management representation letter review engagement

• AR-C 90: Definitive Guide to Review Engagements

By Charles Hall | Preparation, Compilation & Review

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Review engagements provide limited assurance using  AR-C 90, Review of Financial Statements . And these engagements can be done with much less effort than audits.

So, what are the requirements of a review engagement? When might a review be preferable to an audit? Must the CPA be independent? Can the CPA prepare the financial statements and perform the review engagement? Can a special purpose reporting framework be used? Who might desire a review report (rather than an audit or a compilation report)?

I'll answer these questions below, but, first here's a quick video introduction to the post.

Review Engagement Guidance

The guidance for reviews can be found in AR-C 90, Review of Financial Statements . AR-C 90 is part of  the AICPA's Statements on Standards for Accounting and Reporting Services (SSARS)..

Though this article is long, it's not intended to be comprehensive. It's an overview.

Applicability of AR-C 90

You should perform a review engagement when engaged to do so . If your client asks for this service and you accept, you are engaged.

A review engagement letter should be prepared and signed by the accountant or the accountant’s firm and management or those charged with governance. See engagement letter guidance below.

AR-C 90 Objectives

The objective of the accountant in a review engagement is to provide limited assurance regarding the financial statements. Other historical information such as supplementary information can also be included.

So how does an accountant perform a review engagement? Primarily with inquiries and analytics.

How does the limited assurance in a review engagement compare with compilations and audits?

In a compilation engagement, no assurance is provided. What procedures are employed in a compilation? Primarily, the accountant reads the financial statements for appropriateness. Why perform a compilation rather than a review? Economy and cost. Since procedures are minimal, it's easier to perform a compilation and less costly to the client.

In an audit, the accountant provides a high level of assurance. The accountant performs procedures beyond inquires and analytics such as confirmations. Audit risk assessment and planning requirements are much more rigorous than that of a review. While audits provide a higher level of assurance, they are more time-consuming. Consequently, the additional time raises the cost for the client. This is why reviews are sometimes performed rather than an audit.

Prior to performing a review engagement, make sure all stakeholders will accept this product. Some lenders might require an audit.

Review Reports

A review report is always required in a review engagement .

The standard review report states that no material modifications are necessary for the financial statements to be in accordance with the reporting framework. (See a sample review report below.)

If material misstatements are identified and relate to specific amounts in the financial statements, you will issue a review report with a basis for qualified conclusion paragraph and you'll have a qualified conclusion. See Exhibit C, illustration 5 in AR-C 90 for a sample review report with a departure from GAAP.  If the effects of the departure are determined, they are disclosed in the report. If not known, the paragraph states that the effects have not been determined.  

If misstatements are material and pervasive, an adverse conclusion is appropriate. The review report will also have a basis for adverse conclusion paragraph. See Exhibit C, illustration 7 in AR-C 90 for a sample review report with an adverse conclusion.

Review Financial Statements

The accountant prepares financial statements as directed by management or those charged with governance. The financials should be prepared using an acceptable reporting framework including any of the following:

• Regulatory basis
• Contractual basis
• Other basis (as long as the basis uses reasonable, logical criteria that are applied to all material items) 
• Generally accepted accounting principles (GAAP)

All of the above bases of accounting, with the exception of GAAP, are referred to as special purpose frameworks. When such a framework   is used, a description is required and   can be included in:

• The financial statement titles
• The notes to the financial statements, or
• Otherwise on the face of the financial statements

The financial statement should disclose how the special purpose framework differs from generally accepted accounting principles. If, for example, a company uses accelerated depreciation in tax-basis statements, the financial statements should disclose how this method differs from straight-line (the usual GAAP method). 

The review report language changes when a company uses a special purpose reporting framework. See Exhibit C, illustration 3 in AR-90 for a tax-basis review report. 

Which Financial Statements?

Management specifies the financial statements to be prepared. Normally a company desires a balance sheet, an income statement, and a cash flow statement. The accountant can, however, issue just one financial statement (e.g., income statement). 

Who prepares the financial statements? The company or the CPA firm can prepare them.

Can the cash flow statement be omitted? GAAP requires a cash flow statement when a statement of financial condition and an income statement are included. Compilation standards allow for the omission of the GAAP cash flow statement if the omission is noted in the compilation report. Not so in a review engagement. The cash flow statement must be included when GAAP is used.

But is the cash flow statement required when the tax-basis of accounting is used? No, the cash flow statement can be omitted when the financial statements are tax-basis.

Disclosures in Reviewed Financial Statements

What about disclosures? Are they required in a review engagement?

In compilation engagements , disclosures can be omitted. Not so in a review engagement. Full disclosure is required, regardless of the reporting framework.

References to Review Report and Notes

Should a reference to the review report and the notes be included at the bottom of each financial statement page? While not required by the SSARS, it is acceptable to add a reference such as:

• See Accountant’s Report and accompanying notes
• See Accountant’s Review Report and accompanying notes, or
• See Independent Accountant’s Review Report and accompanying notes

Review Engagement Documentation Requirements

The accountant should prepare and retain the following documentation:

• Engagement letter
• A copy of the reviewed financial statements 
• Accountant’s review report 
• Communications with management and those charged with governance about significant matters arising during the engagement
• Communications with other accountants that reviewed or audited financial statements of significant components 
• Emphasis-of-matter or other-matter paragraph communications with management or others
• The representation letter (see Exhibit B of AR-C 90 for sample wording)
• Information about how any inconsistencies were addressed when the accountant identified information that was inconsistent with the accountant's findings regarding significant matters affecting the financial statements

The review documentation should be sufficient to enable an experienced accountant, having no previous connection to the engagement to understand:

• the nature, timing, and extent of the review procedures,
• the evidence obtained and the accountant's conclusions based on that evidence
• significant matters and the related conclusions and judgments

Review Engagement Letter

While it is possible for the accountant to perform only a review and not prepare the financial statements, most review engagement letters will state that the following will be performed by the accountant:

• Preparation of the financial statements (a nonattest service)
• A review engagement (an attest service)

Since a nonattest service and an attest service are being provided, the accountant will add language to the engagement letter describing the client’s responsibility for the nonattest service. 

See illustrative engagement letters in Exhibit A of AR-C 90 .

AICPA independence standards require the accountant to consider whether he is independent when the CPA performs an attest service (e.g., review) and a nonattest service (e.g., preparation of financial statements) for the same client. If management does not possess the skill, knowledge, and experience to oversee the preparation of the financial statements and accept responsibility, the accountant may not be independent.

So, must the accountant be independent? Yes, independence is required in review engagements.

AR-C 90 Review Procedures

The accountant should:

• Make inquiries,
• Perform analytical procedures, and
• Perform other procedures, as appropriate

Direct your procedures to areas with increased risks of material misstatement. An understanding of the entity and the industry in which the entity operates will better enable you to identify potential misstatements.

1. Review Inquiries

AR-90.29 provides a series of inquiries that should be made of management and others. Those questions include matters such as fraud, subsequent events, related party transactions, and litigation. Additionally, once you create your analytical procedures, you may have questions regarding unexpected changes.

The accountant should remain alert for related party transactions outside the normal business course. Inquiries should be made about such transactions. 

2. Review Analytical Procedures

Apply analytical procedures to the numbers. What kind? Well, that depends. What numbers are most important? What numbers are most likely to be misstated? What types of analytics illuminate the client's business? Consideration of such factors will lead you to the right analytics.

Here are examples:

• Comparing the current year's financial statement numbers with the prior year
• Comparing the current year trial balance numbers with the prior year
• Ratios such as debt/equity or current assets/current liabilities or depreciation/total depreciable assets
• Computing numbers with nonfinancial information such as the number of units sold times the average price 
• Comparing quarterly revenues by location

As you can see, judgment is required. Moreover, you need to develop expectations before computing the numbers. AR-C 90 says that the expectations should enable you to identify material misstatements. So the expectations have to be precise enough to yield that result. 

Here are the five steps I use:

• Develop expectations
• Compute the numbers
• See if the numbers align with expectations
• Follow up with additional inquiries if expectations are not met
• Develop a conclusion

I find that many accountants fail to document their expectations. Or if expectations are documented, a second problem occurs: The numbers don't align with the expectation and there's no documented follow-up. If the numbers don't align with expectations, make sure you determine why.

Expectations

How do we develop expectations?

It is helpful to discuss current operations with management before computing your numbers. You want to know, for example, if sales rose during the year or if there were reductions in the workforce. The conversation informs your expectations.

Also, if you've previously worked with the client, you are familiar with their profit margins or debt levels. This prior knowledge informs your expectations.

Finally, you might also read the minutes (if there are any) before computing your numbers.

3. Other Review Procedures

AR-C 90 states that procedures include inquiry, analytics, and other procedures. The third element--other procedures-- is a general category that encompasses reading the financial statements and responding to risks. You might, for example, identify potential misstatements as you perform analytical procedures. If revenues are up 25% but you expected them to be stable, you'll perform additional procedures to see why.

Interestingly (at least to me), AR-C 90.A45 states that you can perform audit procedures in a review engagement. Though your review engagement letter states you are not performing an audit, your review file can include audit procedures. Why would the AICPA provide this latitude? To give you the ability to reach beyond your typical review procedures (inquiry and analytics). You need a basis for the limited assurance you are providing. And in some situations, you may need audit procedures to get you there.

Materiality in Review Engagements

AR-C 90 requires accountants to determine and use materiality. This makes sense given the review report says the following:

Those standards require us to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America.

You can't know what a "material modification" is without knowing what materiality is. So, the accountant should use materiality in the planning and conduct of the review engagement. AR-C 90 says the determination of materiality is a matter of professional judgment. 

Review Representation Letter

A signed representation letter is required in all review engagements.

The date of the representation letter will agree with the date of the review report. In no event should the date of the representation letter precede the date of the review report. (The accountant is not required to have physical possession of the letter on the date of the review report. But the accountant should have the signed letter before releasing the financial statements.)

Provide the draft of the financial statements to the client promptly so they can review them and assume responsibility. Thereafter, the client can sign the representation letter.

Additionally, the representation letter should cover all financial statements and all periods in the report.

Exhibit B of AR-90 provides a sample representation letter.

