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a) Purpose of the letter of engagement.
Paragraph four of the auditors operational standards state that the auditor should obtain relevant and reliable audit evidence sufficient to enable him to arrive at conclusions necessary for his opinion. The guideline recognises management as a valid source of audit evidence. However the same guideline considers internal evidence to be less reliable including representations by management. If representations are made by management their reliability is enhanced if they are written. The guideline on “representations by management” classifies oral and implied representations by management as;
• Not material to financial statements.
• Material to financial statements but capable of independent corroboration.
• Material but knowledge of facts is restricted to by management or it is a matter of subjective judgement or opinion.
(b) Audrey M Kinyua
Certified Public Accountant of Kenya
P O Box 85088
NAIROBI
6th March 2000
Managing Director
Nairobi National Bank Ltd
P O Box 53
NAIROBI
Dear Sir,
Re: Letters of Representation
Following your reluctance to sign a suggested draft of the letter of representation which we sent to you, we have considered it prudent and necessary to explain to you purposes and advantages of the aforesaid letter. Firstly it reduces to writing oral statements by the directors. Without the letter of representation, a meeting will have to been called every time we need to get some information. But when the letter of representation is made available time is saved and operations in the company do not come to a standstill so as to answer questions.
Secondly, it provides evidence necessary to carry out an effective and sufficient audit. Audit evidence is vital for our work. Evidence that management has been or is responsible for the fair presentation of accounts in accordance with the necessary accounting and auditing standards and guidelines. The management is also made aware of existing circumstances, events and conditions.
Thirdly the letter is a requirement of the companies Act cap 486. Since all the laws apply to companies then your company should all adhere to the law.
Fourthly, the letter may be used in court or to settle any dispute as a source of evidence. For example your firm may use the letter to prove the auditors’ negligence. Also bearing in mind the same facts are not obtainable from evidential sources for example contingent liabilities and also some matters of opinion have no evidence for example life of a plant.
Finally, it acts as a reminder to the management of areas in the accounts and in the internal control system at large that it must take care of in particular.
Yours faithfully
(signature)
Audrey Mwendwa Kinyua. CPA (K).
c) The auditor should adopt these steps with regard to this type of representation that is type of representation where it is material but management restricts knowledge of facts, therefore the auditor cannot verify them independently.
• Ensure through appropriate testing that there is no conflicting evidence contradicting management representations.
• Consider whether representations made by management appear reasonable and consistent with other audit evidence obtained including other representations.
• Consider if individuals making representations can be expected to be well informed on the matter.
• If representations by management are contradicted by other evidence the auditor should investigate the circumstances and when necessary reconsider the reliability of other representations by management. When management representations are the only source of evidence and the tests have been satisfactory and management confirm representations in writing then the auditor can use these representations as audit evidence.
He should not rely on management representations rashly but must consider these representation with other evidence obtained before reaching a conclusion on whether he has obtained relevant audit evidence. Management representations are just an additional piece of audit evidence and should not be viewed in isolation.
d) If the auditor is unable to obtain all the information and explanations he considers necessary for the
purpose of the audit he may consider it a limitation of scope as it will prevent him from obtaining
sufficient evidence to express an unqualified opinion. This however depends on whether the matter is
material or immaterial.
Musyoxx answered the question on March 14, 2018 at 16:09
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