management representation letter format for tax audit 2022

Draft Management Representation Letter (MRL) for Tax Audit

Deepak Gupta | Jun 15, 2022 |

Here is a Draft Management Representation Letter (MRL) that should be taken by Chartered Accountant s (CAs) while doing the Tax Audit . Please note that Professional Friends can make changes in this format, as per their requirement.

Firm Name with Address

Date: ___________

Sub: Tax audit of XXX Limited for the year ended 31 March _____ (relevant to the Assessment year 20xx-xx)

This representation letter is provided in connection with your tax audit for the year ended 31 March 20xx for the purpose of expressing an opinion as to whether the Form 3CD (the “Form 3CD”) prescribed under Rule 6G(2) of the Income Tax Rules, 1962 (the “Rules”) pursuant to Section 44AB of the Income Tax Act, 1961 (the “Act”), along with the enclosures thereto give a true and correct view of the facts mentioned therein. Form 3CD is also required to be filed electronically pursuant to the proviso to Rule 12(2) of the Act.

We acknowledge our responsibility for downloading the utility from the designated website, filling the particulars in Form No.3CD in accordance with the books of account and other records of the Company, and electronically forwarding the same, in line with the requirements of the Information Technology Act, 2000 as amended from time to time, to you for verification. We also acknowledge our responsibility for providing you with the scanned copies of the original Tax Accounts, including those which are required to be uploaded on the designated website, namely, https://www.incometax.gov.in/iec/foportal. On completion of the upload on the designated website by you, we will provide you with a complete copy of the aforesaid documents as filed on the designated website.

We confirm, the following representations made to you, to the best of our knowledge and belief:

1 We have made available to you all significant information that we believe is relevant to the subject matter, including the Company’s original accounting records (including computer generated records) as maintained and all other relevant records, including minutes of all Directors’ and Managements’ meetings and details of registration numbers/ other identification numbers for indirect taxes such as goods and service tax, service tax, central sales tax, value added tax, customs duty and entry tax to the extent applicable. We acknowledge our responsibility for the completeness and accuracy of the information supplied to you.

2 There have been no transactions that have not been properly recorded in the underlying accounting records.

3 There have been no irregularities involving any member of the management or any of the employees that could have a material impact on the particulars required to be furnished in the Form No. 3CD.

4 There are no communications from regulatory agencies affecting the subject matter or assertion covered by Form 3CD.

5 The facts and amounts stated and representations made in the Form No. 3CD and the detailed schedules attached thereto (duly authenticated by us) are complete and true and correct in all respects and are as required by law.

6 In providing the same:

• We have relied on judicial pronouncements as indicated against the relevant clauses. Where there is a conflict of judicial opinion, we have referred to the view that has been followed by us.
• We have followed the accounting standards referred to in section 133 of the Companies Act, 2013 read with Rule 7 of the Companies (Accounts) Rules, 2014 and the guidance notes of the Institute of Chartered Accountants of India.

7 We confirm that the Company has no liability to pay indirect taxes being value added tax or any other indirect tax or duty except Goods and Service tax as disclosed in Clause 4 of the Form No. 3CD.

8 The Company is a non-deposit taking Non-Banking Finance Company, engaged primarily in the business of financing, leasing, bill discounting and other financial services. Further, we confirm that there has been no change in the nature of business or profession in the previous year from earlier years.

9 We confirm that no books of account have been prescribed under Section 44 AA of the Income-tax Act, 1961, in relation to the business carried on by the Company.

10 We have made available to you all financial records and related data (including computer generated records) and the address at which the books of account are kept. We confirm that the addresses where the books are maintained as disclosed in Clause 11(b) read with Exhibit-I of form 3CD is correct and complete.

11 The statement of Profit and Loss does not include any profits and gains assessable on presumptive basis u/s 44AD, 44ADA, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, Chapter XII-G, First Schedule or any other relevant section, as required under Clause 12 of Form 3CD.

12 The Company has employed mercantile system of accounting during the year and there has been no change in the method of accounting compared to the method employed in the previous year.

13 There is no deviation in the method of accounting employed in the previous year from the accounting standards prescribed under section 145 of the Income-tax Act, 1961.

14 The Company has given the ‘disclosures as per ICDS’ (to the extent applicable) required under Clause 13(f) read with Exhibit II and IIA of the Form 3CD.

15 The Company has correctly followed the accounting standards prescribed under Section 145 of the Income-tax Act, 1961.

16 We confirm that no adjustment required to be made to the profits for complying with the provisions of income computation and disclosure standards notified under section 145(2) other than those disclosed under Clause 13 of the Form No. 3CD read with Enclosure II.

17 We confirm that appropriate disclosures have been made in clause 13 (f) of the Form No. 3CD required as per income computation and disclosure standards.

18 We confirm that the Company does not own/ hold any inventories, hence reporting under Clause 14 of the Form No. 3CD is not applicable to the Company.

19 There are no items of capital assets converted into stock-in-trade during the previous year.

20 There are no items of the following nature which are not credited to the statement of Profit and Loss other than already disclosed:

• items falling under the scope of Section 28 of the Act except as disclosed under clause 16(a);
• proforma credits, drawbacks, refund of duty of customs or excise or refund of sales tax or value added tax where such credits, drawbacks or refunds are admitted as due by the authorities concerned, during the previous year and not been credited to the Statement of Profit and loss;
• escalation claims accepted during the previous year;
• any other item of income; and
• capital receipts.

21 The Company did not transfer any land or building or both during the previous year, therefore clause 17 is not applicable to the Company.

22 In relation to clause 18, we conform that there are no disputes with tax authorities with regard to classification of assets or depreciation rates.

23 We confirm that the date of put to use in respect of assets capitalised during the year is as per the details mentioned in Exhibit-III A.

24 We confirm that deletions of Fixed Assets during the year disclosed under clause 18(d) read with Exhibit- III B are complete and accurate.

25 In relation to the information requirement of clause 18 of the Form 3CD, we confirm that no Input Tax Credit was claimed on capital goods. We further confirm that no adjustment has been made towards change in foreign exchange rates arising at the time of settlement of liability and the same has been included in additions to fixed assets. In addition, we confirm that there is no adjustment in respect of any subsidy or grant or reimbursement, by whatever name called.

26 In accordance with clause 19, we confirm that Statement of Profit and Loss does not include any amount admissible under sections 32AC, 32AD, 33AB, 33ABA, 35(1)(i), 35(1)(ii), 35(1)(iia), 35(1)(iii), 35(1)(iv), 35(2AA), 35(2AB), 35ABB, 35AC, 35AD, 35CCA, 35CCB, 35CCC, 35CCD, 35D, 35DD, 35DDA and 35E.

27 We confirm that the Company has not paid any sum to an employee as bonus or commission for services rendered, where such sum was otherwise payable to him as profits or dividend.

