Case Study: Audit Procedures for Management Representations

As part of the audit process, auditors often rely on management representations to obtain assurance regarding various aspects of the financial statements and related matters. Let's explore a scenario where audit procedures for management representations are integral to the audit process:

Scenario:

XYZ Corporation, a manufacturing company, engages ABC Audit Firm to conduct its annual audit. As part of the audit engagement, ABC Audit Firm is required to obtain management representations to support its audit procedures and conclusions.

Audit Procedures:

Reviewing Engagement Letter:

ABC Audit Firm begins by reviewing the engagement letter signed by XYZ Corporation's management. The engagement letter outlines the terms and responsibilities of both parties, including management's responsibility for preparing the financial statements and providing representations to the auditor.

Requesting Written Representations:

Auditors request written representations from management regarding various matters relevant to the audit. This may include representations about the completeness and accuracy of financial records, the integrity of management, compliance with laws and regulations, and the existence of related$-$party transactions.

Evaluating Truthfulness and Completeness:

Auditors evaluate the truthfulness and completeness of management representations by comparing them to other audit evidence obtained during the audit process. This may involve corroborating management's representations with documents, third$-$party confirmations, and other sources of information.

Assessing Reliability of Management:

Auditors assess the reliability of management representations based on their knowledge of management's integrity, competence, and past history. They consider factors such as management's track record, responsiveness to auditor inquiries, and transparency in providing information.

Documenting Representations:

Auditors document management representations obtained during the audit process, including the specific representations made by management, the date of representation, and any supporting documentation provided. This documentation serves as evidence of management's acknowledgment and commitment to the matters represented.

Following Up on Inconsistencies:

If auditors identify inconsistencies or discrepancies between management representations and other audit evidence, they follow up with management to obtain clarification or additional information. This ensures that management's representations are accurate and reliable.

Objective Type Question:

Based on the case study, auditors evaluate the reliability of management representations based on factors such as

A$)$ Audit evidence

B$)$ Engagement letter

C$)$ Financial records

D$)$ Compliance with laws