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Auditing revision question (NBAA May, 2017, QN 4)

(a)Explain the role of ‘support letter’ as evidence in the audit of financial statement.
(b)  You are an audit manager in PAC Associates, a firm of Certified Public Accountants, and currently assigned to audit Pembe Group of Companies.  The consolidated financial statements of Pembe Group are prepared in accordance with the accounting standards and interpretations issued by the International Accounting Standard Board (IASB).

Pembe Group’s draft financial statements for the year ended 30th June 2016 show profit before taxation of TZS.62,000,000,000 and total net assets TZS.325,000,000,000. (2015 profit before taxation was TZS 55,000,000,000 and total net assets was TZS 298,000,000,000).
One of the Group’s principle subsidiaries, Pembe (overseas), is audited by another firm, Billos Associates.  You have just received the draft auditor’s report for Pembe from Billos Associates.  The following are extracts of audit report received from Billos of Associates.

Basic of opinion (extract)
As set out in notes 4 and 5, expenditure on finance leases has not been reflected in the statement of Financial Position but included in operating expenses and no provision has been made for deferred taxation.  This is an accordance with local taxation regulations.

In our opinion the financial statements give a true and fair view of the financial position of the company as of 30th June 2016 and of the results of its operations and its cash flows for the year then ended in applicable reporting framework.

The draft financial statements of Pembe (overseas) for the year ended 30th June 2016 show a profit before taxation of TZS. 19,000,000,000/= and total net assets of TZS.65,000,000,000 (The profit before taxation for 2015 was TZS.17,000,000,000 and total net assets TZS,666,000,000.

The relevant notes (in full) are as follows:
(i) Leased Assets
During the year the company has incurred expenditure on leasing agreements that give rights approximating to ownership of non-current assets with fair value of TZS 790,000,000.  All lease payments are charged to the income statement as incurred.

(ii)  Taxation
This includes current taxes on profit and other taxes on capital.  No provision is required to be made for deferred taxation and it is impracticable to quantity the financial effect of unrecognized deferred tax liabilities.

Common on the matters you should consider before expressing an opinion on the consolidated financial statements of the Pembe Group of Companies .

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