Review Report Sample

The following is a review report sample (sometimes referred to as an accounting review report):

Independent Accountant's Review Report

[ Appropriate Addressee ]

I (We) have reviewed the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1, and the related statements of income, changes in stockholders' equity, and cash flows for the years then ended, and the related notes to the financial statements. A review includes primarily applying analytical procedures to management's (owners') financial data and making inquiries of company management (owners). A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, I (we) do not express such an opinion.

Management's Responsibility for the Financial Statements

Management (Owners) is (are) responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error.

Accountant's Responsibility

My (Our) responsibility is to conduct the review engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require me (us) to perform procedures to obtain limited assurance as a basis for reporting whether I am (we are) aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. I (We) believe that the results of my (our) procedures provide a reasonable basis for my (our) conclusion.

We are required to be independent of XYZ Company and to meet our ethical responsibilities, in accordance with the relevant ethical requirements related to our reviews.

Accountant's Conclusion

Based on my (our) reviews, I am (we are) not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.

[ Signature of accounting firm or accountant, as appropriate ]

[ Accountant's city and state ]

[ Date of the accountant's review report ]

Exhibit C of  AR-C 90 provides seven review report illustrations.

Reporting When There are Other Accountants

What are your responsibilities if you are performing the review of a consolidated entity that includes a subsidiary audited or reviewed by another accountant? 

First, obtain and read the subsidiary report.

Second, decide whether to refer to the other accountants in your review report. If reference is made, AR-C 90.122 states the accountant should clearly indicate in the accountant's review report that the accountant used the work of other accountants. The report should also include the magnitude of the portion of the financial statements audited or reviewed by the other accountants." See Illustration 6 in Appendix C of AR-C 90 for sample report language. If you refer to the other accountant, you will state that your conclusion, as it relates to the entity reviewed by the other accountants, is based solely on their report.

Third, regardless of whether you decide to refer to the other accountants, communicate with the other accountants. Determine the following:

• That the other accountants are familiar with the relevant reporting framework and review or auditing standards, as applicable. 
• Advise them that you are including the subsidiary's financials in the consolidation and that their report will be relied upon, and when applicable, that the other accountant's report will be referred to in your review report. 
• Communicate the ethical requirements of the engagement, mainly independence. 
• And finally, advise them that you are reviewing matters affecting the intercompany eliminations.

Going Concern in Review Engagements

If the reporting framework requires that management evaluate going concern (FASB has such a requirement), then you should perform going concern review procedures. Those procedures include:

• Determining whether the going concern basis of accounting is appropriate
• Reviewing management's evaluation of whether substantial doubt exists
• When there is substantial doubt, reviewing management's plans to mitigate the conditions
• Reviewing going concern disclosures

See my article about going concern in relation to FASB standards. 

If the applicable reporting framework does not require management to evaluate going concern but you become aware of conditions or events that raise substantial doubt about the entity's ability to continue as a going concern, do the following:

• Ask management if the going concern basis of accounting is appropriate
• Ask management about their plans to address the adverse effects of the conditions or events
• Review the going concern disclosures to see if they are appropriate

Other Historical Information in Review Engagements

In addition to historical financial statements, AR-C 90 may be applied to the following:

• Profit participation, or
• Income tax provisions
• Supplementary information
• Required supplementary information
• Tax return information

Review Engagements Conclusion

There you have it. Now you know how to perform a review engagement.

The main purpose of a review is to provide limited assurance in regard to the information. Inquiries and analytics are required. A signed representation letter is also required.

If you desire to issue financial statements without a compilation or review report, consider the use of AR-C 70, Preparation of Financial Statements .

If you desire to issue financial statements without a review report, consider using AR-C 80, Compilation Engagements .

The AICPA provides the full text of AR-C 90 online . You can download the PDF if you like. Once you download the document, you can use control-f to find particular words. I find this useful.

For additional SSARS-related articles see:

• AR-C 70: The Definitive Guide to Preparations
• AR-C 80: The Definitive Guide to Compilations

About the Author

Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty-five years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention, The Why and How of Auditing, Audit Risk Assessment Made Easy, and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles consults with other CPA firms, assisting them with auditing and accounting issues.

Hello Charles – My client is selling his business (Sch C). The buyer’s bank is requesting reviewed financial statements prior to closing. The person paying for the work is the buyer. For the engagement letter, do both the seller (I am thinking here about the management representations) and the buyer need to sign the EL? Do you have another suggestion? Thank you.

It’s permissible for you to prepare the financial statements in a review engagement as long as management reviews them (after you prepare them) and assumes responsibility for them. The client (designated person) assuming responsibility for the financial statements must have sufficient skill, knowledge, and experience to perform this role. If the client does not understand the financials, they can’t assume responsibility, and you would not be independent–and could not perform the review engagement.

Lyli, I’d consider whether the records are sufficient before accepting the engagement. It sounds like the transaction detail from the general ledger is not available. If not, you may not want to accept the engagement. You can do a compilation or a review on an entity that has sufficient records. If your independence is impaired, you cannot perform a review engagement. A compilation can be performed, even when your independence is impaired, but you’ll need to disclose your lack of independence in your compilation report. I hope this helps.

Can a CPA prepare financial statements as part of a review engagement? Long story short. A new property management company took over after some irregularities of the previous management company. No tax returns were filed for 2021 and 2022. The current board obtained some bookkeeping records (balance sheet and the general ledger), but only printed reports, not the actual records from the accounting system. At first, we were engaged to do a compilation but the mistatements are so significant that a review would be more appropriate. The client intended to use the new financials for applying to loans, going to litigation proceedings against the former management company and for filing taxes. Can we modified our engagement to a review and as part of such review issue new financial statements? If yes, the reviewed financials should be part of the Independent Accountant’s Report? Our independence would be impaired considering we had to prepare the financials almost from scratch, because the records provided are not reliable? In this case, management was not responsible for preparing the financials under reviewed, who will sign the management representation letter? I couldn’t find a template for this case. Thanks.

I would subject all numbers to review procedures (inquiry and analytics). You may want to use quarterly or monthly comparisons within the first year.

The following if from an audit article I wrote, but should help:

First Option One option is to compute expected numbers using non-financial information. Then compare the calculated numbers to the general ledger to search for unexpected variances.

Second Option A second option is to calculate ratios common to the entity’s industry and compare the results to industry benchmarks.

While industry analytics can be computed, I’m not sure how useful they are for a new company. An infant company often does not generate numbers comparable to more mature entities. But we’ll keep this choice in our quiver–just in case.

Third Option A more useful option is the third: comparing intraperiod numbers.

Discuss the expected monthly or quarterly revenue trends with the client before you examine the accounting records. The warehouse foreman might say, “We shipped almost nothing the first six months. Then things caught fire. My head was spinning the last half of the year.” Does the general ledger reflect this story? Did revenues and costs of goods sold significantly increase in the latter half of the year?

Fourth Option The last option we’ve listed is a review of the budgetary comparisons. Some entities, such as governments, lend themselves to this alternative. Others, not so–those that don’t adopt budgets.

When performing a financial statement Review for the first year can you cover the income statement and cashflow as Reviewed or do they have to be Compiled since the prior year was not Reviewed?

It’s fine to manually create your analytics. Most people still use Excel to do so. The main thing is to document your expectations and then create analytics for material areas. I hope your peer review goes well.

With review analytics, is it acceptable to do it manually or use some type of computer system to assist? Can you recommend a few if the latter? I’m worried about peer review and if it’s done manually, will that be less acceptable?

You can provide a balance sheet using GAAP and it can be subject to a review engagement. But you will need disclosures in addition to the balance sheet. You’ll also need to follow all AR-C 90 guidance.

Licensing bureau is requesting review balance sheet only. Is this in conformity with GAAP

Naina, either is fine, but I prefer the first since it highlights that you are independent. Charles

Hello Mr.Charles,

I have been looking for some illustrative reviewed financial statements. On the report I have seen some firms say “Financial Statements and Independent Accountant’s Report” and few say “Reviewed Financial Statements”. Can you please advice what is the correct title to be disclosed on a Review report. Any help is highly appreciated.

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The Role of Management Representation Letters in Audits

Explore the significance of management representation letters in audits, their preparation process, and common misunderstandings in this insightful overview.

Audits are a critical component of financial transparency and corporate governance. Within this process, management representation letters play an essential role that often goes unnoticed by those outside the accounting profession.

These documents serve as a written assertion from company management regarding the accuracy and completeness of information provided to auditors. Their importance cannot be overstated, as they underpin the trust and integrity of the entire audit process.

Purpose of Management Representation Letters

Management representation letters serve as a formal attestation from a company’s executives to the auditors, confirming the veracity of the financial statements and disclosures. These letters are a professional necessity, providing auditors with assurances that all relevant information has been disclosed. They are a testament to the management’s confidence in their financial reporting and their commitment to transparency.

The letters also support the auditor’s assessment of the risk of material misstatement in the financial statements. By obtaining written confirmations, auditors can reduce the extent of substantive testing required, which can streamline the audit process. This efficiency is beneficial for both the auditors and the company being audited, as it can lead to a more focused and timely audit.

Moreover, these letters can be a safeguard against potential disputes or legal issues that may arise post-audit. In instances where inaccuracies are discovered after the audit has been completed, the letter serves as a record that management had affirmed the completeness and accuracy of the information at the time of the audit. This can be particularly important in cases where financial statements are later found to be fraudulent or misleading.

Preparing a Management Representation Letter

The preparation of a management representation letter is a meticulous process that requires careful attention to detail and a comprehensive understanding of the company’s financial affairs. It is a collaborative effort between management and auditors to ensure that all significant information is accurately reflected.

Necessary Statements Identification

Identifying the necessary statements to be included in the management representation letter is a foundational step. These statements typically cover a range of areas such as the acknowledgment of responsibility for the fair presentation of financial statements in conformity with the applicable financial reporting framework, confirmation of the completeness of the information provided, and the disclosure of any subsequent events that may affect the financial statements. Management must also confirm that they have made the auditors aware of all known instances of fraud or suspected fraud affecting the company. The identification process is guided by professional auditing standards, such as those issued by the American Institute of Certified Public Accountants (AICPA) or the International Auditing and Assurance Standards Board (IAASB).

