a. Audit Work Expected for Each Issue

(i) Legal Claim for Damage to Antique Furniture

• Audit Work:
  • Review Legal Documentation: The auditor should review all correspondence, legal opinions, and the defense strategy provided by the company’s legal advisors. This includes examining any letters or documents related to the customer’s claim.
  • Assess Likelihood of Loss: The auditor should evaluate the probability of the claim being successful, based on the legal advice received, and assess the potential financial impact on the company.
  • Provision for Contingent Liability: Based on the legal evaluation, the auditor should assess whether a provision for contingent liabilities is required under IAS 37 (Provisions, Contingent Liabilities, and Contingent Assets). If the company is likely to lose the case, a provision should be made for the expected settlement.
  • Disclosure: The auditor should verify that any contingent liability or related disclosure is appropriately reflected in the financial statements according to IAS 37.

(ii) Outstanding Balance from Safe Storage (N300,000)

• Audit Work:
  • Direct Confirmation: Although the accountant has requested not to send a direct confirmation letter to Safe Storage, the auditor should still assess the sufficiency of alternative audit evidence, such as reviewing supporting documents (e.g., invoices, contracts, correspondence) and the accounts receivable aging report to assess the collectability of the balance.
  • Assess Relationship and Payment History: The auditor should inquire about the long-standing relationship with Safe Storage and evaluate the payment history, as well as assess the likelihood of recovery of the outstanding balance.
  • Risk of Impairment: If the balance is considered doubtful or the collectability is uncertain, the auditor should evaluate whether an allowance for doubtful debts is necessary.
  • Audit Procedures for Receivables: Additional procedures such as reviewing subsequent payments or the current financial health of Safe Storage may be required.

(iii) Investment in New Vans and Refurbishment, Overdraft Limit Reached

• Audit Work:
  • Verification of Investments: The auditor should verify the acquisition of the four new removal vans and review the expenditure on the refurbishment of the premises. This would include inspecting purchase invoices, contracts, and physical verification of the vans.
  • Assessment of Financing and Overdraft: The auditor should assess the financial condition of the company, including the overdraft limit being reached, and evaluate the company’s liquidity position and ability to meet financial obligations.
  • Disclosure of Financial Position: The auditor should ensure that the financial statements reflect the company’s liquidity and any risk related to the overdraft limit, and that there is appropriate disclosure in the financial statements regarding the company’s capital structure, financing arrangements, and any covenants associated with the overdraft.

b. Draft Sections of the Written Representation Letter

(i) Legal Claim for Damage to Antique Furniture
The directors represent that the company is currently defending a legal claim for N1 million arising from damage to antique furniture. They believe that the furniture was a reproduction and not an antique, and accordingly, the company considers the value of the furniture to be N100,000. The directors further confirm that they have obtained legal advice and are confident that the claim will not result in a material loss to the company, but they will continue to monitor the situation. The directors confirm that no provision has been made in the financial statements for this claim, but appropriate disclosure has been made in the notes.

(ii) Outstanding Balance from Safe Storage (N300,000)
The directors confirm that the outstanding balance of N300,000 due from Safe Storage is fully recoverable. The directors have informed us that there is a longstanding and positive business relationship with Safe Storage, and the payment is expected to be received in the near future. The directors further confirm that no allowance for doubtful debts has been made in respect of this balance, and no material issues have been raised regarding the collectability of the amount.

(iii) Investment in New Vans and Refurbishment, Overdraft Limit Reached
The directors confirm that during the year, the company has made investments in four new removal vans and carried out extensive refurbishment of its premises. The directors also confirm that the company has reached its overdraft limit of N500,000 as a result of these investments. The directors have informed us that the company is negotiating with its bankers to resolve the overdraft situation and ensure sufficient liquidity for its operations. The directors confirm that the overdraft and related financial risks have been adequately disclosed in the financial statements.