Do you know what is a Letter of Representation in auditing? It is an essential document in the auditing process. This letter is signed by an executive leader and is usually written by external auditors on behalf of the organization’s management.
The Letter of Representation (LOR) is known by different names, such as:
- Representation letter
- Rep letter
Importance of an LOR
The LOR provides reassurance that the information presented is accurate, making it essential evidence in any audit. Management’s attestations in the LOR show that the business has revealed all pertinent information, helping to create a foundation of confidence.
This places more responsibility on management in the case of errors or control breakdowns, particularly if relevant data is withheld from the auditors.
Who Prepares the Letter of Representation?
The auditor prepares the rep letter, which the manager signs. The executive then verifies that the information given is true and that all relevant information has been shared with the auditors by signing the LOR.
Key Elements of a Rep Letter
The LOR is crucial in financial audits regarding financial statements and internal controls that regulate financial reporting. Within the framework of SOC 1 or SOC 2 audits, the LOR allows the organization’s management to confirm that service auditors have been provided with all relevant information.
In addition, the rep letter confirms that controls were successfully implemented and maintained during the evaluation period. It holds management accountable for the veracity of the report’s claims and descriptions.
Timing of a Letter of Representation
LOR can be created at any time during a SOC 1 or SOC 2 test. However, the rep letter needs to be dated as of the service auditor’s report date under AT-C section 205 (SSAE 18), paragraph 2.54.
The time between the report’s date of issuance and its signing is appropriate. However, in order to properly support the audit opinion, it must be signed prior to the report’s publication.
Responsibility and Contents of a Letter of Representation
Management is in charge of the LOR. They have to give the auditor written justifications. Claims made in these representations are:
- Description, controls, and control goals (SOC 1)
- Trust services requirements (SOC 2)
These are covered in full in paragraph 38 of AT-C section 320 (SSAE 18).
Click here to read about the IRS & state audit representation.
Crucial Statements in a Representation Letter
The following minimum representations have to be included in a LOR:
Management’s Assertions
The assertions made by management verify the criteria, controls, and descriptions.
Relevance and Disclosure
Declaring that the description or evaluation takes into account all pertinent information.
Responsibility Acknowledgement
Accepting accountability for the criteria used, the description, and its appropriateness.
Post-Period Events
Report any noteworthy occurrences beyond the reporting period.
Access and Information
Attesting to the fact that the auditor has been granted access to all pertinent information.
Material Misstatements and Assumptions
Expressing acknowledgment for any minor errors in information as well as the validity of critical presumptions.
Internal Control Deficiencies
Identifying and disclosing any known weaknesses in internal controls is critical.
Fraud and Compliance
Reporting any suspected fraud or legal non-compliance.
Best Practices & Practical Tips for Letters of Representation
A Letter of Representation is powerful but not a substitute for audit evidence; treat it as complementary confirmation.
Best practices include:
- The Depositor also insisted on having it signed by key management (typically the CEO and CFO), dated as of the date of the auditor’s report, and kept with the audit file.
- Management must keep the supporting documentation for each assertion, and make it available should the auditors ask for proof.
Common pitfalls to avoid:
- vague language
- incomplete disclosure of subsequent events
- delaying their signatures to a point after the issuance of the report
If representations are refused or qualified, auditors should highlight them and evaluate their effect on the opinion. If new facts come out after the report is signed (such as litigation or fraud), then management must quickly tell its auditors and may need to reissue representations or restate financials. Clear, concise wording and documentation of your review before signing will reduce risk and enhance the evidential base of your audit work!! Check out our CPA services for individuals now!
The Bottom Line
Learning what is a letter of representation in auditing offers confirmation from management on the completeness and correctness of the data provided to auditors. In accordance with auditing requirements, the LOR needs to be dated, signed, and contain particular representations before the audit report is released. This agreement guarantees accountability and supports the integrity of the auditing process.
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