The financial statement review management representation letter is designed to complete managements responsibilities in the review. The letter is signed at the end of the engagement and is dated at the time of the review report. The management representation letter has three basic parts, the introduction, statements about the financials and declarations on the information management has provided.
Care should be taken in producing this letter. It contains many items that if left out, increase liability on the CPA. In addition, the standards of SSARS (Statements on Standards for Accounting and Review) require certain elements to be included.
Also, please review our Ultimate Guide to Financial Statement Review and Compilation for information on the review process from beginning to end.
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This section lays out the basis of the representations. Management states what has been performed, the review. They also state that matters are generally limited to items that are material in nature. The following is the standard wording provided by the American Institute of Certified Public Accountants (AICPA).
This representation letter is provided in connection with your review of the financial statements of ABC Company, which comprise the balance sheets as of December 31, 20X2 and 20X1, and the related statements of income, changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the financial statements, for the purpose of obtaining limited assurance as a basis for reporting whether you are aware of any material modifications that should be made to the financial statements in order for the statements to be in accordance with accounting principles generally accepted in the United States of America.
Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement.
Statements About the Financials
This is one of the two sections of the document that contain the meat. In this section management takes responsibility for a number of things, it covers fair presentation according to GAAP, responsibility for internal controls and more. The following is a section form the AICPA approved wording.
- We acknowledge our responsibility and have fulfilled our responsibilities for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America.
- We acknowledge our responsibility and have fulfilled our responsibilities for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
- We acknowledge our responsibility for the design, implementation, and maintenance of internal control to prevent and detect fraud.
- Significant assumptions used by us in making accounting estimates, including those measured at fair value, are reasonable.
- Related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the requirements of accounting principles generally accepted in the United States of America.
- Guarantees, whether written or oral, under which the company is contingently liable have been properly accounted for and disclosed in accordance with the requirements of accounting principles generally accepted in the United States of America.
- Significant estimates and material concentrations known to management that are required to be disclosed in accordance with FASB Accounting Standards Codification (ASC) 275, Risks and Uncertainties, have been properly accounted for and disclosed in accordance with the requirements of accounting principles generally accepted in the United States of America.
- All events occurring subsequent to the date of the financial statements and for which accounting principles generally accepted in the United States of America requires adjustment or disclosure have been properly accounted for.
- The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements as a whole.
- The effects of all known actual or possible litigation and claims have been accounted for and disclosed in accordance with accounting principles generally accepted in the United States of America.
Declaration of the Information Provided
Finally, management states certain things about the information it has provided during the engagement. Things such as:
We have responded fully and truthfully to all inquiries made to us by you during your review.
We have provided you with:
- access to all information, of which we are aware, that is relevant to the preparation and fair presentation of the financial statements, such as records, documentation, and other matters
- minutes of meetings of stockholders, directors, and committees of directors or summaries of actions of recent meetings for which minutes have not yet been prepared; additional information that you have requested from us for the purpose of the review; and unrestricted access to persons within the entity from whom you determined it necessary to obtain review evidence.
- All transactions have been recorded in the accounting records and are reflected in the financial statements.
- We have [no knowledge of any] [disclosed to you all information that we are aware of regarding] fraud or suspected fraud that affects the entity and involves
- management, employees who have significant roles in internal control, or others when the fraud could have a material effect on the financial statements.
- We have [no knowledge of any] [disclosed to you all information that we are aware of regarding] allegations of fraud, or suspected fraud, affecting the entity’s financial statements as a whole communicated by employees, former employees, analysts, regulators, or others.
- We have no plans or intentions that may materially affect the carrying amounts or classification of assets and liabilities.
- We have disclosed to you all known instances of noncompliance or suspected noncompliance with laws or regulations whose effects should be considered when preparing financial statements.
- We [have disclosed to you all known actual or possible] [are not aware of any pending or threatened] litigation and claims whose effects should be considered when preparing the financial statements [and we have not consulted legal counsel concerning litigation or claims]
- We have disclosed to you any other material liabilities or gain or loss contingencies that are required to be accrued or disclosed by FASB ASC 450, Contingencies.
- We have disclosed to you the identity of the entity’s related parties and all the related party relationships and transactions of which we are aware.
- We have disclosed to you all information relevant to the use of the going concern assumption in the financial statements.
- No material losses exist (such as from obsolete inventory or purchase or sale commitments) that have not been properly accrued or disclosed in the financial statements.
- The company has satisfactory title to all owned assets, and no liens or encumbrances on such assets exist, nor has any asset been pledged as collateral, except as disclosed to you and reported in the financial statements.
We have complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance.
- We are in agreement with the adjusting journal entries that you have recommended, and they have been posted to the company’s accounts (if applicable).
In total the management representation letter sums up the company responsibilities for the engagement. It outlines the various factors taken into account during a review or audit. Care should be used when preparing this letter to assure it is in compliance with accounting regulations. Below is a link to a properly formatted financial statement review management representation letter.
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