The letter of representation : an evaluation of its use in Malta

Abstract

This dissertation evaluates the usefulness, significance and effectiveness of the letter of representation as perceived by local auditors, management of public limited companies and advocates. The required information was collected by means of face-to-face interviews, which were conducted with twenty business concerns. The sample consisted of eight audit firms, eight public limited companies and four advocates. The letter was given considerable importance by all concerned but the prominence in the mind of managers was to some extent less than the rest. Although auditors made mention of the written representations in the letter of engagement, they did not renew such a notice on a yearly basis unless there was a change in circumstances. Auditors normally used standard forms, tailored to individual businesses, in the drafting of the letter and there was little or no room for managers' participation. In addition, discussions were rarely held where no changes m the contents occurred from year to year. It also resulted that the letter was not always recorded in board minutes. By far, managers and advocates considered the letter to be less useful when compared to auditors. Auditors applied the letter as audit evidence where solid documentary evidence was not expected to be available; yet, not all managers were aware of this fact. Some auditors were against using the letter as secondary audit evidence. The letter definitely served as a reminder of management's responsibility for the financial statements, but managers failed to appreciate the fact that auditors needed the letter as an assurance that all the relevant information was disclosed. The letter indemnified the auditors where litigation came from clients who made false written statements. A high degree of effectiveness was attributed to the letter, but even here managers took the letter somewhat for granted. Managers never transmitted their unwillingness to co-operate and they were confident that auditors clearly understood the purpose and effect of the letter. Nevertheless, auditors indicated instances whereby clients offered some opposition. Reasons for such negative attitude included misunderstandings on the purpose of the letter, reluctance of directors to take responsibility and disclosure of false information. In addition, advocates feared that some auditors could have attached more protection to the letter than it was meant to. The recommendations contemplated from this study consisted of enhancing the dialogue between auditor and client, legalising the letter, countersigning by management outside the board and dropping the long form standard letter.