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 Ghc 100 million with profit before tax of
Ghc 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:
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 Ghc 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
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.