28 We confirm that there is no other fund that requires disclosure except to the extent disclosed under Clause 20(b) of the Form No 3CD read with Exhibit-IV.

29 There was no capital expenditure debited to the statement of Profit and Loss except to the extent disclosed under clause 21(a) of the Form 3CD.

30 There were no personal expenses debited to the Statement of Profit and Loss other than those payable under contractual obligations or in accordance with generally accepted business practice.

31 We confirmed that there is no expenditure incurred on advertisement in any souvenir, brochure, tract, pamphlet or the like, published by any political party has been incurred.

32 The Company had not made any payments to clubs towards entrance fees and subscriptions, cost for club services and facilities used other than those disclosed under clause 21(a) of the Form 3CD

33 The Company had not incurred any expenditure by way of penalty or fine for violation of any law.

34 The Company had not incurred any expenditure by way of any other penalty or fine, or for any purpose which is an offence or which is prohibited by law.

35 With regard to Clause 21(b), Clause 34(a) and Clause 34(c) we confirm that considering the voluminous nature of transactions undertaken by the Company, it is not practicable for the management to prepare complete reconciliation of expenses/payments (accounted in the books of accounts) with the expenses/ payments actually subjected to and not subjected to TDS.

36 We confirm that systems are in place for the deduction of TDS as required by section 40(a) and there is no amount inadmissible as on 31 March 20xx.

37 Further we confirm that the Company has complied with all the provisions of Chapter XVII B of the Act and deduction of tax at source has been made at the applicable rates under the relevant provisions of the Act. There have been no case of Tax deductible where tax has not been deducted at all, or shortfalls on account of lesser deduction than required to be deducted or tax deducted late, or tax deducted but not paid to the credit of the Central Government in accordance with the provisions of Chapter XVII-B of the Act. Further, we confirm that detail given in Exhibit XI of Form 3CD is correct.

38 With regard to clauses 34(b) of annexed Form 3CD, the statement of tax deducted or collected contains information about all transactions which are required to be reported.

Further, we confirm that all returns of tax deducted at source have been furnished to the authorities within the prescribed time as required per the provisions of Chapter XVII-B.

39 In accordance with clause 34 (c), we confirm that the Company is not liable to pay any interest under section 201(1A) or section 206C(7) as at 31 March 2018 other than those disclosed under the clause.

40 There are no amounts debited to profit and loss account being, interest, salary, bonus, commission or remuneration inadmissible under section 40(b)/40(ba), hence, this clause is not applicable to the Company.

41 We confirm that it is not the practice of the Company to retain the copies of the cheques or to obtain copies of cheques from banks. Further, we confirm that there are no expenses covered under section 40A(3) and payments referred to in section 40A(3A) read with rule 6DD in respect of which payment were made by modes other than account payee cheque/ drafts or online transfer to the bank account of the payee.

42 The provision for payment of gratuity has been correctly disclosed under Clause 21(e) of Form 3CD.

43 The Company has paid no sums, which are disallowed under section 40A (9).

44 We confirm that the Company has no liability of contingent nature which is required to be disclosed under Clause 21(g) of Form No. 3CD.

45 The deductions under Section 14A in respect of expenditure incurred in relation to income which does not form part of the total income as disclosed under clause 21(h) is correct and accurate.

46 The Company does not have any amount of interest paid that is inadmissible under proviso to Section 36(l)(iii) of the Act.

47 There are no amounts of interest inadmissible under Section 23 of the Micro Small and Medium Enterprises Development Act, 2006.

48 There are no parties covered under section 40A(2)(b) other than those disclosed under clause 23 read with Exhibit-V & VI of Form 3CD and no payments have been to the persons specified under section 40A(2)(b) except as disclosed under the said clause.

49 There are no amounts deemed to be profits and gains under section 32AC or 32AD or 33AB or 33ABA or 33AC of the Act.

50 There is no amount of profit chargeable to tax under section 41 of the Act for the purpose of clause 25 of Form 3CD.

51 With respect to requirements of clause 26(A), we confirm that the liabilities that pre-existed on the first day of the previous year but were not allowed in the assessment of any preceding year have been disclosed under Exhibit VII. Except as disclosed in Exhibit VII, liabilities that pre-existed on the first day of the previous year have been claimed by the Company in the Return of Income furnished to the tax authorities under section 139(1) in respect of Assessment Year 2018-20xx. However, the assessment is yet to be completed. Pending completion of the above assessment, the amounts claimed have been deemed to be allowed as deductions and therefore, no details have been given under this clause.

52 With respect to requirements of clause 26(B), we confirm that the liabilities that were paid on or before the due date for furnishing the return of income of the previous year under Section 139 (1) and were not paid on or before the aforesaid date have been disclosed under Exhibit VIII. We further confirm that all amounts incurred during previous year but remaining outstanding as on the last day of the previous year have been considered.

53 We confirm the following with respect to clause 26(B) of the Form 3CD read with Exhibit VIII-

• Bonus- Bonus and ex gratia payments in excess of prescribed limit under Payment of Bonus Act, 1965 were made for purpose of business expediency and were, therefore, allowable under section 37 (i.e. on payable basis and not on payment basis) (Delhi HC in case of Shri Ram Pistons and Rings Ltd. (307 ITR 363) and Autopins (India) Ltd. (192 ITR 161)). Hence we have disclosed only the statutory bonus.

54 The Company has not availed of or utilized during the previous year, Goods and Service Tax (GST) credits other than those disclosed under Clause 27(a) read with Exhibit IX of Form 3CD, along with the treatment in the statement of Profit and Loss and treatment of outstanding Central Value Added Tax/ GST credits in the accounts.

55 There is no income or expenditure of prior period credited or debited to the statement of Profit and Loss.

56 Section 56(2)(viia) of the Act was applicable till 1 April 2017, hence clause 28 is not applicable.

57 We confirm that the Company has not received any consideration for issue of shares which exceeds the fair market value of the shares as referred to in section 56(2)(viib) of the Act. Further we confirm that the fair market value of the equity shares issued through rights issue were determined by merchant banker on the basis of “Comparable Companies Method” which is higher than the book value approach (selected as preferable method as given under Rule 11UA of the Rules).

58 There are no amount is included as income chargeable under the head ‘income from other sources’ as referred to in clause (ix) and (x) of sub-section (2) of section 56.

59 The Company has neither any amount were borrowed on hundi, nor were any amount due thereon (including interest on the amount borrowed) repaid during the previous year.

60 We confirm that the Company has not entered into any specified transactions which would require any adjustment to transfer price under section 92CE(1).

61 The Company has not incurred expenditure during the previous year in respect of which requirement of sub-section (1) of section 94B would be applicable.