Information Completeness

Ensuring the completeness of information in the management representation letter is paramount. This involves a thorough review of the company’s financial records and disclosures to verify that all relevant information has been included. Management must confirm that all transactions have been recorded and are reflected in the financial statements. They must also attest to the appropriateness of the accounting policies applied and whether any unrecorded liabilities exist. This step is critical as it directly impacts the credibility of the financial statements and the audit’s outcome. The completeness of information also extends to the disclosure of any related party transactions and the effects of any uncorrected misstatements identified during the audit.

Review and Approval

The final step in preparing a management representation letter is the review and approval by the company’s top executives, typically the CEO and CFO. This review process is not merely a formality; it is an active examination to ensure that the letter accurately reflects the company’s financial position and that all statements can be substantiated. The approval signifies that management has taken ownership of the representations made within the letter. It is also an opportunity for management to discuss any concerns or clarifications with the auditors before the letter is finalized. The signed letter is then dated as of the last day of fieldwork, signifying that the representations are relevant and up-to-date with the findings of the audit.

Misconceptions About Representation Letters

A common misunderstanding about management representation letters is that they are a mere formality, a routine sign-off without substantial impact on the audit’s outcome. This view underestimates the letter’s function as a document that auditors rely upon for assurance beyond the financial data and records they examine. It is not simply a procedural step, but a declaration that can have legal implications for the signatories, particularly if it is later found that the information provided was knowingly false or misleading.

Another misconception is that the letter is solely for the benefit of the auditors. While it is true that auditors use these letters to corroborate information and reduce audit risk, the benefits extend to the management and the company as well. The process of preparing the letter encourages a comprehensive review of the company’s financial disclosures, which can lead to the identification and rectification of errors before the audit is finalized. This proactive approach can enhance the quality of financial reporting and potentially prevent future financial discrepancies.

There is also a belief that once the letter is signed and the audit is complete, the responsibilities of management in relation to the representations made are concluded. However, the representations have a lasting effect, as they are a testament to the financial condition of the company at the point of the audit. Should any issues arise from the period covered by the audit, the representations made can be scrutinized for their accuracy and completeness.

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AS 2805: Management Representations

Summary table of contents.

• .01  Introduction
• .02  Reliance on Management Representations
• .05  Obtaining Written Representations
• .13  Scope Limitations
• .15  Effective Date
• .16  Appendix A - Illustrative Management Representation Letter
• .17  Appendix B - Additional Illustrative Representations
• .18  Appendix C - Illustrative Updating Management Representation Letter

Introduction

.01        This section establishes a requirement that the independent auditor obtain written representations from management as a part of an audit of financial statements performed in accordance with the standards of the PCAOB and provides guidance concerning the representations to be obtained.

Reliance on Management Representations

.02        During an audit, management makes many representations to the auditor, both oral and written, in response to specific inquiries or through the financial statements. Such representations from management are part of the evidential matter the independent auditor obtains, but they are not a substitute for the application of those auditing procedures necessary to afford a reasonable basis for an opinion regarding the financial statements under audit. Written representations from management ordinarily confirm representations explicitly or implicitly given to the auditor, indicate and document the continuing appropriateness of such representations, and reduce the possibility of misunderstanding concerning the matters that are the subject of the representations. 1

.03        The auditor obtains written representations from management to complement other auditing procedures. In many cases, the auditor applies auditing procedures specifically designed to obtain evidential matter concerning matters that also are the subject of written representations. For example, after the auditor performs the procedures described in AS 2410, Related Parties , the auditor should obtain a written representation that management has no knowledge of any relationships or transactions with related parties that have not been properly accounted for and adequately disclosed. The auditor should obtain this written representation even if the results of those procedures indicate that relationships and transactions with related parties have been properly accounted for and adequately disclosed. In some circumstances, evidential matter that can be obtained by the application of auditing procedures other than inquiry is limited; therefore, the auditor obtains written representations to provide additional evidential matter. For example, if an entity plans to discontinue a line of business and the auditor is not able to obtain sufficient information through other auditing procedures to corroborate the plan or intent, the auditor obtains a written representation to provide evidence of management's intent.

.04        If a representation made by management is contradicted by other audit evidence, the auditor should investigate the circumstances and consider the reliability of the representation made. Based on the circumstances, the auditor should consider whether his or her reliance on management's representations relating to other aspects of the financial statements is appropriate and justified.

Obtaining Written Representations

.05        Written representations from management should be obtained for all financial statements and periods covered by the auditor's report. 2 For example, if comparative financial statements are reported on, the written representations obtained at the completion of the most recent audit should address all periods being reported on. The specific written representations obtained by the auditor will depend on the circumstances of the engagement and the nature and basis of presentation of the financial statements. The auditor should provide a copy of the representation letter to the audit committee if management has not already provided the representation letter to the audit committee.

Note: When performing an integrated audit of financial statements and internal control over financial reporting, refer to paragraphs .75-.77 of AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements , for additional required written representations to be obtained from management.

.06        In connection with an audit of financial statements presented in accordance with generally accepted accounting principles, specific representations should relate to the following matters: 3

Financial Statements

• Management's acknowledgment of its responsibility for the fair presentation in the financial statements of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles.
• Management's belief that the financial statements are fairly presented in conformity with generally accepted accounting principles.

Completeness of Information

• Availability of all financial records and related data, including the names of all related parties and all relationships and transactions with related parties.
• Completeness and availability of all minutes of meetings of stockholders, directors, and committees of directors.
• Communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices.
• Absence of (1) unrecorded transactions  and (2) side agreements or other arrangements (either written or oral) undisclosed to the auditor .

Recognition, Measurement, and Disclosure

• Management's belief that the effects of any uncorrected financial statement misstatements 4 aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. 5 (A summary of such items should be included in or attached to the letter.) 6 , 7
• Management's acknowledgment of its responsibility for the design and implementation of programs and controls to prevent and detect fraud.
• Knowledge of fraud or suspected fraud affecting the entity involving (1) management, (2) employees who have significant roles in internal control, or (3) others where the fraud could have a material effect on the financial statements.
• Knowledge of any allegations of fraud or suspected fraud affecting the entity received in communications from employees, former employees, analysts, regulators, short sellers, or others.
• Plans or intentions that may affect the carrying value or classification of assets or liabilities.
• Information concerning related party transactions and amounts receivable from or payable to related parties, including support for any assertion that a transaction with a related party was conducted on terms equivalent to those prevailing in an arm's-length transaction. 9
• Guarantees, whether written or oral, under which the entity is contingently liable.
• Significant estimates and material concentrations known to management that are required to be disclosed in accordance with the AICPA's Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties .
• Violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency. 10
• Unasserted claims or assessments that the entity's lawyer has advised are probable of assertion and must be disclosed in accordance with Financial Accounting Standards Board (FASB) Statement No. 5, Accounting for Contingencies [AC section C59]. 11
• Other liabilities and gain or loss contingencies that are required to be accrued or disclosed by FASB Statement No. 5 [AC section C59]. 12
• Satisfactory title to assets, liens or encumbrances on assets, and assets pledged as collateral.
• Compliance with aspects of contractual agreements that may affect the financial statements.

  s-1 .    The appropriateness of the methods, the consistency in application, the accuracy and completeness of data, and the reasonableness of significant assumptions used by the company in developing accounting estimates.

Subsequent Events

• Information concerning subsequent events. 13

.07        The representation letter ordinarily should be tailored to include additional appropriate representations from management relating to matters specific to the entity's business or industry. Examples of additional representations that may be appropriate are provided in appendix B, "Additional Illustrative Representations" [paragraph .17].

.08        Management's representations may be limited to matters that are considered either individually or collectively material to the financial statements, provided management and the auditor have reached an understanding on materiality for this purpose. Materiality may be different for different representations. A discussion of materiality may be included explicitly in the representation letter, in either qualitative or quantitative terms. Materiality considerations would not apply to those representations that are not directly related to amounts included in the financial statements, for example, items ( a ), ( c ), ( d ), and ( e ) above. In addition, because of the possible effects of fraud on other aspects of the audit, materiality would not apply to item ( h ) above with respect to management or those employees who have significant roles in internal control.

.09        The written representations should be addressed to the auditor. Because the auditor is concerned with events occurring through the date of his or her report that may require adjustment to or disclosure in the financial statements, the representations should be made as of the date of the auditor's report. [If the auditor "dual dates" his or her report, the auditor should consider whether obtaining additional representations relating to the subsequent event is appropriate. See paragraph .05 of AS 3110, Dating of the Independent Auditor's Report ]. The letter should be signed by those members of management with overall responsibility for financial and operating matters whom the auditor believes are responsible for and knowledgeable about, directly or through others in the organization, the matters covered by the representations. Such members of management normally include the chief executive officer and chief financial officer or others with equivalent positions in the entity.

.10        If current management was not present during all periods covered by the auditor's report, the auditor should nevertheless obtain written representations from current management on all such periods. The specific written representations obtained by the auditor will depend on the circumstances of the engagement and the nature and basis of presentation of the financial statements. As discussed in paragraph .08, management's representations may be limited to matters that are considered either individually or collectively material to the financial statements.

.11        In certain circumstances, the auditor may want to obtain written representations from other individuals. For example, he or she may want to obtain written representations about the completeness of the minutes of the meetings of stockholders, directors, and committees of directors from the person responsible for keeping such minutes. Also, if the independent auditor performs an audit of the financial statements of a subsidiary but does not audit those of the parent company, he or she may want to obtain representations from management of the parent company concerning matters that may affect the subsidiary, such as related-party transactions or the parent company's intention to provide continuing financial support to the subsidiary.

