Question

You are the manager in charge of the audit of Nananom Company, a public limited liability company which manufactures specialist equipment and costumes for use in Kumahwood and Nafftti films in Ghana. Audited revenue is $ 100 million with profit before tax of $ 6.25 million.
Audit work up to but not including, the obtaining of written representations has been completed. A review of the audit file has disclosed the following outstanding point:

1. Kumahwood
Nananom Company is facing a potential legal claim from the Kumahwood Company in respect of a defective equipment that was supplied for one of their films. Kumahwood sustains that the equipment built was not robust enough, while the directors of Nananom argue that the specification was not sufficiently detailed. Nananom were of the view that using such sophisticated equipment under conditions that require heavy falls, may render them not in the best of working conditions after a couple of films produced. However, this is what Kumahwood expected.
Solicitors are unable to determine liability at the present time. Kumahwood has therefore slapped a claim for $ 3.33 million being the cost of a replacement equipment and lost production time on Nananom. The directors’ opinion is that the claim is not justified.

2. Depreciation
Depreciation of specialist production equipment has been included in the financial statements at the amount of 12% per annum using the reducing balance method. The treatment is consistent with prior accounting periods (which received an unmodified auditor’s report) and other companies in the same industry. Sales of old equipment show negligible profit or loss on sale. The audit senior, who is new to the audit, feels that depreciation is being undercharged in the financial statements.


You are required to:
i. Discuss whether or not a paragraph is required in the written representation for each of the above matters.

c) A suggested format for the written representation has been sent by the auditors to the directors of Nananom. The directors have stated that they will not sign the written representation this year on the grounds that they believe the additional evidence that it provides is not required by the auditor.

You are required to:
i. Discuss the action the auditor may take as a result of the decision made by the directors, not to sign the written representation.

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