62 We confirm that with regard to clause 31(a), 31(b) and 31(c) of the annexed Form No. 3CD, there are no receipt or repayment of loans or deposits or specified sum for an amount exceeding the limit specified under section 269SS or 269T were taken or accepted or repaid during the previous year by a cheque or bank draft, whether or not being an account payee cheque or an account payee bank draft.

63 We further confirm that the management has placed reliance on decision of Supreme Court in Sahara India Real Estate Corpn. Ltd. v. SEBI [2012] 25 taxmann.com 18 , wherein it has been held that the debentures (optionally fully convertible debentures) are securities. Hence the management believes that NCDs are out of purview of Section 269SS and 269T and accordingly, NCDs have not been disclosed in clause 31(a) and 31(c) of the Form 3CD.

64 The company retains amount equivalent to 1 or 2 EMIs from the disbursal amount at the time of disbursal from the loan. The company has taken a stand that the amount retained by the company in the ordinary course of business and it is not in the nature of loan/ deposit. (Refer clause vii of para 49.8 on page 179 of Guidance Note on Tax Audit issued by the Institute of Chartered Accountant of India). Hence the same has not been disclosed under clause 31(a) and 31 (c) of the Form 3CD.

65 With regard to clause 31(ba) and 31(bc) of the annexed Form No. 3CD, the Company has not received / paid any amount in excess of limit specified in section 269ST, in aggregate from / to a person in a day or in respect of a single transaction or in respect of transactions relating to one event or occasion from a person, during the previous year, where such receipt / repayment is otherwise than by a cheque or bank draft or use of electronic clearing system through a bank account.

66 With regard to clause 31(bb) and 31(bd) of the annexed Form No. 3CD, there were no receipts or payments which were accepted or paid in aggregate from / to a person in a day or in respect of a single transaction or in respect of transactions relating to one event or occasion from a person otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account.

Further, the Company being a NBFC has entered into arrangements with various banks, collection agents and business correspondents etc. for the purpose of EMI collection from customers, who face technical difficulty or operational issues or financial difficulty in remitting funds/ EMI payments through regular banking channels. Entire collection including cash collections by banks under CMS arrangements, by business correspondents or by collection agents from customers is directly deposited in collection bank accounts.In view of the above and considering voluminous nature of transaction, it is not practical possible to present such information.

67 There is no brought forward losses or depreciation allowance.

68 The Company is not deemed to be carrying on a speculation business as referred in explanation to section 73 and the assesse has not incurred any speculation loss under section 73 and section 73A of the Income-tax Act, 1961.

69 We confirm that there are no other deductions which are admissible under Chapter VIA or Chapter III (Section 10A, section 10AA) except as disclosed under clause 33 of Form 3CD read with Exhibit X.

70 We confirm that the provisions of Chapter XVII-BB are not applicable to the Company.

71 The Company is not a trading/ manufacturing company, hence clause 35 is not applicable.

72 The dividend paid u/s 115 – O of the Income Tax Act, 1961 during the previous year is correctly disclosed in Clause 36 of Form 3CD.

73 The Company has not received any amount in nature of dividend as referred to in sub-clause(e) of clause (22) of section 2 during the previous year.

74 No cost audit was required to be carried out under section 148 of the Companies Act 2013 during the previous year.

75 No audit has been conducted during the previous year under the relevant provisions of the Central Excise Act, 1944.

76 No audit has been conducted of the Company’s records during the year under Section 72A of the Finance Act, 1994.

77 The particulars of accounting ratios and their calculations in respect of the activities of the Company are correctly disclosed in Exhibit XIV.

Further, the Company has adopted IND-AS for preparation of its financial statements for the first time for the year ended 31 March 20xx. Accordingly, the preceding previous year figures represent the comparative restated figures as per IND-AS financial statements for the year ended 31 March 20xx.

78 There are no demand raised or refund issued during the previous year under any tax laws other than Income Tax Act, 1961 and Wealth tax Act, 1957.

79 The Company is not required to furnish statement in Form No. 61 or Form No. 61A or Form No. 61 B during the previous year other than those disclosed in clause 42 read with Exhibit XV of the Form 3CD.

80 We confirm that the Company is not liable to furnish a report under section 286(2) of the Act.

81 The return of income for the preceding previous year has been filed with the tax authorities on or before the due date.

82 All events subsequent to the 31 March 20xx, as applicable have been fully considered while furnishing information in relation to the Form 3CD and no circumstances or events have come to our attention up to the time of signing this letter which require adjustment of or disclosures in the Form 3CD.

We acknowledge that we are responsible for the compilation of information in Form No. 3CD. We shall not hold you liable, in case we are unable to claim a deduction / exemption or if we incur any tax liability on account of any errors / omissions / mistakes or any position taken by you in the Form No. 3CD, or if anything contained in or omitted from the Tax audit report has any unfavorable impact upon any tax proceedings.

Further, we undertake to indemnify and keep you indemnified, in case you suffer or are called upon to suffer, any loss, damage or claim, of any kind or nature whatsoever, arising from your signing the Tax Audit Report, except where, and to the extent that such loss, damage or claim is occasioned by, and is attributable solely to, your gross and wilful neglect and negligence.

Yours faithfully, For and on behalf of XXX Limited

Authorized Signatory

Place: New Delhi Date: xx xx 20xx

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Draft format of Management Representation Letter on Statutory Audit

Management representation letter on statutory audit.

The Management Representation Letter is required to be furnished before the Financial Statements are signed. The auditor should obtain representations from management, wherever considered appropriate. The auditor should obtain evidence that management acknowledges its responsibility for the appropriate preparation and presentation of financial information and that management has approved the financial information.

A sample format of management representation letter (for a company under the Companies Act, 2013) is given below which is required to be tailored for each circumstance .

Written representations are an important source of audit evidence as per "SA 580 WRITTEN REPRESENTATIONS". Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. Representations by management cannot be a substitute for other audit evidence that the auditor could reasonably expect to be available. For example, a representation by management as to the quantity, existence and costs of inventories is no substitute for adopting normal audit procedures regarding verification and valuation of inventories. Accordingly if you are stating "Valuation of Stock is taken as certified by the management " in your Tax Audit/ Stat Audit then don't do that.

Furthermore, the fact that management has provided reliable written representations does not affect the nature or extent of other audit evidence that the auditor obtains about the fulfillment of management’s responsibilities, or about specific assertions.

I have attached herewith draft management representation letter as per the Practitioner’s Guide to Audit of Small Entities issued by the ICAI . Also included representation w.r.t. compliance with accounting software with audit trail function. However, being draft format you must make necessary changes and modifications as per each circumstances and given format of management representation letter can not be considered as standard one.

Download management representation letter here.

