During an audit engagement, a CPA firm performs tests to determine whether a
local auditee’s 
financial statements are fairly stated, in all material respects, and issues an opinion based on those tests.
In order to perform the audit and to be able to provide a clean or unmodified opinion on the financial statements, the CPA firm must gather evidence supporting the amounts and disclosures that are included in the local auditee’s financial statements.
One of the most important pieces of audit evidence the CPA obtains from the local auditee are certain statements or
representations from management regarding the local auditee’s financial statements and other information that will be audited.
The CPA firm requires the local auditee to make these and other written representations to them during an audit:
Ø That the financial statements and other information provided to the auditor are correct and represent all of the financial transactions entered into by the local auditee during the year
Ø That the local auditee is aware that the local auditee is responsible for their agency’s financial statements, internal controls, and the prevention and detection of fraud
Ø That the local auditee has complied with all laws, regulations, and terms of contracts and grant agreements that are material or important for the local auditee to follow
Ø That the local auditee has disclosed to the auditor any actual or suspected instances of fraud or misappropriations that occurred during the year
These representations are given to the CPA firm in a document called the
management representation letter. The CPA firm provides the local auditee with a sample letter containing all the representations they need from the local auditee. The local auditee puts the sample letter on their letterhead, and gives the signed letter to the CPA at the end of the audit.
Alternatively, the CPA firm may ask the local auditee to sign the management representation letter both at the beginning and at the end of the audit.
QUESTIONS:
Q. Since the CPA firm that performed my agency’s audit also prepared the financial statements, wouldn’t it be more appropriate for the CPA firm to take responsibility for them?
A. The CPA firm that performed your audit may also prepare your agency’s financial statements, provided that certain controls are in place. One of these controls is that there is a person in your organization that has the necessary skills, knowledge, and expertise that would allow the person, on behalf of the agency, to take responsibility for the financial statements. This person cannot be the CPA performing the audit. If the CPA were to take responsibility for your financial statements, that CPA would not be
independent regarding your agency, and could not perform your audit. See also
Responsibilities of the Local Auditee vs. Responsibilities of the CPA Performing the Audit .
Q. The CPA who is performing my agency’s audit also asked me to obtain a representation letter from my agency’s legal counsel regarding any litigation my agency is involved in. Is this a normal request?
A. Attorney representation letters are a common tool CPAs use during an audit to confirm contingent liabilities, including the effect of actual or possible litigation. Please assist the CPA in any way you can in obtaining the representation letter from your legal counsel In a timely manner, in order to expedite completion of the audit.
Q. I am the chief executive officer of a local auditee. I don’t want to sign the management representation letter because I was not employed by the local auditee during the period under audit. Is there something else I can do so that my agency receives a clean opinion on its audit report?
A. Management’s representations regarding their agency’s financial statements are the foundation upon which the CPA bases his or her audit opinion. If for any reason management cannot provide representations as to the completeness and correctness of its own financial statements, the CPA is required by professional standards to disclaim his or her opinion on the financial statements, or to withdraw from the engagement (see
Auditors’ Opinions and Accountants’ Reports ).
If you are new to the agency and feel you are not knowledgeable enough about the financial statements to sign the management representation letter, it is essential for you to become familiar and comfortable with the amounts in the financial statements so that you can sign the management representation letter.
If you are not comfortable signing the management representation letter because you believe that fraud occurred during your year under audit, please
call the Louisiana Legislative Auditor’s (LLA’s) Local Government Services (LGS) Engagement Manager .
Q. I am the chief executive officer of a local auditee. I am comfortable signing some parts of the management representation letter, but not all of it. What should I do?
A. Whether your discomfort pertains to a lack of understanding about a specific representation, or questions you have regarding transactions into which your agency entered during the year, speak to the CPA performing your audit. He or she should be able to provide clarification and answers regarding your concerns, or will refer you to LLA staff.
Q. Is a local auditee required to sign a management representation letter for a review/attestation or compilation engagement?
A. The CPA firm should obtain certain written management representations in review/attestation engagements. Because of the limited scope, the CPA is not required to obtain similar representations in compilation engagements. However, the understanding of management’s responsibilities for the financial statements and other matters should be included in the compilation engagement agreement, which is signed by the local auditee.
Q. The CPA firm that performed my audit never requested the management representation letter you are describing. Is this something I should be concerned about?
A. First, ask the CPA firm if one of the documents that he or she provided was the management representation letter. If the CPA’s response is that a formal management representation letter is not required, please
call the LGS Engagement Manager .