While conducting an audit, the auditor comes across various matters in respect of which he is not able to obtain sufficient appropriate audit evidence. One such area involves verification of liabilities, in general, and contingent liabilities in particular. In such cases, it is advisable for the auditor to obtain a written representation from the management as to the fact whether all contingent liabilities have been disclosed and are complete in all respects. Even in normal circumstances, obtaining a certificate from the management would provide a corroborating evidence to support the evidence obtained from other sources. In any case, the fact remains that it is the management which is responsible for preparation of financial information. Therefore, it would be in order to obtain an appropriate certificate from the management that it has approved the financial information prepared by them. Now section 217(2AA) of
the Companies Act, 1956 provides that the Board shall have to give a statement that financial statements are their responsibility.
AAS-11, “Representation by Management”, while amplifying the procedures to be applied in evaluating and documenting one representation from management, it makes it absolutely clear that representations by management cannot be a substitute for other evidence that the auditor could expect to be reasonably available. For example, a representation by management as to the quantity, existence and cost of inventories is no substitute for adopting normal audit procedures regarding verification and valuation of inventories. If the auditor is unable to obtain sufficient appropriate audit evidence that he believes would be available regarding a matter which has or may have a material effect on the financial information, this will constitute a limitation on the scope of his examination even if he has obtained a representation from management on the matter. For further details, students may refer to AAS 11 reproduced in Appendix II.