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I took BPP CBE mock test and found confusion in this question.
“During a conversation with the CEO of X Co, he stated that if the bank refused to extend the overdraft as promised, he will personally inject the necessary finance into the company in order to tide it over until the outstanding payment from customers are received.
(1) Evaluate the reliability of this evidence.
(2) State any further work you would carry out in respect of this claim”.It’s quite easy for (1) but for (2), I state some substantive procedures to verify the likelihood of extending the overdraft from the bank WHILE the answer only indicates that the auditor should request a written representation from the CEO.
Can my answer be acceptable?
The question asks for further work in respect of the claim made by the CEO, it doesn’t ask anything related to bank approving OD or not.
As such, a written representation would be best evidence to collect to support any claim made by the management.
Your answer does not answer the requirements of the question, so would be awarded no marks.
Hope this helps.
The suggested answer is lacking from a practical audit perspective. While written representation would indeed be required, additional audit work should also include verifying the ability of the CEO to provide the proposed funding, through obtaining bank statements in relation to the CEO accounts and possible confirmation that there are no liens on those balances. May also require to obtain a LOC to the benefit of the company and drawn on the CEO accounts.
A letter of representation is not in and of itself sufficient audit evidence. The letter is best used for those aspects of the business for which no additional work can be performed, such as the company entering into any other arrangements, result of directors fraud assessment, sufficiency of provisions (although in this case it is more the principles used to derive the provision rather than the provision itself which should be represented).
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