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Chapter 24
Case Study
Identify the matters connected with these items which the auditor
may include in a Letter of Representation
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Examination questions
(a) Management representations are a form of audit evidence. They are
contained in a letter, written by the company’s directors and sent to the
auditor, just prior to the completion of audit work and before the audit report
is signed.
(b) Lion’s Roar
The amount of the claim is material being 50% of profit before taxation.
There is also a lack of definitive supporting evidence for the claim. The two
main pieces of evidence available are the claim from Lion’s Roar itself and
the legal advice from Crighton Ward’s solicitors. However, any claim amount
cannot be accurately determined because the dispute has not been settled.
The directors have stated that they believe the claim not to be justified,
which is one possible outcome of the dispute. However, in order to obtain
sufficient evidence to show how the treatment of the potential claim was
decided for the financial statements, the auditor must obtain this opinion in
writing. Reference must therefore be made to the claim in the representation
letter.
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Depreciation
This matter is unlikely to be included in the letter of representation because
the auditor appears to have obtained sufficient evidence to confirm the
(c) Lack of representation letter
The auditor may take the following actions:
Discuss the situation with the directors to try and resolve the issue that the
directors have raised. The auditor will need to explain the need for the
representation letter again (and note that the signing of the letter was
mentioned in the engagement letter).