Reference no: EM132569183

Question - You are an audit manager at Wels & Associates. You are responsible for the audit of Telvi Ltd, a subsidiary of Rainco Ltd. Another audit firm is responsible for the audit of Rainco Ltd and the Rainco Group financial statements. The audit of the financial statements of Telvi Ltd for the year ended 30 June 2019 is nearing completion, but the following issues require your attention before the auditor's report is signed and your final communication is made to the group auditor in response to their request for information. The draft financial statements of Telvi Ltd recognise a loss before tax of GHc50,000. Telvi Ltd has been making losses for several years and it generates insufficient cash to meet its significant debt obligations. The company relies on support from Rainco Ltd in order to continue trading. The management of Rainco Ltd has confirmed verbally that it will continue to support Telvi Ltd, but has not provided a formal letter of support despite a number of requests. Rainco Ltd is the subject of a major lawsuit following an industrial accident which led to significant pollution of local agricultural land and, most seriously, loss of life. You attempted to discuss the matter with the directors of Rainco Ltd but they refused, saying that it had already been investigated by the group auditor. The group auditor informed you that the case is ongoing and that they have obtained satisfactory representations from both management and legal advisers stating that they were confident of successfully defending the claim. When you asked for copies of the representations, the group auditor refused, saying it was a matter relevant to the parent company and that it was not relevant to the audit of Telvi Ltd. Shortly after making your enquiries, you received a phone call from the group engagement partner who said that the board of Rainco Ltd was concerned that you might modify the auditor's report of Telvi Ltd. He also said that, as the only person with full oversight of audit matters relating to the Rainco Group, he did not think that it would be necessary to modify the auditor's report of Telvi Ltd and that he would oppose any attempt to do so. He suggested that if the debt in the financial statements of Telvi Ltd was the reason for seeking parental support that he would transfer it to the Group and the letter of support would no longer be necessary.

You are required to - Discuss how professional scepticism should be applied to the statements made by the management and auditors of Rainco Ltd regarding the outstanding legal case.