You are the audit manager in charge of the audit of Radbourn Specialists Cars Limited which...

 

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You are the audit manager in charge of the audit of Radbourn Specialists Cars Limited which is a company that manufactures bespoke sports cars that are each made-to-order for their customers. The draft financial statements show a turnover of £12.5 million with profit before tax of £750,000. All audit work is up-to-date, but the obtaining of written representations from management has not yet been completed. A review of the audit file has disclosed the following outstanding points: Alan Smith Alan Smith, a customer of Radbourn Specialist Cars has issued a legal claim against the company for a faulty car which was purchased two years ago. The particulars of the claim are that the bodywork of the vehicle has started to corrode. Lawyers are unable at this stage to determine liability. Alan Smith's lawyers have submitted a claim to Radbourn Specialist Cars seeking re-imbursement of the original purchase price plus a substantial sum representing the inconvenience that has been suffered. The total claimed is £400,000. The directors are of the opinion that the claim is not justified. Depreciation Radbourn Specialist Cars have depreciated their specialist production equipment in their financial statements at the amount of 10% per annum on the reducing balance method. This treatment is consistent with prior accounting periods (which have received unmodified audit reports) and other companies in the same industry, and sales of old equipment show negligible profit or loss on sale. The audit senior, who is new to this audit, is of the opinion that depreciation is being undercharged in the financial statements. Required (a) (b) (c) Explain the nature and purpose of a management representation letter. (5 marks) For the matters above justify whether it would be appropriate to include them in a representation letter and if appropriate, draft the suggested paragraph in the management representation letter. (10 marks) What actions should an auditor take if the directors refuse to sign the management representation letter? (5 marks) You are the audit manager in charge of the audit of Radbourn Specialists Cars Limited which is a company that manufactures bespoke sports cars that are each made-to-order for their customers. The draft financial statements show a turnover of £12.5 million with profit before tax of £750,000. All audit work is up-to-date, but the obtaining of written representations from management has not yet been completed. A review of the audit file has disclosed the following outstanding points: Alan Smith Alan Smith, a customer of Radbourn Specialist Cars has issued a legal claim against the company for a faulty car which was purchased two years ago. The particulars of the claim are that the bodywork of the vehicle has started to corrode. Lawyers are unable at this stage to determine liability. Alan Smith's lawyers have submitted a claim to Radbourn Specialist Cars seeking re-imbursement of the original purchase price plus a substantial sum representing the inconvenience that has been suffered. The total claimed is £400,000. The directors are of the opinion that the claim is not justified. Depreciation Radbourn Specialist Cars have depreciated their specialist production equipment in their financial statements at the amount of 10% per annum on the reducing balance method. This treatment is consistent with prior accounting periods (which have received unmodified audit reports) and other companies in the same industry, and sales of old equipment show negligible profit or loss on sale. The audit senior, who is new to this audit, is of the opinion that depreciation is being undercharged in the financial statements. Required (a) (b) (c) Explain the nature and purpose of a management representation letter. (5 marks) For the matters above justify whether it would be appropriate to include them in a representation letter and if appropriate, draft the suggested paragraph in the management representation letter. (10 marks) What actions should an auditor take if the directors refuse to sign the management representation letter? (5 marks)

Answer rating: 100% (QA)

a A management representation letter is a form letter written by a companys external auditors which is signed by senior company management The letter attests to the accuracy of the financial statement... View the full answer