You have been the auditor of Crossborder Trading Company Ltd. for a number of years. The company‘s head office is in Nairobi, Kenya and if has considerable overseas operations. At each accounting year end, there are large debts due from overseas agents of the company (Sh. 270 million out of total debts of Sh. 680 million as at 31 December 2000). In the past, these debts have always been settled after year end but you have insisted that the debts be the subject of a specific representation made by the company‘s director. Required: Outline the purpose of a letter of representation from management to the auditor.

Representations by management are one source of audit evidence. They may be an important part of audit evidence in the audit of companies of all sizes.

ISA 580 management representations, requires that auditors obtain written confirmation of appropriate representations before the audit report is issued.

Representations are required:-

i) To allow directors to acknowledge their collective responsibility for the preparation of financial statements and to confirm that they have approved them.
ii) To confirm matters material to the financial statements where the representations are critical to obtaining sufficient, appropriate audit evidence.
iii) Critical representations will be those where knowledge of the facts is confined to management (e.g. management‘s intention to dispose off major assets) and those where the matter is principally one of judgment and opinion (e.g. with respect to litigation process or on the trading position of one particular customer or the appropriateness of change in accounting policy)

NB: _ Representations are not a substitute for other evidence that should be available and auditors should ensure that representations are reasonable and consistent with the auditor‘s knowledge of the business. Any contradiction between the representations made and other evidence obtained should be thoroughly investigated.