Following a tendering process your firm has recently been appointed external auditor of Dazzle Ltd (Dazzle) for the year ending 31 July 20X1. The audit engagement letter is still to be signed. The previous auditor did not seek reappointment. Your firm has also been invited to provide tax planning and compliance work for the company. All of the shares of Dazzle are owned by two sisters: Ruby and Amber Dazzle. They are the only directors and spend on average three days a week managing Dazzle as they have other business interests. The company employs a full-time qualified accountant but does not have a Finance Director. Dazzle manufactures and sells high quality mirrors and light fittings, which are produced in the company’s workshop, in the North East of England. At peak times the company uses subcontractors to help with the manufacture of light fittings as they lack sufficient staff in this area. Due to changes in working practices as a result of covid-19 fewer people are permitted in Dazzle’s workshop and so they are having to make greater use of sub-contractors than in previous years. These sub-contractors are required to invoice Dazzle at the end of each month. Customers place their orders by telephone or over the internet and pay by credit or debit card. All sales are in UK sterling (£). Dazzle’s terms of trade require a 50% deposit with the order. Once the order is completed, the balance must be paid within 30 days of receipt of the order. Customers are required to check the items on delivery and have five working days to return the items if not completely satisfied. All items are sold with a one-year guarantee. The company supplies some goods from inventory and others are made to customer order. Typical production time for items made to order is three to four weeks. The company does not have continuous records for inventory and undertakes a full count of raw materials and finished goods at the end of each quarter including at the year-end. The quantities are recorded on inventory sheets and are subsequently costed by the company accountant. Ruby Dazzle estimates the value of any work in progress and finished goods. Raw materials are sourced from a number of suppliers some based in the UK but the majority are overseas. There has been steady growth in sales in recent years and in April 20X1, Dazzle acquired the premises next to its current workshops to enable them to expand their manufacturing capacity. The new premises are not yet in use as they are currently undergoing a significant refurbishment in order to make them suitable for use by Dazzle. This acquisition was funded by a bank loan, repayable in monthly instalments over 15 years. The existing workshop, which is owned by the company and included in the financial statements at cost less accumulated depreciation, was revalued by an external valuer in April 20X1. The directors are planning on include the revalued amount in the financial statements for the year ending 31 July 20X1. Required: 1) Explain the purpose of the audit engagement letter and identify two items which will be included in the audit engagement letter between Dazzle and the audit firm.
Following a tendering process your firm has recently been appointed external auditor of Dazzle Ltd (Dazzle) for the year ending 31 July 20X1. The audit engagement letter is still to be signed. The previous auditor did not seek reappointment. Your firm has also been invited to provide tax planning and compliance work for the company.
All of the shares of Dazzle are owned by two sisters: Ruby and Amber Dazzle. They are the only directors and spend on average three days a week managing Dazzle as they have other business interests. The company employs a full-time qualified accountant but does not have a Finance Director.
Dazzle manufactures and sells high quality mirrors and light fittings, which are produced in the company’s workshop, in the North East of England. At peak times the company uses subcontractors to help with the manufacture of light fittings as they lack sufficient staff in this area. Due to changes in working practices as a result of covid-19 fewer people are permitted in Dazzle’s workshop and so they are having to make greater use of sub-contractors than in previous years. These sub-contractors are required to invoice Dazzle at the end of each month.
Customers place their orders by telephone or over the internet and pay by credit or debit card. All sales are in UK sterling (£). Dazzle’s terms of trade require a 50% deposit with the order. Once the order is completed, the balance must be paid within 30 days of receipt of the order. Customers are required to check the items on delivery and have five working days to return the items if not completely satisfied. All items are sold with a one-year guarantee.
The company supplies some goods from inventory and others are made to customer order. Typical production time for items made to order is three to four weeks. The company does not have continuous records for inventory and undertakes a full count of raw materials and finished goods at the end of each quarter including at the year-end. The quantities are recorded on inventory sheets and are subsequently costed by the company accountant. Ruby Dazzle estimates the value of any work in progress and finished goods.
Raw materials are sourced from a number of suppliers some based in the UK but the majority are overseas.
There has been steady growth in sales in recent years and in April 20X1, Dazzle acquired the premises next to its current workshops to enable them to expand their manufacturing capacity. The new premises are not yet in use as they are currently undergoing a significant refurbishment in order to make them suitable for use by Dazzle.
This acquisition was funded by a bank loan, repayable in monthly instalments over 15 years. The existing workshop, which is owned by the company and included in the financial statements at cost less
Required:
1) Explain the purpose of the audit engagement letter and identify two items which will be included in the audit engagement letter between Dazzle and the audit firm.
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