.12        There are circumstances in which an auditor should obtain updating representation letters from management. If a predecessor auditor is requested by a former client to reissue (or consent to the reuse of) his or her report on the financial statements of a prior period, and those financial statements are to be presented on a comparative basis with audited financial statements of a subsequent period, the predecessor auditor should obtain an updating representation letter from the management of the former client. 15 Also, when performing subsequent events procedures in connection with filings under the Securities Act of 1933, the auditor should obtain certain written representations. 16 The updating management representation letter should state ( a ) whether any information has come to management's attention that would cause them to believe that any of the previous representations should be modified, and ( b ) whether any events have occurred subsequent to the balance-sheet date of the latest financial statements reported on by the auditor that would require adjustment to or disclosure in those financial statements. 17

Scope Limitations

.13        Management's refusal to furnish written representations constitutes a limitation on the scope of the audit sufficient to preclude an unqualified opinion and is ordinarily sufficient to cause an auditor to disclaim an opinion or withdraw from the engagement. 18 However, based on the nature of the representations not obtained or the circumstances of the refusal, the auditor may conclude that a qualified opinion is appropriate. Further, the auditor should consider the effects of the refusal on his or her ability to rely on other management representations.

.14        If the auditor is precluded from performing procedures he or she considers necessary in the circumstances with respect to a matter that is material to the financial statements, even though management has given representations concerning the matter, there is a limitation on the scope of the audit, and the auditor should qualify his or her opinion or disclaim an opinion.

Effective Date

.15        This section is effective for audits of financial statements for periods ending on or after June 30, 1998. Earlier application is permitted.

Appendix A - Illustrative Management Representation Letter

.16        

1.    The following letter, which relates to an audit of financial statements prepared in conformity with generally accepted accounting principles, is presented for illustrative purposes only. The introductory paragraph should specify the financial statements and periods covered by the auditor's report, for example, "balance sheets of XYZ Company as of December 31, 19X1 and 19X0, and the related statements of income and retained earnings and cash flows for the years then ended." The written representations to be obtained should be based on the circumstances of the engagement and the nature and basis of presentation of the financial statements being audited. ( See appendix B [paragraph .17]).

2.    If matters exist that should be disclosed to the auditor, they should be indicated by modifying the related representation. For example, if an event subsequent to the date of the balance sheet has been disclosed in the financial statements, the final paragraph could be modified as follows: "To the best of our knowledge and belief, except as discussed in Note X to the financial statements, no events have occurred" In appropriate circumstances, item 9 could be modified as follows: "The company has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities, except for its plans to dispose of segment A, as disclosed in Note X to the financial statements, which are discussed in the minutes of the December 7, 20X1, meeting of the board of directors." Similarly, if management has received a communication regarding an allegation of fraud or suspected fraud, item 8 could be modified as follows: "Except for the allegation discussed in the minutes of the December 7, 20X1, meeting of the board of directors (or disclosed to you at our meeting on October 15, 20X1), we have no knowledge of any allegations of fraud or suspected fraud affecting the company received in communications from employees, former employees, analysts, regulators, short sellers, or others."

3.    The qualitative discussion of materiality used in the illustrative letter is adapted from FASB Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information .

4.    Certain terms are used in the illustrative letter that are described elsewhere in authoritative literature. Examples are fraud, in AS 2401, Consideration of Fraud in a Financial Statement Audit , and related parties, in AS 2410,  Related Parties . To avoid misunderstanding concerning the meaning of such terms, the auditor may wish to furnish those definitions to management or request that the definitions be included in the written representations.

5.    The illustrative letter assumes that management and the auditor have reached an understanding on the limits of materiality for purposes of the written representations. However, it should be noted that a materiality limit would not apply for certain representations, as explained in paragraph .08 of this section.

To [ Independent Auditor ]

We are providing this letter in connection with your audit(s) of the [ identification of financial statements ] of [ name of entity ] as of [ dates ] and for the [ periods ] for the purpose of expressing an opinion as to whether the [ consolidated ] financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of [ name of entity ] in conformity with accounting principles generally accepted in the United States of America. We confirm that we are responsible for the fair presentation in the [ consolidated ] financial statements of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles.

Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement.

We confirm, to the best of our knowledge and belief, [ as of (date of auditor's report), ] the following representations made to you during your audit(s).

• The financial statements referred to above are fairly presented in conformity with accounting principles generally accepted in the United States of America.
• Financial records and related data, including the names of all related parties and all relationships and transactions with related parties.
• Minutes of the meetings of stockholders, directors, and committees of directors, or summaries of actions of recent meetings for which minutes have not yet been prepared.
• There have been no communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices.
• There are no material transactions that have not been properly recorded in the accounting records underlying the financial statements.
• We believe that the effects of the uncorrected financial statement misstatements summarized in the accompanying schedule are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. 1
• We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud.
• Management,
• Employees who have significant roles in internal control, or
• Others where the fraud could have a material effect on the financial statements.
• We have no knowledge of any allegations of fraud or suspected fraud affecting the entity received in communications from employees, former employees, analysts, regulators, short sellers, or others.
• The company has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.
• Related-party transactions, including sales, purchases, loans, transfers, leasing arrangements, and guarantees, and amounts receivable from or payable to related parties.
• Guarantees, whether written or oral, under which the company is contingently liable.
• Significant estimates and material concentrations known to management that are required to be disclosed in accordance with the AICPA's Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties. [ Significant estimates are estimates at the balance sheet date that could change materially within the next year. Concentrations refer to volumes of business, revenues, available sources of supply, or markets or geographic areas for which events could occur that would significantly disrupt normal finances within the next year. ]
• Violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency.
• Unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed in accordance with Financial Accounting Standards Board (FASB) Statement No. 5, Accounting for Contingencies . 2
• Other liabilities or gain or loss contingencies that are required to be accrued or disclosed by FASB Statement No. 5.
• Side agreements or other arrangements (either written or oral) that have not been disclosed to you.
• The company has satisfactory title to all owned assets, and there are no liens or encumbrances on such assets nor has any asset been pledged as collateral.
• The company has complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance.

[ Add additional representations that are unique to the entity's business or industry. See paragraph .07 and appendix B [paragraph .17] of this section. ]

To the best of our knowledge and belief, no events have occurred subsequent to the balance-sheet date and through the date of this letter that would require adjustment to or disclosure in the aforementioned financial statements.

____________________________________________ [ Name of Chief Executive Officer and Title ]

____________________________________________ [ Name of Chief Financial Officer and Title ]

[As amended, effective for audits of financial statements for periods beginning on or after December 15, 1999 by Statement on Auditing Standards No. 89. As amended, effective for audits of financial statements for periods beginning on or after December 15, 2002, by Statement on Auditing Standards No. 99.]

Appendix B - Additional Illustrative Representations

.17        

1.    As discussed in paragraph .07 of this section, representation letters ordinarily should be tailored to include additional appropriate representations from management relating to matters specific to the entity's business or industry. The following is a list of additional representations that may be appropriate in certain situations. This list is not intended to be all-inclusive. The auditor also should consider the effects of pronouncements issued subsequent to the issuance of this section.

Appendix C - Illustrative Updating Management Representation Letter

.18        

1.    The following letter is presented for illustrative purposes only. It may be used in the circumstances described in paragraph .12 of this section. Management need not repeat all of the representations made in the previous representation letter.

2.    If matters exist that should be disclosed to the auditor, they should be indicated by listing them following the representation. For example, if an event subsequent to the date of the balance sheet has been disclosed in the financial statements, the final paragraph could be modified as follows: "To the best of our knowledge and belief, except as discussed in Note X to the financial statements, no events have occurred. . . ."

    [ Date ]

    To [ Auditor ]

    In connection with your audit(s) of the [ identification of financial statements ] of [ name of entity ] as of [ dates ] and for the [ periods ] for the purpose of expressing an opinion as to whether the [ consolidated ] financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of [ name of entity ] in conformity with accounting principles generally accepted in the United States of America, you were previously provided with a representation letter under date of [ date of previous representation letter ]. No information has come to our attention that would cause us to believe that any of those previous representations should be modified.

    To the best of our knowledge and belief, no events have occurred subsequent to [ date of latest balance sheet reported on by the auditor ] and through the date of this letter that would require adjustment to or disclosure in the aforementioned financial statements.

    __________________________________________ [ Name of Chief Executive Officer and Title ]

    __________________________________________ [ Name of Chief Financial Officer and Title ]

[Revised, October 2000, to reflect conforming changes necessary due to the issuance of Statement on Auditing Standards No. 93.]

Footnotes (AS 2805 - Management Representations):

1 AS 1015, Due Professional Care in the Performance of Work , states, "The auditor neither assumes that management is dishonest nor assumes unquestioned honesty. In exercising professional skepticism, the auditor should not be satisfied with less than persuasive evidence because of a belief that management is honest."

2 An illustrative representation letter from management is contained in appendix A, "Illustrative Management Representation Letter" [paragraph .16].

3 Specific representations also are applicable to financial statements presented in conformity with a comprehensive basis of accounting other than generally accepted accounting principles. The specific representations to be obtained should be based on the nature and basis of presentation of the financial statements being audited.

4 AS 2810, Evaluating Audit Results, indicates that a misstatement can arise from error or fraud and also discusses the auditor's responsibilities for evaluating accumulated misstatements .

5 If management believes that certain of the identified items are not misstatements, management's belief may be acknowledged by adding to the representation, for example, "We do not agree that items XX and XX constitute misstatements because [description of reasons]." 

6 AS 2810.11 states that the auditor may designate an amount below which misstatements need not be accumulated. Similarly, the summary of uncorrected misstatements included in or attached to the representation letter need not include such misstatements. The summary should include sufficient information to provide management with an understanding of the nature, amount, and effect of the uncorrected misstatements. Similar items may be aggregated.

7 The communication to management of immaterial misstatements aggregated by the auditor does not constitute a communication pursuant to paragraph .17 of AS 2405, Illegal Acts by Clients , Section 10A of the Securities Exchange Act of 1934, or paragraphs .79 through .82 of AS 2401, Consideration of Fraud in a Financial Statement Audit . The auditor may have additional communication responsibilities pursuant to AS 2405, Section 10A of the Securities Exchange Act of 1934, or AS 2401.

[8] [Footnote deleted.]

9 See AS 2410.18. 

10 See AS 2405. 

11 See paragraph .05 d of AS 2505, Inquiry of a Client's Lawyer Concerning Litigation, Claims, and Assessments. If the entity has not consulted a lawyer regarding litigation, claims, and assessments, the auditor normally would rely on the review of internally available information and obtain a written representation by management regarding the lack of litigation, claims, and assessments; see auditing Interpretation No. 6, "Client Has Not Consulted a Lawyer" (paragraphs .15-.17 of AI 17, Inquiry of a Client's Lawyer Concerning Litigation, Claims, and Assessments: Auditing Interpretations of AS 2505 ) .

