January 1999 Issue



By John F. Burke, CPA, The CPA Journal

SAS No. 85, Management Representations, supersedes SAS No. 19, Client Representations, and Auditing Interpretation No. 2, Management Representations When Current Management Was Not Present During the Period Under Audit. The new SAS now incorporates the guidance previously included in the interpretation. It also amends SAS No. 58, Reports on Audited Financial Statements, by requiring a predecessor auditor to obtain a letter of representation from management in addition to the representation letter from a successor auditor before reissuing a report previously issued on financial statements of a prior period.

The new SAS has been issued to respond to changes in both auditing practice and the auditing environment since SAS No. 19 was issued. The specific representations to be received from management now include information concerning fraud and significant risks and uncertainties. Others, such as the one on obsolete inventories, have been dropped.

Other changes include the following:

A clarification that the auditor is to receive representations for all financial statements and periods covered by the auditor's report;

Management must now state that it is their belief that the financial statements are fairly presented in conformity with generally accepted accounting principles;

The auditor is now ordinarily required to obtain a representation letter tailored to cover representations relating to the financial statements unique to the entity's business or industry;

If other evidence contradicts a representation, the auditor is required to investigate the circumstances and consider the reliability of the representation made;

Guidance is now included regarding materiality levels that may be stated explicitly in the representation letter, in either qualitative or quantitative terms.

SAS No. 85 has expanded the number of appendixes. Whereas SAS No. 19 had only an illustrative management representation letter, the new SAS has both a letter and two additional appendixes. The first is an extensive listing of possible additional representations. The second is an illustrative updated management representation letter.

SAS No. 85 is effective for audits of financial statements for periods ending on or after June 30, 1998. Earlier application is permitted. *


By John F. Burke, CPA, The CPA Journal

The October issue of The CPA Journal presented a number of audit interpretations issued by the Auditing Standards Board in 1998. Here are descriptions of two other interpretations. The full text is available on the AICPA's website, www.aicpa.org.

AU Section 634, Letter for Underwriters and Certain Other Requesting Parties, "Commenting in a Comfort Letter on Quantitative Disclosures About Market Risk Made in Accordance with Item 305 of Regulation S-K" (August 1998)

In Regulation S-K, the SEC now requires certain quantitative and qualitative disclosures about market risk­sensitive instruments, e.g., derivative financial instruments. The interpretation covers the following questions:

May an accountant provide positive or negative assurance on the conformity of such information with the requirements of Regulation S-K?

May an accountant otherwise provide comments in a comfort letter on such disclosures?

In response to the first question, the interpretation advises that accountants may not give positive assurance. Negative assurance may be given if certain conditions are met.

As to the second question, the advice is that accountants should not comment on the qualitative disclosures. The interpretation then goes on to give detailed advice about commenting on the quantitative disclosures.

AU Section 326, Evidential Matter, "Applying Auditing Procedures to Segment Disclosures in Financial Statements" (August 1998)

This interpretation covers the auditor's responsibilities in connection with the new segment disclosure requirements under SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. It covers the following:

The auditor's objectives when applying auditing procedures to segment disclosures

The auditor's considerations when planning the audit in connection with such disclosures

The procedures to be performed when evaluating whether the entity appropriately identified its reportable segments, and determining the adequacy and completeness of management's disclosures

The implications related to segment information on the auditor's report. *

Douglas R. Carmichael, PhD, CPA
Baruch College

John F. Burke, CPA
The CPA Journal

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