You may also like to read: 

Defining the Scope of the Audit with an Engagement Letter

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AS 2805: Management Representations

Amendments to footnote 1 to paragraph .02 have been adopted by the PCAOB and approved by the U.S. Securities and Exchange Commission. The amendments will be effective for audits of financial statements for fiscal years beginning on or after December 15, 2024. See PCAOB Release No. 2024-004 , SEC Release No. 34-100773 .  View the standard as amended .

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.

2023 Audit Representation Engagement Letter

An engagement letter is a contract that establishes the services a practitioner will provide to his or her clients. Each engagement requires careful consideration to address its particular circumstances.

We’ve provided a sample engagement letter to use with representing your client before a taxing authority. Tailor the template to your clients’ needs.

All engagement letters and the Terms and Conditions Addendum contained in the AICPA Tax Section’s Annual Tax Compliance Kit have been developed in collaboration with CNA, the endorsed

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Draft Format Engagement letter & Management representation on Tax Audit

The main purpose of Management Representation Letter on various matters is to focus the management’s attention on those matters so that the management can specifically address those matters in more detail than would otherwise be the case.

However the Auditor needs to understand the limitations of management representations as audit evidence. Getting a Management Representation Letter does not absolve the auditor of its responsibilities. He has to exercise professional care in conducting the audit.

Article contains Draft Format of Engagement letter on Tax Audit and Draft Format of Management Representation letter related to Tax Audit –

Draft Format of Engagement letter on Tax Audit

Date: XX/XX/2020

The Executive Director

(Mention the name & Address of client)

We refer to the letter dated      informing us about our (re) appointment as the tax auditors of the Company/Partnership/LLP/individual. You have requested our firm “ XYZ & Co.” to do the tax audit of the Company/ Partnership/LLP/individual as defined in Section 44AB of the Income Tax Act, 1961, for the previous year(s) ending March 31, 2020. The tax audit of the Company/Partnership/LLP/individual include issuance of Tax Audit Report in Form Nos. 3CA/3CB and 3CD & filing the same with Income Tax Department. We are pleased to confirm our acceptance and our understanding of this audit engagement by means of this letter.

Our audit will be  conducted  for  the  purpose  to  ascertain/derive/report  the  requirements  of Form  Nos. 3CA/3CB and 3CD, to ensure that the books of account and other records are properly maintained, that they truly reflect the income of the taxpayer and claims for deduction/relief are correctly made by him & to checking fraudulent practices. In ascertaining/deriving/reporting the requirements of tax audit, we will rely on the work of statutory auditors appointed by the Company, to the extent it will required.

We will conduct the tax audit in accordance with the Provisions of Income Tax Act, 1961 & rules and regulations made thereunder. This tax audit involves performing procedures to ascertaining/deriving/reporting the requirements and the disclosures required in Form 3CA/CB & 3CD. Tax audit also includes evaluating the compliances with the provisions of Income Tax, TDS and with other laws.

Form 3CD should be duly filled & authenticated by the Management. We will only verify and confirm the same & on that basis form our opinion & issue the report in Form 3CA/3CB as the case may be.

This tax audit will be conducted on the basis that the Management and those charged with governance (Audit Committee / Board) acknowledge and understand that they have the responsibility:

1. For the preparation of tax audit report that give assurance in accordance with the provision of the Act, This includes:

• Compliance with the applicable provisions of the Income Tax Act, TDS Provisions & GST Provisions;
• Proper maintenance of accounts and other matters connected therewith;

2. Identifying and informing us of financial transactions or matters that may have any adverse effect on the tax compliance of the

3. Providing the required information completely and accurately in required

4. To provide us, inter alia, with:

a. Access, at all times, to all information, including the books, accounts, vouchers and other records and documentation of the Company, whether kept at the Head Office or elsewhere, of which the Management is aware that are relevant to the “books of account” such as records, documentation and other

b. Access to reports, if any, relating to internal reporting on frauds (e.g., vigil mechanism reports etc.), including those submitted by cost accountant or company secretary in practice;

• Additional information that we may request from the Management for the purposes of our audit;

1. Unrestricted access to persons within the Company from whom we deem it necessary to obtain audit evidence. This includes our entitlement to require from the officers of the Company such information and explanations as we may think necessary for the performance of our duties as the tax auditors of the Company; and

2. All the required support to discharge our duties as the tax

As part of our audit process, we will request from the Management written confirmation concerning representations made to us in connection with our audit.

Our report prepared in accordance with relevant provisions of the Act would be addressed to the Company. The form and content of our report may need to be amended in the light of our audit findings.

Our fees will be billed as follows”

The total audit fee of Rs…… (Excluding GST) (Rupees………………only) which will be billed on submission of the audit report.

We wish to emphasis that our audit report will be exclusively for income-tax purposes. We shall not be liable for any way to any third party to whom you may make the audit report available.

We also wish to invite your attention to the fact that our audit process is subject to ‘peer review’ under the Chartered Accountants Act, 1949. The reviewer may examine our working papers during the course of the peer review.

Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangement for our audit of the financial statements.

Thanking you

Yours faithfully

For ……..

Chartered Accountants

 (Mention n ame & Designation of Partner)

Draft Format of Management Representation letter on Tax Audit

[ON THE LETTER HEAD OF AUDITEE]

M/s ……

Sub: Management Representation in course of Tax Audit for A.Y……

Please find enclosed a copy of Form 3 CD alongwith all relevant details for the purpose of conducting the Tax Audit of XYZ Company , for the year ended 31st March, 2020.  In this connection, we further confirm that

1. The address that we have reported in Clause 2 of the form 3CD is same as we have informed to the income tax department, there is no change in the same.

2. That the registration or identification number, if any, under indirect tax laws including excise duty, goods & service tax, sales tax, customs duty, etc. as informed to you and reported in Clause 4 of Form 3CD are correct and there is no other number other than what is reported in said clause.

3. We certify, there has been no change in the partners or members or in their profit sharing ratio since the last date of the preceding year during the year under report as stated in clause 9 (b) of form 3 CD.

4. We certify, there has been no change in the nature of business during the year under report as stated in clause 10 (a) of form 3 CD.

5. That the List of books of account as prescribed u/s 44AA have been maintained and the address at which the books of accounts are kept as reported in Clause 11 has been informed by us and there are no other books and no other location at which books are kept.

6. We confirm that the profit and loss account does not include any profits and gains assessable on presumptive basis under relevant sections 44AD , 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB or any other relevant section as stated in clause 12 of form 3 CD.

7. The company has followed the mercantile system of accounting & there is no change in the method of accounting employed in the immediately preceding previous year, for the preparation of final accounts for the financial year 2019-2020 as stated in clause 13 of form 3 CD.

8. We certify that the valuation of closing stock is on the same basis & there is no deviation from the method of valuation prescribed under section 145A as stated in clause 14 of form 3 CD.

9. We certify that there are no capital assets which are converted into stock in trade as stated in clause 15 of form 3 CD.

