Communications

Question 1

On the management representation letter, when must corporate officers evaluate internal controls over financial reporting?

Answer 1

Within 90 days prior to the issuer’s report date to ensure the assessment is timely and reflects the current control environment. This evaluation is part of management’s responsibility and must be recent, not months after year-end or throughout the audit process.

Question 2

Who signs the management representation letter and when is it dated?

Answer 2

Management with overall responsibility—usually the CEO and CFO—and is dated the same date as the auditor’s report, representing the date the auditor obtained sufficient appropriate audit evidence.

Question 3

What five key assertions does management make in the management representation letter?

Answer 3

Management asserts responsibility for:

1. Preparing the FINANCIAL STATEMENTS fairly
2. Designing, implementing, and maintaining INTERNAL CONTROLS
3. Providing all relevant information and ACCESS to records
4. DISCLOSE all known or suspected fraud, litigation, and subsequent events
5. Confirming UNCORRECTED MISSTAEMENTENTS are immaterial

Question 4

What happens if management refuses to provide the management representation letter?

Answer 4

The auditor generally must disclaim an opinion or withdraw from the engagement because the letter is mandatory audit evidence with no alternative procedures.

Question 5

In which of the following engagements is an opinion disclaimed? 1, 2, both, or neither

1. Compilation
2. Review

Answer 5

COMPILATION ONLY.

Compilation: No assurance, disclaim an opinion (state no opinion expressed).
Review: Limited assurance, conclusion, no opinion disclaimed.

Question 6

In a compilation engagement, if disclosures are omitted, what 2 actions should the auditor take?

Answer 6

1. A paragraph in the compilation report explaining the omission.
2. A statement that if the disclosures were included, they might influence users’ conclusions.

Question 7

What is the auditor’s responsibility for required supplementary information that is outside the basic financial statements but required by the FASB?

Answer 7

1. Apply certain limited procedures to the required supplementary information
2. Add a separate section with the heading “Required Supplementary Information” to the financial statement audit report.

Question 8

What are the four main factors that an auditor considers when identifying fraud?

Answer 8

1. Likelihood
2. Pervasiveness
3. Significance
4. Type (theft, financial, etc)

Question 9

What are the seven main elements of an engagement letter?

Answer 9

Main elements of an engagement letter:

1. MANAGEMENT ACKNOWLEDGEMENT of responsibility (e.g., maintaining effective internal control)
2. Objective and SCOPE of the audit or engagement
3. AUDITOR responsibilities
4. MANAGEMENT responsibilities (including financial statements preparation)
5. Reference to applicable financial reporting FRAMEWORK
6. Agreement on FEES and timing
7. Any LIMITATIONS or special terms agreed upon

Question 10

What are the seven main elements of a management representation letter?

Answer 10

Main elements of a management representation letter:

1. Confirmation that all material information has been provided to the auditor.
2. Acknowledgment of management’s responsibility for the financial statements and internal controls.
3. Representations about the completeness and accuracy of financial records and disclosures.
4. Statements regarding recognition, measurement, and disclosure of known or possible litigation, claims, and assessments.
5. Affirmation that all events subsequent to the financial statement date requiring adjustment or disclosure have been addressed.
6. Disclosure of any uncorrected misstatements and their effects.
   Representations about fraud involving management or employees with significant roles.
7. Any other matters the auditor considers necessary.

Question 11

An auditor’s engagement letter most likely would include:

A) The auditor’s preliminary assessment of the risk factors relating to misstatements arising from fraudulent financial reporting.
B) A request for permission to contact the client’s lawyer for assistance in identifying litigation, claims, and assessments.
C) A reminder that management is responsible for acts of noncompliance with laws and regulations committed by employees.
D) Management’s acknowledgment of its responsibility for maintaining effective internal control.

Answer 11

D

A is wrong because this info would go in audit documentation not an engagement letter - the auditor wouldnt even have this assessment yet

B is wrong because the auditor doesn’t contact the lawyer directly - the engagement letter wouldnt included any information regarding this

C is wrong because management is responsible for maintaining effective internal controls and compliance overall, but not personally responsible for wrongful acts or noncompliance committed by individual employees. If employees commit violations, the employees themselves are accountable.