PCAOB – Public Company Accounting Oversight Board
Staff Audit Practice Alert No. 3 – Audit Considerations in the Current Economic Environment (December 5, 2008)
Representation Letter
A letter from management to the auditor representing that the financial statements are fairly presented. The letter is addressed to the independent auditor, and dated at the date of the auditor's report. It is signed by members of management whom the auditor believes are responsible for, and knowledgeable about, matters covered (chief executive officer and chief financial officer).
Specific items included in the representation letter are:
- All items requiring disclosure (such as loss contingencies, illegal acts, and related party transactions) have been properly disclosed.
- All accounting records, financial data, and minutes of directors’ meetings have been made available to the auditors.
- Financial statements are completed and prepared in conformity with generally accepted accounting principles
- Management's responsibility for the significant assumptions used in forecasting future cash flows.
Consult Specialist
The auditor's considerations should be based on knowledge of the entity, its business and management. When reviewing cash flow estimates, auditors should ensure they have the expertise to make critical assessments of the company's work. If necessary, they should contact industry experts or financial consultants specializing in valuation services.
Fair Value Estimates
The audit of fair values often involves substantial risks of material misstatement. For a particular estimate, the level of risk is influenced by a number of factors, such as the length of the forecast period, the number of significant and complex assumptions, the degree of subjectivity associated with those assumptions, and the availability of
