Page 80 - CA Final PARAM Digital Book.

Content of WR, in case of estimates and Old Course – (M19M, N19E, SM21)
QNO
consequences of refusal
81.100
TITANIUM CNO—SA540.220
Statutory auditor of O Ltd requested the management for a written representation in respect of
obsolescence of inventory and warranty obligations recognized by the company in its financial statements.
The management denied the representation on the ground that during the course of audit, all the required
procedures were performed by the auditor and after obtaining sufficient appropriate audit evidence,
auditor has issued a clean report. Please comment.

OR
Mr. L while conducting the observed that inventory and warranty obligation in the financial statements,
Mr. L wants to obtain written representation from the management to determine whether the
assumptions and estimates used are reasonable.
Guide Mr. L with reference to the relevant Standard on Auditing,
Answer ➢ As per SA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates
and Related Disclosures:

The auditor shall obtain written representations from the management and, where appropriate,
those charged with governance whether they believe significant assumptions used in making
accounting estimates are reasonable.
Depending on the nature, materiality and extent of estimation uncertainty, written representations
about accounting estimates recognised or disclosed in the financial statements may include
representations:
About the appropriateness of the measurement processes, including related assumptions
and models, used by management in determining accounting estimates in the context of
the applicable financial reporting framework, and the consistency in application of the
processes.
That the assumptions appropriately reflect management’s intent and ability to carry out
specific courses of action on behalf of the entity, where relevant to the accounting
estimates and disclosures.
That disclosure related to accounting estimates are complete and appropriate under the
applicable financial reporting framework.
That no subsequent event requires adjustment to the accounting estimates and disclosures
included in the financial statements.

➢ For those accounting estimates not recognised or disclosed in the financial statements, written
representations may also include representations about:

The appropriateness of the basis used by management for determining that the recognition
or disclosure criteria of the applicable financial reporting framework have not been met.
The appropriateness of the basis used by management to overcome the presumption
relating to the use of fair value set forth under the entity’s applicable financial reporting
framework, for those accounting estimates not measured or disclosed at fair value.

➢ Thus, management’s contention on the ground that during the course of audit, all the required
procedures were performed by the auditor and after obtaining sufficient appropriate audit
evidence, auditor has issued a clean report, for not providing written representation is not correct.
The management should provide written representations to the auditor.

Further as per SA 580 Written Representation, if management does not provide one or more of the
requested written representations, the auditor shall:-

Discuss the matter with management.
Re-evaluate the integrity of management and evaluate the effect that this may have on the
reliability of representations (oral or written) and audit evidence in general; and
Take appropriate actions, including determining the possible effect on the opinion in the
auditor’s report in accordance with SA 705.

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