12 See AS 2505.05 b . 

13 See paragraph .12 of AS 2801, Subsequent Events , paragraph .10 of AS 4101, Responsibilities Regarding Filings Under Federal Securities Statutes , and paragraph .45, footnote 31 of AS 6101, Letters for Underwriters and Certain Other Requesting Parties . 

[14] [Footnote deleted.]

15 See paragraph .55 of AS 3105 , Departures from Unqualified Opinions and Other Reporting Circumstances .

16 See AS 4101.10. 

17 An illustrative updating management representation letter is contained in appendix C, "Illustrative Updating Management Representation Letter" [paragraph .18]. 

18 See AS 3105.05–.17. 

Footnotes (Appendix A - Illustrative Management Representation Letter):

1 If management believes that certain of the identified items are not misstatements, management's belief may be acknowledged by adding to the representation, for example, "We do not agree that items XX and XX constitute misstatements because [ description of reasons ]." 

2 In the circumstance discussed in footnote 11 of this section, this representation might be worded as follows:

    We are not aware of any pending or threatened litigation, claims, or assessments or unasserted claims or assessments that are required to be accrued or disclosed in the financial statements in accordance with Financial Accounting Standards Board Statement No. 5,  Accounting for Contingencies , and we have not consulted a lawyer concerning litigation, claims, or assessments.

03 Apr What are Management Representation Letters?

In the world of assurance engagements, a management representation letter is a formal document that represents management’s agreement with the financial statements that are being audited or reviewed. This letter is a critical part of the assurance engagement process and is required by the auditor or reviewer as evidence that management acknowledges and accepts responsibility for the financial statements.

A management representation letter is typically issued by senior management, such as the CEO or CFO, and is addressed to the CPA firm performing the audit or review. It contains a series of statements that confirm certain facts and assurances about the company’s financial information, including the completeness and accuracy of financial records, disclosures of relevant information, and adherence to accounting principles.

The letter serves several purposes, including:

• Confirming the accuracy of financial information : The management representation letter is used to confirm that the financial statements are accurate and complete. This helps provide assurance to stakeholders that the financial statements are reliable.
• Demonstrating management’s responsibility : By signing the letter, management acknowledges its responsibility for the accuracy and completeness of the financial statements. This helps to provide accountability and transparency to stakeholders.
• Providing evidence for auditors and reviewer s: The management representation letter provides evidence to the CPA firm that management has taken responsibility for the financial statements, which helps to support the audit opinion or review conclusion.
• Reducing the risk of misstatements : The letter helps to reduce the risk of misstatements by requiring management to review the financial statements and provide assurance that they are accurate and complete.

Overall, the management representation letter is a critical part of the assurance engagement process, as it helps to provide assurance that the financial statements are accurate and complete, and that management takes responsibility for them. Without this letter, CPA firms would not have the necessary evidence to support their opinions and conclusions, which could lead to a lack of confidence in the financial statements and potential legal and financial consequences for the company. In fact, CPA firms are not permitted to complete their engagement and issue an audit or review engagement report until management provides a signed management representation letter.

If you require an audit or review and would like to speak to someone about these processes, please contact us to set up a free consultation.

Annelie Vistica

Cpa, ca – principal.

Annelie Vistica, a Principal at Clearline, is a CPA and CA with a strong background in private enterprise and assurance. With a Bachelor of Accountancy from the University of Stellenbosch in South Africa and extensive experience in tax, Annelie brings expertise in business setup, growth planning, and estate transitioning. She is passionate about engaging with clients to support them through various business stages, from inception to succession planning. Annelie values the supportive environment at Clearline, where she appreciates colleagues’ assistance in tax and assurance. Outside work, she enjoys spending time with her family and dog, exploring nature, visiting family in the Okanagan, and travelling the world.

Jennifer Scott

Cpa, cga – senior manager.

Jennifer Scott, a Senior Manager at Clearline brings a wealth of expertise in Private Enterprise and Assurance, holding designations as a CPA and CGA. Jennifer’s focus at Clearline includes conducting reviews, compilations, and providing tax services tailored to owner-manager businesses and partnerships, with a keen interest in industries such as professionals, manufacturing, real estate, and services. Her commitment to exceptional client service is evident through her proactive approach to staying updated on evolving accounting standards and tax legislation, thereby making her clients’ lives easier Jennifer’s educational background includes a Bachelor of Commerce from UBC with a major in Accounting, followed by over 15 years of experience in public practice, specializing in private enterprise. She appreciates the supportive environment at Clearline and enjoys various activities outside of work, including travelling, cheering on her children in sports like soccer, baseball, and volleyball, indulging in long walks with her dog while listening to podcasts, spending quality time with loved ones, and exploring her passion for baking through experimenting with new recipes.

Charmaine Pirrie

Cpa, ca(sa) – senior manager.

Charmaine Pirrie, a Senior Manager at Clearline is a CPA and CA (SA) with a background in audit and review engagements. With experience from Grant Thornton and D&Co, she brings expertise in private company audits and values Clearline’s supportive environment and technical resources. Charmaine also finds fulfillment in delving into her clients’ businesses to provide tailored services, ensuring meticulous audit and review procedures. Outside of work, she enjoys spending time with family, going for walks, and swimming.

Deepeka Dhillon

Cpa – manager.

Deepeka Dhillon, a Manager at Clearline, holds a CPA designation with a focus in Private Enterprise and Tax. Her primary responsibilities include compliance, corporate restructuring, and, estate and succession planning. Deepeka’s passion lies in continuous learning, enabling her to provide tailored solutions to clients’ unique needs. With a CPA designation and completion of the CPA in-depth tax program, she brings a strong educational background to her role at Clearline. Deepeka values the countless opportunities at Clearline to expand her knowledge in the complex world of tax. Outside work, she enjoys spending time with her beloved Jack Russell Terrier, Opie.

Raj Momrath

Cpa, ca, senior tax manager.

Raj Momrath, a Senior Tax Manager at Clearline, is a CPA, CA specializing in Canadian Tax. With a focus on Canadian tax planning, corporate reorganizations, estate planning, and providing business advice, Raj caters to a diverse clientele, including small owner-manager companies, high-net-worth individuals and large privately held multinational firms. His passion lies in helping Canadian owner-manager businesses and their shareholders minimize their overall tax obligations while navigating disputes with the Canada Revenue Agency and ensuring compliance with the complex Canadian tax system. Raj’s professional journey includes prior experience in PwC’s tax group, where he obtained his Chartered Accountant designation and then some time at some mid-sized firms. Raj completed the CPA Canada InDepth Tax course in 2017 strengthening his knowledge of Canadian tax. At Clearline, Raj appreciates working alongside knowledgeable colleagues and enjoys spending quality time with his wife and two sons and attending and volunteering with their sports activities. In his leisure time, Raj indulges in barbequing, golfing, and spending time outdoors, finding relaxation and enjoyment in these pursuits.

Julia Wallis

Julia Wallis, a Senior Manager at Clearline, holds designations as a CPA, CGA, and also holds a BA. Working within the Private Enterprise Group, her primary focus revolves around assisting entrepreneurs in understanding their personal and business finances while ensuring compliance with tax reporting requirements. Julia finds fulfillment in learning about her clients’ businesses and providing financial insights to enhance their management effectiveness while optimizing tax strategies. With a diverse career spanning various companies and public practice roles, including as a controller, Julia’s progression has equipped her with invaluable skills and insights into different business operations. She chose Clearline for its respected partners and staff, aligned philosophy on client service, and flexibility to balance demanding tax filing periods with leisure time for travel and personal interests such as gardening, wine exploration, reading, and relaxation.

Bilal Kathrada

Cpa, ca, principal.

Bilal, a Principal at Clearline Chartered Professional Accountants, primarily focuses on income tax and succession planning for Canadian owner-managed businesses in various industries. Bilal received his Bachelor of Commerce degree from the University of Victoria and obtained his CA designation in 2005.

Prior to Clearline, he worked in the tax group of a large international accounting firm in Vancouver and a mid-sized accounting firm located in the Fraser Valley.

Outside of the office, he enjoys spending time with his wife and three children. He enjoys outdoor activities such as golf and spending time with his family and friends.

Danny Sandhu

Cpa, manager.

Bio coming soon.

Shehzel Saif

Cpa, tax manager.

As Clearline’s Tax Manager, Shehzel focuses on tax planning, corporate reorganizations and succession and estate planning. She’s passionate about continuous learning and staying up to date on tax legislation changes and helping clients with succession. In addition to her CPA designation, Shehzel also has a Bachelor of Business Administration and has completed the CPA In-Depth Taxation Program. Outside of work, she enjoys spending time with family and friends, traveling and trying out new recipes.

Ameeta Randhawa

As Clearline’s HR Manager, Ameeta supports our firm’s greatest resource—our staff. With a Bachelor of Business Administration in Human Resources and over 7 years of HR experience in various industries, she ensures all employees have a positive experience at Clearline. Ameeta’s focuses include recruitment, performance management, employee relations, program and policy development, and employee engagement. Outside of work, she enjoys traveling and spending time with friends and family.

CPA, CA, Senior Manager

Michael is a Senior Manager in Private Enterprise, carrying out reviews, compilations, and tax services for small- to medium-sized businesses. With a Bachelor of Commerce specializing in finance and a Diploma in Accounting, backed by over a decade of accounting experience, Michael is a trusted advisor who helps clients’ businesses succeed. Outside of the office, Michael enjoys spending time with family, trying out different restaurants in the city, and building and collecting mechanical keyboards.

CPA, CGA, Manager

Victor K. Yoshida

Victor was born and raised in Vancouver and obtained his Bachelor of Commerce from the University of British Columbia. He articled with Deloitte & Touche and received his CA designation in 1984. Victor was accepted to the firm’s tax group and went on to complete the Canadian Institute of Chartered Accountants In-Depth Tax course.

