Management Representation Letter

Monday April 25, 2022 comments

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Hey, so this is actually going to be the last episode that I do on audit for this season, unless something comes up and I'm like, "Ooh!" But this time, what I wanted to dig into were some letters that the actual organization will put into what might be called their report package and what they're giving out to the auditors.

Today we are talking about the management representation letter. First time we talk about the audit opinion, so that's what the auditor is saying about the reports. Then there was the management letter. This is actually the letter that the auditor is giving the management team and board to say, "Hey, heads up, we saw these things and we think you guys should be aware."

The management representation letter is written by, modified by the management of the organization and presented to the auditors. Why is this important? Part of the organization's responsibility is to actually give access to the auditors to actually do their work. The management representation letter is confirmation that they have done that.

It is also done so that as the auditor is closing things out, the management team is saying, "Yes, there's not something missing. There's not information stating that we don't give you. So some items that are going to be listed in this letter are going to be what they made available. And so this is where the management team should actually go through and confirm, did we actually do this? You don't want to just sign it because maybe you're signing something you don't actually agree with because this template is typically provided by the auditors, but you want to be able to give that.

So some things that I want to mention that you do want to make sure that you have done correctly is "Dan, dan, daaa," there have been no communications from regulatory agencies concerning non-compliance or deficiencies in financial reporting procedures.

Hey, so if the IRS, your state has sent you any letters and you did not tell the auditors and they're related to your financial matters, this would be a no. You should be saying yes, we did have communications. Having communications doesn't mean something is wrong. The auditor is trying to make sure, did you give me the thing that I asked for? So this is their way of covering their bases to say we got what we needed to give the opinion we gave. And so this is where you're saying, "Oh no, no, we didn't withhold information from them." So another one that I really like, or I don't know if I should say I like, but I think it's important to include, is we have no knowledge of fraud or suspected fraud involving management and employees who have significant roles in internal controls or others where fraud could have a material effect on the financial statements.

Again, this is the auditor covering them by giving this letter to sign off. And so you really want to make sure, "Do we have knowledge? If we have knowledge, have we disclosed this? Do we have knowledge of any allegations? Because that's the next one?" So those types of things are pieces that you should really be thinking about for your organization, if this is something that you are able to do. I didn't really find a sample of this online for free, but if you have your own finance department or you're working with another accountant, maybe they can get you a copy of what the IACPI gives out. That's where I got my template from, but you need a membership. So be sure to comply with those things and get the necessary information. So again, the management representation letter is the letter that is the management team is saying to the auditors, "Hi, we gave you all of the things that were necessary. It is our belief that we've given this to you, to the best of our knowledge, the best of our understanding."

So that's part one. The other thing I did want to mention to you though, was the management response letter. This is essentially in response to the management letter. So again, the management letter is where the auditors tell the board and the management team where they saw issues that needed to be corrected, that they thought were material enough to either be a significant audit entry, or it was significant enough that they wanted the leadership team to know. I've seen instances where the leadership team then decides to do a response letter that says, "Yes, this was the case. Here's some additional information." This is helpful for them to cover their bases. When talking about what happened, what came up in the audit, this is not something that's going to go out to the bank.

So I don't know if I mentioned this. So when we think of the audit reports, audit financials are simply the actual audit opinion, as well as the financial statements. The actual management letter is not part of the audited financial statements. And so that's not going to go out to your bank unless it's specifically addressed to it. These letters should not be given to anyone that they are not addressed to. So don't give it to your bank if it does not say, and the bank of blah, blah, blah. Also, the idea of this response, again, it's only going to be addressed to whoever got the management letter. And so just think about that when people see, "Oh my gosh, we had all these findings." Sometimes the findings are not that big of a deal and your management team might be comfortable.

So how I knew I needed to get out of the audit arena was when I was working with one firm, you will not find them on my resume, so don't worry about them. I was working for one firm and what happened was I noticed a finding, we were at an organization. I was like, "Hey, they didn't do this thing." And then later I noticed that they did correct it. So they had an issue that I was like, "This is concerning." They corrected it themselves. So without us prompting, I noticed that they corrected it. The audit manager that I was working with still wanted it to be reported. And that is a great example of something that in the management response letter, they were like, "Hi, we actually did correct that thing. We disagree with you putting that into our report because we self-corrected." And so those are the instances where you really want to say, is the auditor simply reporting things because that's just how they do it or is this things that are adding value?

And the management response letter is where you can say, "Hi, yes, that's true. Was it true that thing happened? Yes, it was. However, here is some additional information." So those are the two pieces that I wanted to tell you, is that one you're going to give your management representation letter so that you can say, "We gave this information. We provided this information. This is what we are aware of as of this time." And then your management response letter to say, "Hi, the auditors reported on this thing. And here's some additional information that I think our board and whoever else received the copy of the management letter should be aware of." So, thank you for listening to our episodes on the audits. I hope this was informative. Let me know, be sure to subscribe to the podcast, wherever you're listening.

I personally use Cast box, I like it. And you can follow me on social media. It's CNRG accounting, CNRG accounting on Instagram and Facebook. Hopefully by the time you talk to me, I'll be back on LinkedIn. I really prefer LinkedIn, but they were disliking me for a little bit and I'd love a review. So if you can give me some feedback, what do you love about the show? What would you like to see different? I would be open to that. We're looking at some changes in the future. And so be sure to give me some info. All right, then have a great day.

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