10. We certify there is no capital receipt which is credited to Profit & Loss Account as stated in clause 16 of form 3 CD.

11. We certify that the items falling within the scope of section 28 have been correctly stated in clause 16.

12. That there is no land or building or both which is transferred during the previous year for a consideration less than value adopted or assessed or assessable by any authority of a State Government referred to in section 43CA or 50C, other than what is informed by us and has been reported in Clause 17 of Form 3CD.

13. We follow a policy of capitalizing an asset only after the asset has been purchased and has been put to use. The date on which the asset is put to use is as certified by us in Clause 18 of Form 3CD.

14. We certify that particulars of depreciation allowable as per the Income-tax Act, 1961 in respect of each asset or block of assets, as the case may be are correct.

15. We certify that there is no sum paid to an employee as bonus or commission for service rendered, where such sum was otherwise payable to him as profit or dividend as stated in clause 20 of form 3 CD.

16. The employee’s and employer’s share contributed towards provident fund, pension fund and ESI, date of deposit and amount of deposit is correctly stated in clauses 20 (b) of Form 3CD.

17. No Capital Expenses have been debited to any Revenue Accounts as stated in clause 21 (a) of form 3 CD.

18. All the expenses incurred on during the Year by us are for the purpose of business only.

19. No personal expenses, except those under contractual obligations or by generally accepted business practice, have been charged to the profit & loss account.

20. We certify that there is no expenditure on advertisement in any souvenir, broucher, tact, pamphlet etc. published by a political party. Further we confirm that we have not made any expenditure at clubs.

21. There have been no amounts in the nature of penalties or fines levied on us other than what has been disclosed in Clause 21 (a).

22. We have not made any payments otherwise than Account payee cheque, above Rs. 10,000/- (Rs.35,000 in case of Transporters) covered u/s 40A(3) or Section 40A(3A) during the year except those which have been disclosed in Clause 21(d).

23. No sums have been paid by the company as an employer which is not allowable U/s 40A (7) of the Income Tax Act, 1961 as stated in Clause 21(e).

24. We have not incurred any liability of a contingent nature as stated in Clause 21(g).

25. No amount of interest inadmissible under section 23 of the Micro, Small and Medium Enterprises Development Act, 2006 other than stated in Clause 22.

26. All transactions with any related party within the meaning of section 40(A)(2)(b) of the Act, have been disclosed in Clause 23.

27. No amounts deemed to be profits and gains under section 32AC or 32AD or 33AB or 33ABA or 33AC other than stated in Clause 24.

28. There is no amount of profit chargeable to tax u/s. 41 as disclosed under clause 25 of Form 3CD.

29. All the statutory dues have been deposited on time as disclosed under clause 26.

30. That during the previous year we have not received any property, being share of a company not being a company in which the public are substantially interested, without consideration or for inadequate consideration as referred to in section 56(2)(viia) under clause 28 of Form 3CD.

31. That during the previous year we have not received any consideration for issue of shares which exceeds the fair market value of the shares as referred to in section 56(2)(viib) under clause 29 of Form 3CD.

32. That we have not accepted or repaid any amount borrowed on hundi or any amount due thereon in contravention to Section 269SS and 269T of the Act (including interest on the amount borrowed), otherwise than through an account payee cheque, bank draft, Online payments as stated in clause 30 & 31 of Form 3CD.

33. That we have not incurred any loss referred to in section 73A of the Act in respect of any specified business during the previous year as stated in clause 32 of Form 3CD.

34. That the company is not deemed to be carrying on a speculation business as referred in explanation to section 73 as stated in clause 32 of Form 3CD.

35. There are no deductions under Chapter VI A other than those stated in Clause 33.

36. The taxes deducted at source by us under the provisions of the Income-tax Act during the year have been paid to the Central Government except those which have been disclosed in Clause 34(a).

37. The statement of tax deducted or collected contains information about all transactions which are required to be reported under Clause 34(b) of the Form 3CD.

38. Interest payable u/s 201(1A) and 206C(7) of the Act have been paid which have been disclosed in Clause 34(c).

39. We certify that stock quantities furnished in Clause 35 of Form 3CD has been valued & certified by us.

40. No Cost Audit was carried out during the relevant Assessment year as reported in the clause 37.

41. No audit under Central Excise Act was carried out during the relevant Assessment year as reported in the clause 38.

42. No audit was conducted under section 72A of the Finance Act, 1994 in relation to valuation of taxable services during the relevant Assessment year as reported in clause 39.

43. The basis of calculation of ratios as specified in clause 40 of Form 3CD is correct.

44. That there is no demand raised or refund issued during the previous year under any tax laws other than Income Tax Act, 1961 and Wealth tax Act, 1957 as required in Clause 41.

45. We also certify information furnished in Clause 1 to 44 & Annexures 1 to ….. of Form 3CD are true and correct.

By order of the Board

For «Name of company»

Sd/- Name Director DIN-

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Can anyone please send me word format of certifctaes that one needs to obtain from client while doing tax audit?

Very useful information in preparing Management representation letter Thanks you very much

Very helpful information sir.

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Management Representation Letter: Format, Content, Signature

Home » Bookkeeping » Management Representation Letter: Format, Content, Signature

As of 2019, the FASB requires publicly traded companies to prepare financial statements following the Generally Accepted Accounting Principles (GAAP). Auditors are required by professional standards to report, in writing, internal control matters that they believe should be brought to the attention of those charged with governance (the board). Generally, if your auditor is going to put an internal control matter in a letter, they have assessed that the matter was the result of a deficiency in internal controls. This is an important part of that audit that the profession does not take lightly.

One common example of a deficiency in internal control that’s severe enough to be considered a material weakness or significant deficiency is when an organization lacks the knowledge and training to prepare its own financial statements, including footnote disclosures. The “SAS 115” letter is usually issued when any significant deficiencies or material weaknesses would have been discussed with management during the audit, but are not required to be communicated in written form. In performing an audit of your Plan’s internal controls and plan financials, your auditors are required to obtain an understanding of the Plan’s operations and internal controls.

A management representation letter is a form letter written by a company’s external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis. The CEO and the most senior accounting person (such as the CFO) are usually required to sign the letter. The letter is signed following the completion of audit fieldwork, and before the financial statements are issued along with the auditor’s opinion. External auditors follow a set of standards different from that of the company or organization hiring them to do the work.

In doing so, they may become aware of matters related to your Plan’s internal control that may be considered deficiencies, significant deficiencies, or material weaknesses. Audits performed by outside parties can be extremely helpful in removing any bias in reviewing the state of a company’s financials. Financial audits seek to identify if there are any material misstatements in the financial statements. An unqualified, or clean, auditor’s opinion provides financial statement users with confidence that the financials are both accurate and complete. External audits, therefore, allow stakeholders to make better, more informed decisions related to the company being audited.