Victor specializes in Canadian income tax issues for professional and owner-managed businesses. He has extensive experience with business succession, estate planning, wealth preservation issues, corporate reorganizations, as well as mergers and acquisitions.

Victor was a member of the education committee of the Institute of Chartered Accountants of British Columbia and has held executive positions with various amateur sport organizations.

In his free time, Victor enjoys training for marathons, travelling, and spending time with his family.

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Understanding the Representation Letter

Written by David T. Schwindt, CPA

What is a Representation Letter? As a Board member or manager of a community management company, you may be asked to sign a representation letter at the conclusion of an audit or a reviewed financial statement engagement.  Although the letter is from the Association/management company to the CPA, the CPA will generally draft the letter on behalf of the Association.   The letter includes certain assertions about the Association during the period covered by the financial statements.  Those assertions include but are not limited to the following:

• The Association/management company has provided the CPA with all requested financial information.
• The Association/management company has disclosed all related party transactions.
• The Association/management company has disclosed all existing and potential litigation.
• The Association/management company has disclosed any knowledge of fraud or financial irregularities.
• The Association takes responsibility for the design and implementation of a system of internal controls.  These controls include but are not limited to safeguarding assets, approving transactions and minimizing the risk of someone perpetrating a theft of money or information and not being discovered in a reasonable amount of time. Although the Board is ultimately responsible for this activity, it is common that Boards rely upon the management company to assist in this responsibility.

In some instances, the management company may sign a different representation letter because the responsibilities are slightly different.

Why is the Representation Letter necessary? The American Institute of Certified Public Accounts has determined that those charged with governance (the board of directors and the community management company) should take responsibility for the assertions in the representation letter.  CPAs are mandated to obtain the signed representation letter before issuing the final financial statements.

Who should sign the representation letter? Most often, the Board Chair, Board Treasurer and community manager signs the letter.

When does the Representation Letter need to be signed? The letter needs to be signed at the end of the engagement generally after a draft of the financial statements are issued.  Schwindt & Co combines the representation letter with the management letter comments and proposed adjusting journal entries for ease of review.  When the signed document is received by our office, we are then able to issue the final financial statements.

Should a new Board member or community manager who was not involved with Association management or governance during the period under audit or review be hesitant about signing the representation letter? This is a common question and the answer is simple.  No!  The first paragraph of the representation states that whoever signs the letter does so based on the best knowledge and belief of the person signing.  This means that even though you may be new to the Board or management company, it is perfectly fine to sign the letter because you will only be asserting to issues that you have knowledge.  It is very common for Board members/managers to sign a representation letter even though they were not involved during the period being audited or reviewed.

• Representation letters are normal and required before the issuance of audited/reviewed financial statements.
• Board members are only asserting to issues that they are aware of and new board members and managers frequently are required to sign representation letters.
• The Board Chair, Board Treasurer and community manager are generally required to sign the representation letter.

Questions regarding this article may be directed to David T. Schwindt, CPA at Schwindt & Co. (503) 227-1165.

12300 SE Mallard Way, Suite 275 Milwaukie, OR 97222 (503) 227-1165

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Illustrative Management Representation Letter: SOC 2® Type 1

AICPA MEMBER

AT-C section 205, Assertion-Based Examinations, requires the service auditor to request written representations from the responsible party in a SOC 2 engagement. These representation should be in the form of a letter addressed to the service auditor. The following illustrative management representation letter includes the representations required by AT-C section 205 as well as additional representations specific to a SOC 2 Type 1 examination and should be used for engagements with reports dated on or after June 15, 2022. This

Download the Illustrative Management Rep Letter: SOC 2® Type 1

File name: illustrative-mgmt-rep-letter-for-soc-2-type-1.pdf

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Your Ask Joey ™ Answer

What is a management representation letter?

A “rep” letter is the audit teams’ formal evidence that management understands their responsibilities and that management has performed all of their responsibilities.

Management should provide the auditor with a representation letter in writing that outlines the following characteristics:

A) Managements acceptance for its responsibility in the establishment and maintenance of an effective internal control systems.

B) Managements performance of its assessment of the effectiveness of its internal control systems.

C) A statement of management’s assessment and the criteria that has been used and implemented as of a specified period in time.

D) A statement that management has disclosed all deficiencies both in design and operation of its system of internal controls.

E) A statement that management confirms that all significant deficiencies and material weaknesses have been disclosed to the independent external auditor.

F) A statement the management confirms whether or not previously identified deficiencies have been resolved or remain unresolved.

G) Illustrates all fraudulent activities that result in material misstatements specifically involving senior management or other employees that have a significant role in ICFR.

H) Illustrates whether or not there are any significant changes to internal controls after the “as of” date of the report as well as any corrective action that has been taken by management in regard to significant deficiencies and material weaknesses that have been identified.

I) Any failure to obtain written representations for management will result in scope limitations which might include the auditor’s withdrawal from the engagement altogether.

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SSARS no. 1, Compilation and Review of Financial Statements, has long been the source of information on procedures applicable to a financial statement review. But practitioners said they needed new and more comprehensive direction on several topics, such as inquiries, analytical procedures and documentation requirements. The new statement, which the ARSC issued in May 2004, amends SSARS no. 1 by providing guidance on

EXAMINE, MEASURE, APPRAISE Analytical procedures provide a basis for the limited assurance CPAs provide in the review report and may identify financial statement items that appear to be materially misstated. The techniques for conducting an analysis fall into two categories: developing expectations—although this term was introduced in SSARS no. 10, SSARS no. 1 introduced the concept it represents—and evaluating results.

Developing expectations. In review engagements CPAs develop expectations by identifying and considering relationships they reasonably could assume might exist, given their understanding of the entity and the industry in which it operates. Expectations developed by a CPA in a review ordinarily are less encompassing than those developed in an audit, and in a review, it isn’t necessary to corroborate management’s responses with other evidence. Although SSARS no. 10 does not provide guidance on how to deal with the highly judgmental nature of this process, practitioners must be able to assimilate a wealth of information into a series of logical and internally consistent conclusions (see “ Key Factors in a Financial Relationship ”).

Evaluating results. CPAs do this by comparing the recorded amounts—or ratios developed from them—with the expectations they’ve developed. The practitioner’s knowledge of the client and the industry in which it operates is essential to interpret the results of the analytical procedures and to determine when a difference from an expected amount is significant. For example, it’s important for CPAs to know whether fluctuations from previous periods resulted from changed conditions, such as major increases in product selling price, inventory obsolescence or changes in credit policy. It’s equally crucial to identify when a value should have fluctuated but did not, such as when a company’s gross profit percentage remained substantially the same even though its raw material costs increased significantly while its prices stayed flat. The AICPA’s annual Audit Risk Alert series is a good source of up-to-date information on economic and industry trends that can help CPAs make such evaluations accurately. For titles in the series, see “ AICPA Resources .”

After applying a specific analytical procedure to the client’s financial information, CPAs should compare the actual results with their original expectations of what that outcome should be. It is essential to do this, in my opinion, by means of objective analysis—by evaluating the results of the analytical procedure to determine whether the result is consistent with the expectation—rather than by relying on rationalization, that is, searching for conditions that support a result without identifying which conditions are the most important, most logical and most relevant to the evaluation.

The ARSC also created an issues paper, Analytical Procedures in a Review Engagement , that explains certain requirements related to analytical procedures in review engagements, including the development of expectations and the documentation of analytical procedures in such engagements.

GETTING MORE FROM MANAGEMENT The inquiry process is a fundamental technique used to collect information relevant to the financial statements. It should be evolving and ongoing. SSARS no. 10 gathers the inquiries the accountant should consider performing in one place in a logical sequence, and adds new ones—most notably concerning fraud.

Practitioners should consider making inquiries to management concerning the following matters, most of which are introduced in SSARS no. 10:

Although the inquiry process is straightforward, its success depends on how it is followed. A related critical factor not within SSARS no. 10’s scope is the importance, in my opinion, of CPAs’ knowing what questions to ask and how to effectively pursue a particular line of inquiry. The quality of the review engagement is reduced dramatically when a practitioner performs inquiries in a mechanical fashion and accepts responses without thoroughly evaluating them. For example, a practitioner who is aware of major recent changes in the client’s business activities or structure would be remiss in not probing further if the client said there had been no such modifications.

Many of the questions typically found on engagement checklists apply to almost all review engagements. CPAs typically ask such questions in a formal manner when they interview appropriate client personnel and record their responses directly in the documentation. But the inquiry should consist of more than this rather rigid process; it also should take the more dynamic form of a dialogue between the CPA and the client’s management. As practitioners become aware of circumstances, facts or relationships, they may find it logical and appropriate to pose follow-up questions to the client.

For example, the CPA may ask management to provide more information about a recent acquisition that the company made and how it recorded the transaction, and then change the focus of the questioning based on the client’s responses, if applicable. Or when a relative of the company’s owner is a company subcontractor, the CPA might inquire about the types of services the relative provides and how he or she is compensated.

DIAGNOSING MISSTATEMENTS A review engagement provides limited assurance the financial statements require no material modifications to conform to GAAP or an other comprehensive basis of accounting. Misstatements could be intentional, thus constituting fraud, or unintentional, the result of error. The ARSC determined that the issue of fraud should be addressed in a review engagement; SSARS no. 10 therefore requires specific inquiries about fraud and specific written representations from management about it.

SSARS no. 10 requires the accountant to obtain from management written representations for all financial statements and periods covered by the accountant’s review report (see “ Your Signature, Please ,” below). The contents will depend on the circumstances of the engagement and the nature and basis of presentation of the financial statements, but SSARS no. 10 requires specific representations from management on the following matters:

The ARSC issued an interpretation ( www.aicpa.org/members/div/auditstd/interp_ar_9100_26.htm ) of SSARS no. 10 to provide guidance on the steps CPAs should follow to perform the required communication when, during a compilation or review engagement, they suspect fraud or an illegal act may have occurred.

GET IT IN WRITING Documentation is the principal record of the procedures performed and the conclusions reached in performing the review. The ARSC determined that SSARS no. 1 didn’t provide enough specific documentation guidance for practitioners. The guidance now requires the documentation to describe

SSARS no. 10 does not preclude CPAs from supporting their review reports by means in addition to the review documentation. This may be written documentation contained in other engagement files (for example, compilation files) or quality control files (for example, consultation files) or oral explanations when the accountant finds it necessary to supplement or clarify information contained in the documentation. Oral explanations should not be the principal support for the work performed or the conclusions reached.

