You are the manager in charge of the audit of Lambley Properties, a listed company, and you have been asked to prepare the written representation which will be signed by the company's directors.
You are aware that there are two material items in the financial statements for the year ended 31 March 20X2 on which you want the company's directors to confirm that the treatment in the financial statements is correct.
(1) One of the company's subsidiaries, Keyworth Builders Co, is experiencing going concern problems, fand you want the directors' confirmation that they intend to support the company for the foreseeable future
(2) Eastwood Manufacturing, a listed company, is in dispute with Lambley Properties over repairs required to a building they purchased from Lambley. Lambley Properties constructed the building for Eastwood, and three years after it was sold to Eastwood, the customer is claiming that repairs are required which will cost $3 million, and that Lambley is liable to pay for these repairs, as they are as a result of negligent construction of the building. In addition, Eastwood is claiming $2 million for the cost of disruption of the business due to the faults in the building and in the period when the repairs take place. Lambley Properties have obtained the advice of a lawyer and a surveyor, and the directors believe there are no grounds for the claim and any court action will find in their favour. However, Lambley Properties has included a note in its financial statements concerning this contingency.
Required
(a) List the general representations which must be provided by management in a written representation.
(b) Draft the relevant extracts of the written representation referring to the two items above. (5 marks)
(c) Discuss the reliability of a written representation as audit evidence and the extent to which the auditors can rely on this evidence.
(d) Describe the work you will perform to check whether a provision should be included in the financial statements for the legal claim from Eastwood Manufacturing.
(e) Describe the matters you will consider and the further action you will take if the directors refuse to sign the written representation because of the legal claim from Eastwood Manufacturing.