The representation should reaffirm your client’s understanding of all significant terms in the engagement letter. A relevant assertion is a financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated.

The purpose of an internal audit is to ensure compliance with laws and regulations and to help maintain accurate and timely financial reporting and data collection. It also provides a benefit to management by identifying flaws in internal control or financial reporting prior to its review by external auditors.

Depending on materiality and other qualitative factors, the auditors will consider the deficiency to be an “other” matter, significant deficiency, or material weakness. The auditor has discretion on which category the deficiency falls into, but are otherwise required to use the standard wording and definitions in the letter.

It serves to document management’s representations during the audit, reducing misunderstandings of management’s responsibilities for the financial statements. The definition of good internal controls is that they allow errors and other misstatements to be prevented or detected and corrected by (the nonprofit’s) employees in the normal course of performing their duties.

Material weaknesses or significant deficiencies may exist that were not identified during the audit, and auditors are required to disclose this in their written communication. The auditor’s report contains the auditor’s opinion on whether a company’s financial statements comply with accounting standards. The results of the internal audit are used to make managerial changes and improvements to internal controls.

What is a management representation letter?

A management representation letter is a form letter written by a company’s external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis.

A control objective provides a specific target against which to evaluate the effectiveness of controls. Management representation is a letter issued by a client to the auditor in writing as part of audit evidences. The representations letter must cover all periods encompassed by the audit report, and must be dated the same date of audit work completion.

These types of auditors are used when an organization doesn’t have the in-house resources to audit certain parts of their own operations. The assertion of completeness is an assertion that the financial statements are thorough and include every item that should be included in the statement for a given accounting period. The assertion of completeness also states that a company’s entire inventory, even inventory that may be temporarily in the possession of a third party, is included in the total inventory figure appearing on a financial statement. The compilation standards do not require practitioners to obtain a management representation letter, but this does not mean that it’s not a prudent thing to do. Obtaining a representation letter helps to ensure your client understands the services that you have provided, the limitations on the work you have completed, and that they are ultimately responsible for their financial statements.

The biggest difference between an internal and external audit is the concept of independence of the external auditor. When audits are performed by third parties, the resulting auditor’s opinion expressed on items being audited (a company’s financials, internal controls, or a system) can be candid and honest without it affecting daily work relationships within the company. Auditors evaluate each internal control deficiency noted during the audit to determine whether the deficiency, or a combination of deficiencies, is severe enough to be considered a material weakness or significant deficiency. In assessing the deficiency, auditors consider the magnitude of potential misstatements of your financial statements as well as the likelihood that internal controls would not prevent or detect and correct the misstatements.

Representation to Management

• In an audit of financial statements, professional standards require that auditors obtain an understanding of internal controls to the extent necessary to plan the audit.
• written confirmation from management to the auditor about the fairness of various financial statement elements.
• Auditors use this understanding of internal controls to assess the risk of material misstatement of the financial statements and to design appropriate audit procedures to minimize that risk.

The idea behind a management representation letter is to take away some of the legal burdens of delivering wrong financial statements from the auditor to the company. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. Internal auditors are employed by the company or organization for whom they are performing an audit, and the resulting audit report is given directly to management and the board of directors. Consultant auditors, while not employed internally, use the standards of the company they are auditing as opposed to a separate set of standards.

If the auditors detect an unexpected material misstatement during your audit, it could indicate that your internal controls are not functioning properly. Conversely, lack of an actual misstatement doesn’t necessarily mean that your internal controls are working.

The determination of whether an assertion is a relevant assertion is based on inherent risk, without regard to the effect of controls. Financial statements and related disclosures refers to a company’s financial statements and notes to the financial statements as presented in accordance with generally accepted accounting principles (“GAAP”). References to financial statements and related disclosures do not extend to the preparation of management’s discussion and analysis or other similar financial information presented outside a company’s GAAP-basis financial statements and notes.

External audits can include a review of both financial statements and a company’s internal controls. When a company’s financial statements are audited, the principal element an auditor reviews is the reliability of the financial statement assertions. In the United States, the Financial Accounting Standards Board (FASB) establishes the accounting standards that companies must follow when preparing their financial statements.

In an audit of financial statements, professional standards require that auditors obtain an understanding of internal controls to the extent necessary to plan the audit. Auditors use this understanding of internal controls to assess the risk of material misstatement of the financial statements and to design appropriate audit procedures to minimize that risk. written confirmation from management to the auditor about the fairness of various financial statement elements. The purpose of the letter is to emphasize that the financial statements are management’s representations, and thus management has the primary responsibility for their accuracy.

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This letter is useful for setting the expectations of both parties to the arrangement. Almost all companies receive a yearly audit of their financial statements, such as the income statement, balance sheet, and cash flow statement. Lenders often require the results of an external audit annually as part of their debt covenants. For some companies, audits are a legal requirement due to the compelling incentives to intentionally misstate financial information in an attempt to commit fraud.

Management representation letter

As long as there’s a reasonable possibility for material misstatement of account balances or financial statement disclosures, your internal controls are considered to be deficient. An auditor typically will not issue an opinion on a company’s financial statements without first receiving a signed management representation letter. An audit engagement is an arrangement that an auditor has with a client to perform an audit of the client’s accounting records and financial statements. The term usually applies to the contractual arrangement between the two parties, rather than the full set of auditing tasks that the auditor will perform. To create an engagement, the two parties meet to discuss the services needed by the client.

As a result of the Sarbanes-Oxley Act (SOX) of 2002, publicly traded companies must also receive an evaluation of the effectiveness of their internal controls. As noted above, an internal control letter is usually the result of a deficiency in internal controls discovered during the audit, most commonly from a material audit adjustment. The letter includes required language regarding the severity of the deficiency.

Real Business Owners,

The parties then agree on the services to be provided, along with a price and the period during which the audit will be conducted. This information is stated in an engagement letter, which is prepared by the auditor and sent to the client. If the client agrees with the terms of the letter, a person authorized to do so signs the letter and returns a copy to the auditor. By doing so, the parties indicate that an audit engagement has been initiated.

Also, the letter provides supplementary audit evidence of an internal nature by giving formal management replies to auditor questions regarding matters that did not come to the auditor’s attention in performing audit procedures. Some auditors request written representations of all financial statement items. All auditors require representations regarding receivables, inventories, plant and equipment, liabilities, and subsequent events. The letter is required at the completion of the audit fieldwork and prior to issuance of the financial statements with the auditor’s opinion.

Auditors spend a lot of time assessing how material audit adjustments and immaterial adjustments that have the potential to be material will be communicated in the internal control letter. The Representation Letter is issued with the draft audit and is required by auditing standards to finalize the audit. The Representation Letter is a letter from the Association to our firm confirming responsibilities of the board and management for the financial statements, as well as confirming information provided to us during the audit. The President or Treasurer and Management need to sign the Representation Letter and return it back to our office within 60 days from the date the draft audit was issued. Representation Letters received after the 60-day mark may result in additional auditing procedures in order to finalize the audit and comply with auditing standards at an additional expense to the Association.

