- 6 Marks
Question
Musky Fresh Limited has been in existence, for a number of years, importing perfume. The managing director had built up the business using contacts he already had in the industry. The company imports only one brand of perfume which is manufactured exclusively by one company. The perfume is distributed via ‘shops within shops’ at 20 branches of a well-known store. Under this agreement, Musky Fresh Limited pays a percentage of its takings to the store, with a minimum annual payment of N100,000 per store.
The audit is nearing completion, but you have just heard that the Arabian manufacturer is facing serious financial difficulties, and that supplies have ceased.
Required:
a. Set out the further information the auditor would require before reaching his audit opinion. (6 Marks)
Answer
- Detailed information about the nature of the financial difficulties of the Arabian supplier—whether they are temporary or permanent.
- Assurance from the foreign supplier regarding the probable resolution time of the financial difficulties.
- Evidence of any financial assistance being extended to the foreign supplier.
- Information from management about possible alternative sources for supply of the perfume from other manufacturers.
- Verification of whether the company has collected advance payments from customers for perfumes that may not be supplied.
- A written representation from management concerning the company’s ability to continue as a going concern.
- Legal advice regarding the possibility of negotiating a break clause in the agreement with the store.
- Information on any costs or penalties arising from potential breaches in the agreement.
- An assessment of Musky Fresh Ltd’s involvement in other activities and its ability to diversify into other areas.
- Willingness of Musky Fresh Ltd’s bankers to extend or grant additional overdraft facilities
- Tags: Audit opinion, Financial difficulties, Going Concern, Supplier Risks, Trade Payables
- Level: Level 2
- Topic: Audit evidence
- Series: MAY 2016
- Uploader: Kwame Aikins