(a) Explain the role of ‘support letters’ (also called ‘comfort letters’) as evidence in the audit of financial statements.

(b) You are an audit manager in Tickett & Run, a firm of Chartered Certified Accountants, and currently assigned to the audit of Capri Group. The consolidated financial statements of Capri Group are prepared in accordance with the accounting standards and interpretations issued by the International Accounting Standards Board (IASB). The draft financial statements for the year ended 30 June 2X11 show profit before taxation of £62 million (2X10 — £55 million) and total assets £325 million (2X10 — £298 million). One of the Group’s principal subsidiaries, Capri (Overseas), is audited by another firm, Bangit & Go. You have just received Bangit & Go's draft auditor’s report as follows:

‘As set out in notes 4 and 5, expenditure on finance leases has not been reflected in the Statement of Financial Position but included in operating expenses and no provision has been made for deferred taxation. This is in accordance with local taxation regulations.

In our opinion the financial statements give a true and fair view of the financial position of the company as of 30 June 2X11 and of the results of its operations and its cash flows for the year then ended in accordance with ...’
The draft financial statements of Capri (Overseas) for the year ended 30 June 2X11 show profit before taxation of £19 million (2X10 — £17 million) and total assets £65 million (2010 — £66 million). The relevant notes (in full) are as follows:

(1) During the year the company has incurred expenditure on leasing agreements that give rights approximating to ownership of fixed assets with a fair value of £790 000. Alll lease payments are charged to the income statement as incurred.

(2) This includes current taxes on profit and other taxes such as taxes on capital. No provision is required to be made for deferred taxation and it is impracticable to quantify the financial effect of unrecognised deferred tax liabilities.

Required:

Comment on the matters you should consider before expressing an opinion on the consolidated financial statements of the Capri Group.