The management representation letter : the perspectives of Maltese sole audit practitioners and small companies

Abstract

Purpose: This dissertation focuses on the use of the management representation letter in small business audits. The main objective of this study is to examine and analyse the significance and utility of the management representation letter from the perspectives of sole audit practitioners and small company managers. Design: Research data was collected through personal semi-structured interviews carried out between November 2004 and February 2005. Thirty interviews, fifteen with sole audit practitioners and fifteen with small company managers, were conducted and response thereto analysed. Findings: It was found that many small company managers signing the representation letter were not even aware of the letter. Sole audit practitioners considered the letter as being important and somewhere between useful and very useful, whereas small company managers aware of such letter considered it as moderately important and moderately useful. On average, both group of participants stated that the letter was a merely routine one and that its preparation was initiated at the final stage of the audit. The study found that generally a standardised form of the letter was used and that managers did not participate in the preparation of the letter. It also emerged that there were some misunderstandings on the reasons for significance and on the purpose of the letter among sole audit practitioners and particularly, among, small company managers. Moreover, it emerged that the letter was to be highly used for obtaining sole audit evidence when no other evidence was available, but there were conflicting responses as to what extent the letter was to be used for providing corroborative evidence. Value: The study shows that the management representation letter is very important but is not appreciated enough by sole audit practitioners and small company managers, with the latter often signing it obliviously. Amongst its recommendations, the study gives the following: An improvement in the education on the management representation letter by placing more emphasis on the representation letter in courses leading to accountancy qualifications and by increasing education exposure to the representation letter. Encouragement by auditors to managers to participate in the preparation of the letter. Reduction of over-standardisation by starting a new letter from scratch for each client and by initiating its drafting at the initial stage of the audit. Consideration of the extent to which the letter is to be used as corroborating evidence in order to make the letter as short as possible.