Mr. Mahmoud is the owner of EFG company his finance manager Miss. Bushra presented financial statements with big difference of percentage declined in terms of assets, net income and high increased of liabilities compared to the last year. Mr. Mahmoud ask Miss. Bushra to give explanation, that did not satisfy him. Mr. Mahmoud decided to hire external auditor to clear his doubts. Based on the above scenario: How auditor will plan his work to clear Mr. Mahmoud’s doubts? Suggest some recommendations on how to rectify the issues in the above cited case.
Mr. Mahmoud is the owner of EFG company his finance manager Miss. Bushra presented financial statements with big difference of percentage declined in terms of assets, net income and high increased of liabilities compared to the last year. Mr. Mahmoud ask Miss. Bushra to give explanation, that did not satisfy him. Mr. Mahmoud decided to hire external auditor to clear his doubts. Based on the above scenario: How auditor will plan his work to clear Mr. Mahmoud’s doubts? Suggest some recommendations on how to rectify the issues in the above cited case.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Mr. Mahmoud is the owner of EFG company his finance manager Miss. Bushra presented financial statements with big difference of percentage declined in terms of assets, net income and high increased of liabilities compared to the last year. Mr. Mahmoud ask Miss. Bushra to give explanation, that did not satisfy him. Mr. Mahmoud decided to hire external auditor to clear his doubts.
Based on the above scenario:
How auditor will plan his work to clear Mr. Mahmoud’s doubts? Suggest some recommendations on how to rectify the issues in the above cited case.
Expert Solution
Introduction
Audit planning includes detailed plan containing scope, timing and extent of procedures to be performed, assignment of tasks, assigning priority and time limits, setting materiality levels, and identifying sampling techniques. Audit plan also includes risk assessment and checking of internal controls.
Planning
Planning would include:
- Checking personnel authorized to pass loans, checking whether the predefined loan procedure has been followed or not. Auditor should also check the end use of the loan and obtain various evidences to ensure that the end use is genuine.
- Checking the possibility of misuse of organization’s borrowed funds by the company’s personnel.
- Valuation of assets, checking whether there is any difference in valuation, depreciation, or recognition criteria.
- Checking the reasons for decline in assets such as sale, scrapping, impairment.
- Considering fraud risk factor and checking possibility of theft of assets and income.
- Checking whether there is any significant difference in accounting or sales personnel.
- Obtaining market data and comparing income trend of comparative industries.
- Checking whether there is any additional element of expense apart from increased interest costs.
- Comparing sales and net profit margin with previous year’s ratios and industry ratios and finding the reasons for deviations if any.
- Checking segment wise data to ascertain income, asset and liability position of each identifiable segment and finding the segments that contribute the most for such adverse figures.
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