You are performing the audit of Toledo Ltd. for the financial year ended December 31, 2020. Under the terms of a major loan contract, Toledo is required to maintain certain financial ratios. If the ratios are breached, then the loan is immediately due for repayment. This would create significant cash flow problems. To comply with the loan covenant and maintain the ratios, Toledo must continue to hold its 100-percent shareholding in Granada Ltd. as a long-term investment.

You have obtained a management representation letter from the client, which says in part: “Toledo Ltd. warrants for the period January 1, 2020, to December 31, 2020, that it intends to retain ownership of its entire parcel of ordinary shares in Granada Ltd. Toledo has not entered into any discussions with any party, directly or indirectly, regarding the sale of these shares.”

On February 24, 2021, you noted an article in the financial press that described the rumoured sale of Granada’s business assets to a foreign investor. 

Required

a. Does the management representation letter from Toledo regarding its shareholding in Granada constitute sufficient appropriate audit evidence? Give reasons for your answer.

b. Describe the procedures you need to perform in relation to this situation before signing the auditor’s report.