Statement on Auditing Standards No. 85 requires that an independent auditor obtain written representations from management as a part of an audit of financial statements performed in accordance with generally accepted auditing standards (GAAS). It also provides guidance concerning representations to be obtained.

Why Management Representations are Necessary
Management's written representations confirm those representations explicitly or implicitly given to the auditor. These representations should be properly documented in order to lessen the possibility of a misunderstanding concerning the matters that are the subject of the representations. The auditor should obtain these written representations from management in order to complement other auditing procedures.

The auditor should always obtain written representation even though he/she has applied other evidence gathering procedures to a specific audit area. Written representations from management should be obtained for all financial statements and periods covered by the auditor's report.

Specific Representations
Specific representations should be obtained on all of the following:

• Management carries the responsibility for the fair presentation of the financial statements in conformity with generally accepted accounting principles (GAAP).

• Management believes that the financial statements are fairly presented in conformity with GAAP.

• All financial records and related data have been made available to the auditor.

• A complete set of all minutes of meetings of stockholders, directors, and committees of directors has been made available to the auditor.

• All communication from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices has been disclosed to the auditor.

• There are no unrecorded transactions.

• The auditor has been provided with all information concerning fraud involving management, employees who have significant roles in internal control, and/or others where the fraud could have a material effect on the financial statements.

• The auditor has been made aware of any plans or intentions that may affect the carrying value or classification of assets or liabilities.

• The auditor has been made aware of any information concerning related-party transactions along with receivables/payables from/to related parties.

• The auditor has been made aware of all written and/or oral guarantees under which the client is, or could be, contingently liable.

• Significant estimates and material concentrations known to management that are required to be disclosed have been so disclosed.

• The auditor has been made aware of any violations or possible violations of laws or regulations where the effects should be considered for disclosure in the financial statements, or as a basis for recording a loss contingency.

• Any unasserted claims or assessments that the client's attorney has advised are probable of assertion have been properly disclosed.

• All liabilities and gain/loss contingencies that are required to be disclosed have been so disclosed.

• The auditor has been made aware that the client holds satisfactory title to assets, liens, or encumbrances on assets, and assets pledged as collateral.

• The client has complied with contractual agreements that may affect the financial statements.

Other Issues Regarding Management Representations
Management's representations may be limited to matters that are considered either individually or collectively material to the financial statements. It is required, though, that management and the auditor reach a documented understanding on the parameters of materiality.

The written representations should be addressed directly to the auditor and signed by the members of management who have the overall responsibility for financial and operating matters. The date of the representation document should be no earlier than the date of the auditor's report.

For some engagements, the auditor will be required to obtain an updating representation letter from management. This circumstance occurs when a predecessor auditor is requested by a former client to reissue his/her report on the financial statements of a prior period, and those financial statements are to be presented on a comparative basis with the audited financial statements of a subsequent period.

The predecessor auditor must obtain an updating representation letter from the management of the former client. Specifically, this updating letter should address whether any information has come to management's attention that would call for previous representations to be modified, and whether any subsequent events have occurred which would require adjustment to, or disclosure in, the previously issued financial statements.

Management's refusal to furnish written representations is a scope limitation sufficient to preclude the issuance of an unqualified opinion. Normally, this limitation is sufficient enough to require the issuance of a disclaimer of opinion.

This statement is effective for audits of financial statements for periods ending on or after June 30, 1998, with earlier application permitted.