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• TAX PRACTICE RESPONSIBILITIES

Best practices for engagement letters, POAs, and tax return extensions

• Practice Management & Professional Standards
• Engagement letters
• Client communications
• Professional liability

This discussion focuses on how and why to use engagement letters and what they should cover. The primary purpose of using a letter to define a professional relationship is to ensure that the client and the practitioner agree upon the services that are to be provided. Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service  (31 C.F.R. Part 10), Section 10.33, Best Practices for Tax Advisors , states that a practitioner should communicate clearly with the client regarding the terms of the engagement; a signed engagement letter provides clarity and prevents scope creep.

An engagement letter is also a valuable tool for cementing the relationship with a new client, particularly when there is a delay between accepting a new client and beginning services. Furthermore, defining the scope and agreeing upon the terms in writing clarifies the client's expectations and builds trust by preventing the billing of services that were not anticipated by the client. It also removes any ambiguity regarding who the client is, especially when the practitioner is dealing with a representative of a business.

In addition, clarifying the services through an engagement letter acts as a primary defense against malpractice claims. Disagreements arise when clients believe you are handling their taxes but do not understand exactly what that might entail or encompass. A clearly defined engagement letter sets out the scope of services, defining what the practitioner has agreed to do, what the client has agreed to do, and what the practitioner will not be doing. Additionally, malpractice insurance premiums may be increased without the consistent use of engagement letters.

The importance of being specific

The benefits of engagement letters are often limited by vagueness and the omission of useful provisions. For instance, tax forms should be listed specifically, rather than using a general phrase like "all income tax returns" or "all state tax returns" and should patently exclude all returns and forms not listed. For instance, specifically mentioning and excluding any foreign reporting requirements such as the FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), is prudent, considering the potential for significant penalties.

Tax planning and consulting should be excluded from engagements that are merely for tax return preparation and should ideally be dealt with under a separate engagement letter with clearly defined parameters. Clients can become upset when they discover that they have missed a tax - saving opportunity, regardless of whether they were paying for proactive tax advice. Clients' expectations of CPAs generally include tax - saving advice, so being specific about tax services can prevent a client from looking to the firm to provide remuneration for a missed opportunity.

Useful provisions to include

Because firms may not have liability protection in the event of a data breach (although this optional coverage is recommended when available), an engagement letter can offer additional protection with a provision to disclaim liability from a data breach that occurs through no fault of the firm. Reasonable measures must be taken to ensure security of data, but language providing protection is helpful when reasonable measures fail.

Practitioners should also consider a conflict - of - interest waiver clause for related parties, divorcing couples, or multiple shareholders or partnership situations. These waivers can be a part of the engagement letter or executed in conjunction with the engagement letter.

The following points should also be included in the engagement letter:

• Alternative dispute resolution provisions;
• Venue in the event of a civil claim;
• A clause to limit liability to a percentage of fees, if allowed under applicable state law;
• Termination date for services (to trigger the statute of limitation);
• Date by which information must be provided by the client to complete the work on time;
• Language about filing extensions for tax returns;
• Statement of client asserting the completeness and accuracy of the data provided;
• Disclaimer that the firm is not verifying or auditing data;
• Provisions on data retention and who is responsible for providing supporting data in the event of a future audit;
• Disclaimer that the firm is not taking steps to discover fraudulent activity, although the firm may disclose any indications of fraud that are observed during the engagement.

Engagement letters should be reviewed and revised on a continual basis, at least annually, to incorporate changes in the tax law or other provisions as needed.

Challenges for small firms

While the benefits are clear, implementing engagement letters for all clients is undeniably challenging for smaller firms with limited resources. But there are practical steps that can lessen the impact and track the process better.

Firms preparing less complex tax returns may consider negative assurance engagement letters. Essentially, such a letter provided to clients lays out the terms and states that providing information to begin work constitutes acceptance of those terms. This type of engagement letter is not as good as one requiring a signature acknowledgment but may provide some protection.

In addition, electronic signatures can be used to streamline the process. The firm can send all engagement letters en masse at the beginning of the year for electronic signature or with organizers when sent. When data is received to begin tax preparation, a process must be in place to verify that the engagement letter was signed before routing or assigning the work. If no signature is received, the firm should notify the client that work cannot commence until the engagement letter has been signed and should consider returning the paperwork to the client with the engagement letter requesting a signature for work to commence.

The ability to access information from the IRS on behalf of a client is a necessary component of the practice of most CPA firms and other tax practitioners. The two avenues for this are Form 8821, Tax Information Authorization , and Form 2848, Power of Attorney and Declaration of Representative .

There are three key differences between these two avenues. Form 2848 can be used only by someone with authority to practice before the IRS, such as an attorney, CPA, enrolled agent, enrolled actuary, or enrolled retirement plan agent; it also grants power of attorney (POA) to represent the client before the IRS. Representation before the IRS encompasses advocating for the client and providing information on behalf of the client.

Form 8821 only allows the appointee to receive information, but the appointee does not need any authority to practice before the IRS or even need to be an individual; businesses and entities can be appointed via the Form 8821. Form 8821 may be a viable option if a practitioner is merely collecting data to file a return or, where the firm is the appointee, to allow unlicensed staff to request transcripts from the IRS. It also may be useful to accept a limited authorization under a Form 8821 during the process of determining whether to accept someone as a client. It allows the practitioner to receive information but makes clear to the IRS representative and to the client that the practitioner has not accepted the authority and responsibility to advocate on the client's behalf.

The final key difference is that a Form 8821 automatically expires after seven years, while a Form 2848 must be revoked. With the termination of a POA, the practitioner can no longer represent the taxpayer for that tax period.To revoke a Form 2848, the practitioner should write "REVOKE" across the top of the Form 2848 that is being revoked and sign and date below the notation. The revocation should be filed with the Centralized Authorization File (CAF) unit in the same manner as the original POA. If the original Form 2848 is not available, a signed and dated letter from the practitioner stating the intention to revoke the POA for the applicable tax matters and periods, the name and address of each recognized representative whose authority is revoked, the taxpayer's name, the taxpayer's address, and the taxpayer identification number can be submitted to the CAF unit. If all authority under the POA is being revoked, "revoke all years/periods" can be written instead of listing the specific matters and years/periods.

With the revocation, both the client and the firm should be clear that the firm is no longer responsible for tracking new notices as they arise. It may be prudent to issue a termination of the engagement letter at the time of the POA revocation. The clear communication of the letter articulates the mutual understanding while also working within the relationship to remind the client that the practitioner will be available to help on other issues later.

