

The proposed revised ISA requires the auditor to determine whether written representations relating to specific assertions in the financial statements are necessary ('specific written representations'). To avoid over-reliance on these specific written representations, the proposed revised ISA explicitly states that they 'do not constitute sufficient appropriate audit evidence by themselves. Accordingly, they do not relieve the auditor of the responsibility to obtain other audit evidence'.

The proposed revisions to the ISA, however, go much further than avoiding over-reliance on specific written representations. Other proposals in the exposure draft have proven to be of particular concern for some members of the business community, especially company management, who will be asked to provide the required written representations.

General written representations

The most contentious issue relates to the proposed requirements for 'general written representations'.

The IAASB has stated that an audit of financial statements in accordance with the ISAs is based on the fundamental premises that management is responsible for (a) preparing and presenting the financial statements in accordance with the applicable financial reporting framework; (b) designing, implementing and maintaining internal control relevant to preparing and presenting financial statements that are free from material misstatement, whether due to fraud or error; and (c) the completeness of information made available to the auditor.

The proposed revised ISA requires the auditor to request relevant parties to provide general written representations to acknowledge their understanding and fulfilment of these premises. The importance of the general written representations is such that if the relevant parties do not provide them to the auditor, the ISA leads to a conclusion that the auditor will not have obtained sufficient appropriate audit evidence and that the possible effects on the financial statements are so pervasive that the auditor shall disclaim an opinion.

These proposals have given rise to a number of concerns, including that:

•    The general written representations set out in the proposed ISA are overly detailed and may cause management to need to develop costly processes for the specific purpose of giving the representations separate from, and additional to, their processes for preparing the financial statements.

For example, the exposure draft proposes that auditors be required to obtain from relevant parties a written representation that they 'acknowledge and understand their responsibility for designing, implementing and maintaining internal control relevant to preparing and presenting financial statements that are free from material misstatement, whether due to fraud or error, and whether they believe that the internal control they have maintained is adequate for that purpose' (emphasis added).

This representation is intended to be given on the basis of relevant parties' knowledge and belief, having made 'appropriate inquiries' to be able to provide such representation. The IAASB has stated that 'it is not envisaged that such inquiries will entail a comprehensive assessment of the effectiveness of internal control'. However, the IAASB has given no indication of what the nature and extent of 'appropriate inquiries' would be, and the substance of the wording of the required representation may lead management to conclude that a comprehensive assessment of the effectiveness of internal control will be needed.

•    Insufficient consideration is given to countries such as the UK where management's responsibilities in relation to the preparation of financial statements and the relationship with the auditor are clearly established in law and regulation. In such countries, inconsistencies between the wording of those laws and regulations and the wording of representations required by ISA 580 are likely to give rise to disputes about the appropriateness of the representations being sought and a reluctance to provide the specified representations.

•    With respect to a failure to obtain a general representation, the proposed ISA is too rigid in mandating that the only possible course of action is to disclaim an opinion. Refusal to provide a general written representation should certainly put the auditor 'on alert', but it should be recognised that there may be exceptional circumstances in which the auditor ought to be allowed to exercise judgment as to the action to take.

The principle of auditors obtaining general written representations should not, of itself, be an issue. The current ISA 580 already requires general written representations on a number of matters, including responsibility for the financial statements and for the design and implementation of internal control to prevent and detect error. The key issues appear to relate to the level of detail that is now being proposed, and the consequences of failing to obtain a general representation.

It is important for the IAASB to get this right. If ISA 580 imposes obligations on management, and thereby extends their duties beyond those established by law and regulation, it is likely to be unacceptable for adoption in the EU.


In October 2005 the International Auditing and Assurance Standards Board (IAASB) announced its intention to improve the clarity of its International Standards on Auditing (ISAs) through structural and drafting improvements.

This project is an important precondition for adoption of the ISAs in the EU.

The IAASB is approximately half way through the 'Clarity Project'. In addition to 'clarifying' all the ISAs, the IAASB is revising a number of ISAs, including the current ISA 580, .

Keith Billing is a project director at the Auditing Practices Board. The views expressed are his own

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