IAS 1 Presentation of Financial Statements refers to three fundamental accounting assumptions which call for no explanation in published accounts and the observance of which is presumed unless it is stated otherwise. One of the fundamental accounting assumptions is the `going concern' assumption.
List the points which you, as auditor of a medium-sized manufacturing company, would consider in determining whether it is appropriate that the accounts are prepared on a `going concern' basis.
It has been your practice for some years to obtain letters of representation from the management of audit client companies. The newly appointed managing director of a client company has, however, expressed reluctance to sign a letter of representation, a suggested draft of which you sent him, and he makes the following observations in his reply to your request for such a letter.
i. The company employs several qualified accountants who are responsible for preparing accurate accounts which comply with the Companies Acts and statements of standard accounting practice. It is his understanding that it is the responsibility of the auditors (who receive a substantial fee for their services) and not his responsibility to vouch for the accuracy of the accounts and the auditors have access to all accounting records, directors' minutes, correspondence and internal audit department reports, etc and even authority to approach third parties to enable them to draw their own conclusions.
ii. He is not an accountant or lawyer and is not qualified to comment on some matters contained in the letter.
iii. He and a fellow director will be signing the balance sheet before the report is signed.
Draft your reply to the managing director
You are the partner in the firm of Certified Public Accountants in charge of the audit of Textile Distributors Limited and are reviewing the financial statements for the year ended 30 September 19X2 having completed the review of the detailed audit work performed by your staff. The company is a wholesaler of textile products, it has an annual turnover of about £4 million and it is not part of a group of companies. It buys from a wide range of suppliers and sells to a large number of small shops within a 50 Km radius of its warehouse.
You are required to describe the work you would perform in reviewing the financial statements of Textile Distributors Limited for the year ended 30 September 19X2, dividing your answer into the following sections:
(a) Accounting policies;
(b) Profit and loss account;
(c) Balance sheet;
(d) Statutory disclosure requirements;
(e) Other factors you would consider and trends you would expect to see during a period of economic recession.
(a) Why are related party transactions important?
(b) How can the auditor go about identifying related parties?
(c) What audit work is done in the area of related parties?
(d) Give examples of related parties.