If Form 2848 is used, the firm should track all POAs for all practitioners in the firm and have a system in place for revoking them when the project terminates or when the client is no longer a client. This avoids confusion about who is responsible for replying to further notices for the covered subject or period.

If there is uncertainty regarding what POAs a firm has outstanding, a Freedom of Information Act (FOIA) request can be filed. The request must state that it is being made under the Freedom of Information Act, identify the records that are being sought, identify the name and address of the requester, provide a copy of a valid photo identification of the requestor that includes a signature, and make a firm commitment to pay any applicable fees. The requestor can state the maximum fee he or she is willing to pay. Generally, there will be no fee for individuals seeking records for their own use unless the request is for more than 100 pages or the search takes more than two hours. If the applicable fees will exceed the maximum fee stated, the IRS will contact the requestor and ask the requestor whether he or she would like to withdraw or modify the request before proceeding.

The IRS recently implemented an online authorization process through the Tax Pro Account service to simplify the process and allow instant access for the practitioner. A tax practitioner can submit a POA authorization (if the practitioner meets the POA requirements) or a Tax Information Authorization request to the taxpayer's individual IRS online account. The practitioner chooses the appropriate authorization type when requesting it.

To request an authorization online, representatives log in to their Tax Pro Account on irs.gov and request an authorization from the taxpayer. The representatives will need all of the data traditionally required on a Form 8821 or Form 2848; the data entered must match previously filed returns exactly. After submitting the form, the practitioner should notify the taxpayer that the request is waiting for authorization. The taxpayer must log in to his or her individual IRS account to review and sign the authorization request; if any data is incorrect, the request will not appear for the taxpayer, and the practitioner will need to resubmit the request with the correct data.

Authority via a Tax Pro Account can only be granted for the years 2000 through the current year plus three calendar years forward from the date of the request and is limited to the following matters:

• Form 1040, U.S. Individual Income Tax Return , income tax;
• Split spousal assessment or innocent spouse relief;
• Shared-responsibility payment, including split spousal assessment; and
• Civil penalties.

Unlike with a paper filing, only two representatives can receive copies of a taxpayer's IRS notices and communications, and the online process automatically revokes any other authorization granted for that period, tax matter, or authorization type. If multiple representatives are requesting authority, the taxpayer must authorize them on the same day. Once the taxpayer has accepted the request in his or her online account, the representative has immediate access to the records.

Extensions provide a valuable release valve for the tax preparer in two primary ways: They spread out the tax filing over a longer period, and they allow time for the necessary data to arrive for the return to be accurately prepared.

Increased complexity and additional reporting requirements have resulted in Schedules K - 1 and corrected information returns being sent out shortly before or even after the filing deadline. However, clients often want their returns to be filed "on time," while failing to understand that, with an extension, the return is still on time if it is filed by the extended due date. The taxes must be paid by the due date, but unless there is a compelling need for the return to be filed by the original due date, the practitioner should advise the client to wait so that a more complex return can be done when professionals are less fatigued and not under a pressing deadline. It is worth considering charging a higher rate for those who insist on filing by the original due date, to compensate for the additional burden and risk of error.

An extension allows additional time for retroactive tax law changes to be incorporated into tax preparation software. The IRS did not require amended returns to be filed for returns filed prior to the tax law changes for tax year 2020 but instead adjusted taxpayers' returns; the resulting notices of the adjustments sent to taxpayers by the IRS raised concerns that the practitioner had erred. Thus, because these returns were not extended, additional time was required for client inquiries and explanations for returns. Moreover, because not all states pass legislation to conform to the federal tax law by the due date of the return, retroactive changes at the state level also generate notices to adjust the state tax return, again wasting the time of taxpayers and practitioners.

The opportunity for filing a superseding return is an often - overlooked benefit of filing an extension. A superseding return acts as the original filed return and allows for elections that are required to be filed with the original return if they are considered timely filed by its extended due date. Even if the return is filed by the original due date, an extension allows for the possibility of filing a superseding return and acts as a safety net for any missed elections if they are caught before the extended due date. However, superseding returns do not allow a change from married filing jointly to married filing separately or changes to other irrevocable elections.

When return due dates are legislatively postponed, such as occurred during the filing seasons for tax years 2019 and 2020, the period for claiming a refund may be shortened if the return is filed after the original due date but before the postponed due date. Under Secs. 6511(a) and (b)(2) and Regs. Secs. 301.6511(a)- 1 (a) and 301.6511(b)- 1 (b), a refund claim can be made for three years from the date of filing, with the amount of the claim limited to the taxes paid or considered paid within a lookback period of three years plus any extension period. If no extension was filed, taxes are considered paid on April 15, even if the return was timely filed on May 15. The three - year lookback period stops at the date filed unless a valid extension was filed to bring it back to the original due date of the return.

When due dates are postponed, filing extensions as of the original due date of the returns serves a practical purpose for smaller firms; by following the firm's normal procedures, there is less likelihood of making mistakes or missing necessary extensions.

There are potential pitfalls to be wary of when filing extensions. Some elections, such as the mark - to - market election for traders, must be made by the due date of the return without taking into account any extensions. If extensions are filed without a full review of the taxpayer's documents, the need or benefit of such an election may be missed before the due date.

An additional area of potential liability is in failing to properly advise the taxpayers or document having advised them that the extension does not extend the time to pay. Taxpayers must still provide the necessary data to enable the correct tax liability to be calculated and paid by the original due date. To qualify for an extension, the taxpayer must properly estimate the tax liability using the information available, enter the total tax liability, and file the extension by the return's due date. A failure to calculate the tax may result in a rejection of the extension and additional penalties.

Preparers subject to Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), must follow the due diligence guidelines for preparing and filing extensions found in Sections 10.22, Diligence as to Accuracy ,and 10.36, Procedures to Ensure Compliance , of Circular 230 or face potential penalties and liabilities.An example of a potential area for concern is when a taxpayer has an accepted offer in compromise or an installment agreement, or is subject to a pertinent court order; failing to file or failing to pay the full amount of tax due could terminate the existing agreement or violate the terms of the order. It is advisable to document the authorization to file the extension and the calculation of the tax due. Smaller firms may have a difficult time tracking the information for due diligence compliance and may not be able to bill the clients for the additional expense and the additional time in the file.

An extension may lessen the urgency felt by taxpayers to compile their financial data; in the event of an increase in taxable income, the delay in organization of the data creates the possibility of cash flow difficulties for business owners. A taxpayer with a surprise tax payment due for the prior year may also have to make a large fourth - quarter estimated payment for the current year if the three quarterly estimated payments for the current year that are due prior to the extended due date of the return were underestimated using old data. The additional penalties and interest on the underpayment of estimates and the late payments of taxes may cause the client to feel the preparer is at fault regardless of when the information is provided to the preparer.

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