- That all financial records have been made available.
- That there have been no irregularities involving management, employees, etc.
- That all related party transactions have been disclosed
- That no events have occurred after the end of the fiscal year about which the CPA should know.
Each accountant may put different representations into their letters. Some of these representations may deal with insurance, legal matters, reserves and taxes. Discuss those items that are unclear with the CPA. Ask for explanations of unfamiliar terms or phrases.
It is important to note that the representation is “to the best of our knowledge”. As long as the person signing the letter does not know of any conflicting facts, they can sign the letter of representations.
When?
A letter of representations cannot be signed earlier than the date of the audit report. Thus, most CPAs, including our firm, issue the letter along with a draft copy of the audit report. The Board should review the audit report and the report of internal controls, as well as any other documentation that is provided. Once the Board is assured that the audit is materially complete and accurate, they sign the Letter of Representations. This is the notification to the CPA that the final audit report is ready to be issued.
Why?
Why is the letter issued? The technical answer is that the letter is a requirement of the American Institute of Certified Public Accountants, the governing body for CPAs. Thus all CPAs should be requiring this letter for all audit engagements.
From a practical standpoint, this letter assures the CPA that management has given the accountant all pertinent information. The financial statements belong to the Association, not to the CPA, so it is important that management take responsibility for the amounts contained within the final audit or review report.
If a CPA cannot obtain a signed representation letter in an audit, the auditor will be required to change the report to a “qualified report” (as compared with an “unqualified” or “clean” opinion), if limited representations can be obtained or will need too “disclaim” an opinion or “withdraw” from an engagement if no representations can be obtained.
Who should sign the representation letter? Guidance states that “the letter should be signed by those members of management with overall responsibility for financial and operating matters whom the auditor believes are responsible for and knowledgeable about, directly or through others in the organization, the matters covered by the representations”. In community associations, as discussed above, this term may involve board members as well as professional management. Thus, it is up to the CPA to determine who should sign the letter. We interpret the term “management” to include “those charged with governance”. Most professionals in this industry agree that this includes the Board of Directors.
In our firm, we ask for the president and treasurer of the association, as well as the community association manager - if there is one - to sign the report. Board members should not be hesitant to sign the representation letter if they have complied with the terms of the letter - to the best of their ability. It does not matter if a board member has been in office only a few months. The current Board is responsible for the report that is going out to the membership; thus, it is the current Board that is being asked to sign “to the best of their knowledge”. Guidance supports this determination with the statement – “If current management was not present during all periods covered by the auditor’s report, the auditor should nevertheless obtain written representations from current management on all such periods”.
In conclusion, the AICPA in its brochure, The Representation Letter in an Audit - An Important Communication Between Management and the Independent Auditor, states the following:
“…as management, you are asked to acknowledge that you - rather than the auditor - have primary responsibility for the financial statements and that to the best of your knowledge these statements are correct. The letter does not change or add to your to your fundamental responsibilities, nor does it relieve the auditor of any of his or her responsibilities. It simply clarifies the traditional roles that management and the auditor perform.”
In summary – the Letter of Representations
- Required by auditing and accounting standards
- It simply clarifies that to the best of your knowledge that these statements are correct.
- Must be signed by those who govern and manage the Association
- Is the notification to the CPA that the final report is ready to be issued
