You are performing the audit of Galway Ltd for the financial year ended 30 June 20X0.

Under the terms of a major loan contract, Galway Ltd is required to maintain certain financial ratios. If the ratios are breached, the loan is immediately due for repayment. This would create significant cash flow problems. In order to comply with the loan covenant and maintain the ratios, Galway Ltd must continue to hold its 100 per cent shareholding in Mayo Ltd as a long-term investment.

You have obtained a management representation letter from the client, which says in part: ‘Galway Ltd warrants for the period 1 July 20X0 to 30 June 20X1 that it intends to retain ownership of its entire parcel of ordinary shares in Mayo Ltd. Galway has not entered into any discussions with any party, directly or indirectly, regarding the sale of these shares.’

On 24 July 20X0, you noted an article in the financial press which described the rumoured sale of the business assets of Mayo Ltd to a foreign investor.

Required

(a) Does the management representation letter from Galway Ltd regarding its shareholding in Mayo Ltd constitute sufficient appropriate audit evidence? Why or why not?

(b) What procedures do you need to perform in relation to this situation prior to signing the audit report?