dolution

You have been the auditor of Baobab Trading Company Ltd. for several years. The company’s head office is in Nairobi, Kenya, and it has considerable overseas operations. At each accounting year-end, there are large debts due from overseas agents of the company (Sh. 270 million out of total debts of Sh. 680 million as of 31 December 2020). In the past, these debts have always been settled after year-end but you have insisted that the debts be the subject of a specific representation made by the company’s director.

Required:

1. Outline the purpose of a letter of representation from management to the auditor.
2. Draft a paragraph for a letter of representation appropriate to the circumstances described above.
3. Outline the audit work which should be performed when seeking evidence to substantiate the management’s representations as drafted and indicate the value of the directors’ representations in these circumstances. Present your answer under the following headings:

• Existence and title.
• Valuation.
• Disclosure