For more information or to place an order, go to www.cpa2biz.com or call the Institute at 888-777-7077.

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Financial Statement Review Management Representation Letter (What is it?)

The financial statement review management representation letter is designed to complete managements responsibilities in the review. The letter is signed at the end of the engagement and is dated at the time of the review report. The management representation letter has three basic parts, the introduction, statements about the financials and declarations on the information management has provided.

Care should be taken in producing this letter. It contains many items that if left out, increase liability on the CPA. In addition, the standards of SSARS (Statements on Standards for Accounting and Review) require certain elements to be included.

Also, please review our Ultimate Guide to Financial Statement Review and Compilation for information on the review process from beginning to end.

If you need help with a financial statement review or audit, contact me now!

The Introduction

This section lays out the basis of the representations. Management states what has been performed, the review. They also state that matters are generally limited to items that are material in nature. The following is the standard wording provided by the American Institute of Certified Public Accountants (AICPA ).

This representation letter is provided in connection with your review of the financial statements of ABC Company, which comprise the balance sheets as of December 31, 20X2 and 20X1, and the related statements of income, changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the financial statements, for the purpose of obtaining limited assurance as a basis for reporting whether you are aware of any material modifications that should be made to the financial statements in order for the statements to be in accordance with accounting principles generally accepted in the United States of America.

Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement.

Statements About the Financials

This is one of the two sections of the document that contain the meat. In this section management takes responsibility for a number of things, it covers fair presentation according to GAAP, responsibility for internal controls and more. The following is a section form the AICPA approved wording.

• We acknowledge our responsibility and have fulfilled our responsibilities for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America.
• We acknowledge our responsibility and have fulfilled our responsibilities for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
• We acknowledge our responsibility for the design, implementation, and maintenance of internal control to prevent and detect fraud.
• Significant assumptions used by us in making accounting estimates, including those measured at fair value, are reasonable.
• Related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the requirements of accounting principles generally accepted in the United States of America.
• Guarantees, whether written or oral, under which the company is contingently liable have been properly accounted for and disclosed in accordance with the requirements of accounting principles generally accepted in the United States of America.
• Significant estimates and material concentrations known to management that are required to be disclosed in accordance with FASB Accounting Standards Codification (ASC) 275, Risks and Uncertainties, have been properly accounted for and disclosed in accordance with the requirements of accounting principles generally accepted in the United States of America.
• All events occurring subsequent to the date of the financial statements and for which accounting principles generally accepted in the United States of America requires adjustment or disclosure have been properly accounted for.
• The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements as a whole.
• The effects of all known actual or possible litigation and claims have been accounted for and disclosed in accordance with accounting principles generally accepted in the United States of America.

Declaration of the Information Provided

Finally, management states certain things about the information it has provided during the engagement. Things such as: We have responded fully and truthfully to all inquiries made to us by you during your review.

We have provided you with:

• access to all information, of which we are aware, that is relevant to the preparation and fair presentation of the financial statements, such as records, documentation, and other matters
• minutes of meetings of stockholders, directors, and committees of directors or summaries of actions of recent meetings for which minutes have not yet been prepared; additional information that you have requested from us for the purpose of the review; and unrestricted access to persons within the entity from whom you determined it necessary to obtain review evidence.
• All transactions have been recorded in the accounting records and are reflected in the financial statements.
• We have [no knowledge of any] [disclosed to you all information that we are aware of regarding] fraud or suspected fraud that affects the entity and involves
• management, employees who have significant roles in internal control, or others when the fraud could have a material effect on the financial statements.
• We have [no knowledge of any] [disclosed to you all information that we are aware of regarding] allegations of fraud, or suspected fraud, affecting the entity’s financial statements as a whole communicated by employees, former employees, analysts, regulators, or others.
• We have no plans or intentions that may materially affect the carrying amounts or classification of assets and liabilities.
• We have disclosed to you all known instances of noncompliance or suspected noncompliance with laws or regulations whose effects should be considered when preparing financial statements.
• We [have disclosed to you all known actual or possible] [are not aware of any pending or threatened] litigation and claims whose effects should be considered when preparing the financial statements [and we have not consulted legal counsel concerning litigation or claims]
• We have disclosed to you any other material liabilities or gain or loss contingencies that are required to be accrued or disclosed by FASB ASC 450, Contingencies.
• We have disclosed to you the identity of the entity’s related parties and all the related party relationships and transactions of which we are aware.
• We have disclosed to you all information relevant to the use of the going concern assumption in the financial statements.
• No material losses exist (such as from obsolete inventory or purchase or sale commitments) that have not been properly accrued or disclosed in the financial statements.
• The company has satisfactory title to all owned assets, and no liens or encumbrances on such assets exist, nor has any asset been pledged as collateral, except as disclosed to you and reported in the financial statements. We have complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance.
• We are in agreement with the adjusting journal entries that you have recommended, and they have been posted to the company’s accounts (if applicable).

In total the management representation letter sums up the company responsibilities for the engagement. It outlines the various factors taken into account during a review or audit. Care should be used when preparing this letter to assure it is in compliance with accounting regulations. Below is a link to a properly formatted financial statement review management representation letter.

Sample Management Representation Letter

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CPA Auditing and Attestation (AUD) : Preparation vs Compilation vs Review Engagements

Study concepts, example questions & explanations for cpa auditing and attestation (aud), all cpa auditing and attestation (aud) resources, example questions, example question #1 : accounting & review service engagements & interim reviews.

The Compilation audit report will:

Express an opinion based on GAAP

State that the Financial Statements are the responsibility of management

Discuss internal control findings

Discuss auditing procedures

Although the firm may assist management in the preparation of statements, the compilation audit report will state that the report is the responsibility of management.

Example Question #2 : Preparation Vs Compilation Vs Review Engagements

A review engagement provides what level of assurance regarding the applicable financial framework

limited assurance

absolute assurance

sufficient assurance

minimal assurance

A review engagement provides limited assurance.  Limited assurance is given that the financial statements comply with the applicable reporting framework.

Example Question #1 : Cpa Auditing And Attestation (Aud)

A review engagement should express which of the following terms:

All of the answer choices are correct

Managements objectives

Managements responsibilities

Auditors Responsibilities

AR Section 90; review of financial statements.  Section .04 states that the engagement determines: management responsibility, the auditor’s responsibility, and management objectives.

Example Question #1 : Preparation Vs Compilation Vs Review Engagements

Regarding the review of financial statements of a non-issuer performed in accordance with SSARS, the CPA is required to obtain:

A client representation letter

An understanding of internal control

Sufficient evidence supporting management's assertions

A letter of consent from the prior auditor

The CPA is required to obtain a representation letter from management for all financial statements and periods covered by the review report.

Of the following statements, which is correct regarding a review of a nonpublic entity financial statements in accordance with SSARS?

The CPA must be independent to issue the review report

An opinion is expressed in the review report

The CPA is required to assess the risk of fraud

It is not necessary for the CPA to obtain a management representation letter

In order to issue a review report on the financial statements of a nonpublic entity, the accountant must be independent.

When a preparer conducts a preparation engagement, the accountant should:

Issue a disclaimer of opinion if he or she is unable to include a statement on each page of the financial statements

Perform a compilation engagement if he or she is unable to include a statement on each page of the financial statements

With a preparation requirement, the preparer must include a statement on each page of the financials. If he or she cannot, these two options are the only options.

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Engagement letter and management representation letter

Does anyone have any tips on knowing the contents/differences in these letters? It seems like everything is in these letters and I am trying to grasp it

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Risk Management Insights

The critical importance of engagement and disengagement letters.

AUGUST 19, 2024

In the legal profession, the clarity and precision of agreements between attorneys and their clients are not just beneficial—they are essential. Engagement, disengagement, and non-engagement letters serve as foundational documents that define the scope of the relationship, responsibilities, and the bounds of the services provided.

Just what are these letters and why are they so important? This article answers those questions, helping law firms avoid misunderstandings and potential disputes, ensuring that both lawyer and client are aligned from the outset until the conclusion of their legal interactions.

What is an Engagement Letter?

An engagement letter is a formal document that outlines the scope of work, terms, and conditions between a professional service provider and a client. These letters, often used by professionals in the accounting, financial, and legal fields, serve as a contract that specifies the services to be delivered, the responsibilities of both parties, the timeline, and the payment terms. It might also include details such as confidentiality agreements, dispute resolution methods, and provisions for terminating the agreement.

The purpose of an engagement letter is to ensure that both the service provider and the client have a clear understanding of the expectations and obligations involved in the engagement. This helps to prevent misunderstandings and conflicts, and provides a legal foundation to address any issues that might arise during the course of the working relationship.

What Should be Included in an Engagement Letter?

An engagement letter should contain several key elements to ensure that both the client and the professional service provider have a clear understanding of the terms of their agreement. Here are the essential components that should be included in an engagement letter:

• Parties Involved: Clearly identify the service provider and the client, including full legal names and contact information.
• Scope of Services: Detail the specific services to be provided. This section should be clear and concise, describing what the professional will do and, importantly, what falls outside the scope of the engagement to prevent scope creep.
• Duration of Engagement: Specify the time period during which the services will be provided, including start and end dates if applicable. If the engagement is ongoing, the conditions under which either party may terminate the relationship should be described.
• Fees and Payment Terms: Outline how fees will be calculated (e.g., hourly rates, fixed fees, contingency fees), any retainer required, payment schedules, and acceptable payment methods. This section should also address expenses that might be reimbursed by the client, such as travel costs or filing fees.
• Confidentiality: Include a clause that describes how confidential information will be handled. This is crucial to ensure that sensitive information shared during the course of the engagement remains protected.
• Conflict of Interest: Address potential conflicts of interest and explain how they will be managed. This ensures transparency and maintains ethical standards.
• Dispute Resolution: Outline the methods for resolving disputes related to the agreement, whether through arbitration, mediation, or legal proceedings. This can help avoid costly litigation and maintain a professional relationship.
• Termination Conditions: Clearly state the conditions under which the engagement can be terminated by either party. This should include any notice requirements and the procedure for termination.
• Legal and Regulatory Compliance: Mention any legal or regulatory requirements that might affect the engagement, especially for professions under strict regulatory oversight.
• Signatures: Ensure that both parties sign the letter to acknowledge their understanding and agreement of the terms.

