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B$.$ Scenario questions

Question $7$

Cake Ltd $($Cake$)$

Your firm is performing an engagement to examine and provide assurance on Cake's cash flow forecast for the three years ending $30$ September $2011.$ The forecast has been prepared by Cake's directors in support of a loan application. Cake's bank requires the forecast to be examined and reported on by independent accountants. The cash flow forecast has been prepared on the assumption that revenue will grow by $10\%$ pa$.$ Your firm believes this is highly unrealistic because

current revenue growth for Cake and the industry in which it operates is $4\%$ pa and $5\%$ pa respectively.

Tac plc $($Tac$)$

$(5$ marks$)$

The brother of the managing director of Tac owns Lyde Ltd $($Lyde$)$ a haulage business which Tac uses for some of its distribution requirements. The total amount paid by Tac to Lyde during the year was $0\mathrm{.}4$ million. The directors of Tac have refused to disclose this transaction in the notes to the financial statements as they claim that the amount is too small to warrant disclosure.

The draft financial statements show that Tac's profit before tax is $11\mathrm{.}3$ million and total assets are $88\mathrm{.}0$ million.

$(5$ marks$)$

Requirement

For each of the four situations above, state, with reasons, the implications for your firm's audit or assurance reports.

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