Including these elements in an engagement letter helps establish a legally sound and clear foundation for the professional relationship, minimizing misunderstandings and setting clear expectations from the outset.

A Word About Disengagement Letters

Disengagement letters are critical tools in the legal profession, serving as formal notices that mark the conclusion of a lawyer's services to a client. These letters are typically issued when a case or project is completed, or when a lawyer decides not to continue representing a client. The disengagement letter ensures clear communication about the end of the attorney-client relationship, helping to prevent any assumptions of ongoing representation.

By clearly documenting the termination of services, disengagement letters help manage legal risks and maintain professional integrity. They also serve as an important record that can be referred to in the future, should any questions arise about the representation or its conclusion.

What Should be Included in a Disengagement Letter?

A disengagement letter serves to formally notify a client that a professional service provider, such as a lawyer, is concluding their services. This letter is crucial for ensuring clarity and avoiding any misunderstandings about the ongoing nature of the relationship. Here are key elements that should be included in a disengagement letter:

• Clear Identification of the Parties: Start with the date and address the letter to the specific client, using their full legal name and any relevant contact information to ensure it is directed correctly.
• Statement of Termination: Clearly state that the professional relationship is being terminated. This should be unequivocal to avoid any ambiguity about the status of the engagement.
• Effective Date of Termination: Specify when the termination is effective. This is important to clarify any deadlines or obligations that the client may need to meet following the termination.
• Summary of Services Provided: Briefly summarize the services that were provided during the engagement. This helps to reaffirm what has been completed and ensures both parties are on the same page regarding the extent of work undertaken.
• Reason for Disengagement (if appropriate): If applicable, explain the reason for the disengagement. This could be due to the natural conclusion of a project, the client’s failure to meet payment obligations, or other reasons. However, care must be taken to communicate this professionally and tactfully.
• Outstanding Issues and Obligations: Inform the client of any remaining tasks or obligations they have, such as outstanding payments or documents they need to submit. Also, advise on any important deadlines or future obligations that remain post-engagement.
• Advice on Future Needs: Recommend that the client seeks further assistance if the termination occurs before the complete resolution of their matter. Suggesting they engage another professional or firm can help ensure they continue to receive the necessary support.
• Return of Client Materials: Mention the return of any documents or materials belonging to the client. Specify how these will be returned or how the client can collect them.
• Thank You and Goodwill Statement: It's often good practice to thank the client for their business and express wishes for their future success. This helps maintain a positive relationship, which could be beneficial for future engagements or referrals.
• Contact Information for Follow-Up: Provide contact details should the client have questions about the termination or need further clarification on any points.
• Signatures: Include a signature from the appropriate party within the professional service provider's organization to formalize the communication.

Crafting a disengagement letter with these components ensures that the termination of services is communicated clearly and professionally, helping to manage client expectations and reduce potential liabilities associated with incomplete or misunderstood termination of services.

Non-Engagement Letters: Key to Formal Communication in Professional Relationships

Non-engagement letters are important – yet often overlooked – in the professional services context, especially in legal and consulting fields. They serve as a formal communication to inform a potential client that a professional will not be taking on their case or project. Here are key aspects and purposes of non-engagement letters:

Purpose of Non-Engagement Letters

• Clarification: The primary purpose of a non-engagement letter is to clearly communicate to the potential client that they do not have an attorney-client relationship or similar professional relationship. This is crucial to avoid any misunderstandings that the professional is representing or advising them.
• Risk Management: These letters help manage liability risks by preventing claims that the professional was engaged and thus responsible for part of the client’s matters. It is a proactive step to avoid potential legal claims or ethical issues.

Key Elements of Non-Engagement Letters

• Clear Statement of Non-Engagement: The letter should explicitly state that the professional will not be engaging in a relationship with the recipient. This statement should be straightforward and unequivocal.
• Reasons for Non-Engagement (if appropriate): While not always necessary, providing a reason can be helpful for the recipient's understanding. Common reasons might include conflicts of interest, lack of expertise in the specific legal area, or capacity issues.
• Handling of Any Provided Materials: If the potential client has provided any documents or information, the letter should address how these materials will be handled, whether they will be returned or securely disposed of.
• Recommendations or Referrals: Although not required, the letter might include a referral to another professional or advise the recipient on seeking other counsel. This can be particularly helpful and is often seen as a courtesy.
• Urgency and Deadlines: If there are any impending deadlines or urgent matters discussed during the consultation, it’s ethical to remind the recipient of these deadlines so they can seek assistance elsewhere in a timely manner. Be very careful if you choose to give advice relative to statues of limitation.  If you give the wrong information this could be a viewed as providing legal service and can open you up to malpractice.  
• Formal Closure: A non-engagement letter provides a formal end to any preliminary consultations or discussions, making it clear that no further communication or actions should be expected unless initiated by the potential client.

Non-engagement letters are a critical tool for professionals to define their working boundaries clearly and maintain ethical standards while protecting both their interests and those of potential clients.

Ethical Considerations for Legal Professionals

Drafting engagement, disengagement, and non-engagement letters involves several ethical considerations that professionals, especially in legal and financial fields, must carefully navigate to maintain integrity and compliance with professional standards. Here are key ethical considerations:

Clarity and Honesty

• Transparency: Both engagement and disengagement letters must clearly outline the terms of the agreement, the scope of services provided, and any relevant conditions. This prevents any potential misrepresentation or misunderstanding.
• Honest Communication: It’s important to communicate honestly about what the service provider can realistically accomplish for the client, including any potential risks or negative outcomes.

Confidentiality

• Protecting Sensitive Information: These letters often handle sensitive information. It's crucial to ensure that confidentiality is maintained in accordance with legal requirements and professional ethics.
• Secure Handling and Transmission: When sending these letters, especially disengagement letters that may summarize detailed aspects of a case, ensure that they are transmitted securely to protect any confidential information.

Responsibility to Inform

• Duty to Educate: Professionals have a responsibility to ensure that the client fully understands the terms of the engagement or the reasons for disengagement. This includes advising on the implications of these terms and any necessary steps the client needs to take.
• In many professions, particularly law, there is an ethical obligation to clearly define when a professional relationship does not exist to avoid the unauthorized practice of law and to ensure that the individual seeks the necessary assistance elsewhere. This is where a non-engagement letter serves as a recorded document that firmly establishes boundaries between parties and alleviates liabilities.
• Guidance on Future Actions: Particularly in disengagement letters, there is an ethical duty to guide clients on necessary future actions to prevent legal or financial harm.

Professionalism

• Maintaining Professional Decorum: Both types of letters should be written with a tone of professionalism and respect. Even when discontinuing a service, it's important to remain courteous and supportive, offering assistance for a smooth transition to another service provider if necessary.

Legal Compliance

• Adherence to Legal Standards and Guidelines: Ensure all recommendations and terms comply with applicable laws and professional guidelines. This includes respecting termination rights, notice periods, and any legal obligations related to the engagement.

Understanding and adhering to these ethical considerations help professionals draft engagement and disengagement letters that not only meet legal standards but also uphold the dignity and integrity of their professions.

Risk Management With Engagement and Disengagement Letters

Law firms have numerous options when it comes to managing risk. Engagement and disengagement letters are some of many powerful tools that supplement and support the protections of professional liability insurance.

How are engagement and disengagement letters used as risk management tools? Consider the following:

Engagement Letters

• Clarification of Scope: Engagement letters define the precise legal services that an attorney will provide. This clear delineation helps prevent scope creep—where a client might assume additional services are covered under the original agreement. It protects the attorney from claims that they failed to perform duties they never agreed to undertake.
• Terms of Payment: By specifying payment terms, including retainer fees, billing rates, and payment schedules, engagement letters help avoid disputes over financial matters, which can lead to litigation or grievances filed with professional bodies.
• Duration of Engagement: The letter outlines how long the attorney expects to be engaged with the client's matter. It sets expectations on how long the client can rely on the attorney's services before needing to renegotiate or conclude their agreement.
• Conflict of Interest: These documents can address potential conflicts of interest, stating how they will be handled. This proactive measure helps in avoiding conflicts that could result in legal malpractice claims.

Disengagement Letters

• Formal Termination: Disengagement letters formally notify the client that the legal representation has ended, which is crucial when the attorney-client relationship concludes without a distinct, final legal act (like a court decision). This prevents clients from assuming the attorney is still handling their matters, which might otherwise lead to missed deadlines or unaddressed legal issues, potentially resulting in claims of negligence.
• Confirmation of Completed Tasks: The letter can summarize the services provided and state any final steps or obligations that the client must handle independently. This summary helps prevent misunderstandings about the status of the case and the extent of the attorney's involvement.
• Advice on Future Legal Needs: Often, disengagement letters will advise clients on upcoming deadlines or critical actions they need to take, which mitigates the risk of clients failing to pursue legal options due to a misunderstanding about the conclusion of legal services.
• Documentation: Both engagement and disengagement letters provide a paper trail that can be invaluable in defending against accusations of misconduct or malpractice. They are proof of what was communicated, agreed upon, and concluded, which can be decisive in legal disputes or disciplinary actions.

By setting out the terms clearly at both the commencement and conclusion of legal services, these letters form an essential part of the legal risk management strategy, protecting both the client and the attorney throughout the duration of their professional relationship.

By using these letters to protect professional interests against the losses associated with legal claims, they add valuable benefits to law firms of nearly every size and type. Incorporating engagement and disengagement letters to operating practices helps to support the risk mitigation strategies of professional liability insurance.

WHAT'S TRENDING

• The Rise in Trust and Estate Attorney Claims 8/19/2024
• Beyond the Policy Period: Why Lawyers Need Tail Coverage for Long-term Security 8/19/2024
• Prior Acts Explained 8/19/2024

INSIGHTS BY TOPIC

• Cyber Security
• Risk Management
• Personal Insurance