Question

Ms. Fatima is having a business and she wants to know the financial status of the business so, she decided to hire external auditor. The auditor Mr. Assad, pointed the highlights of his audit report: (1) inventories and receivable management are not properly done , (2) collection strategy is very poor (3) also the current asset management is not handled very well.

Based on the above scenario:

1. Justify how GAAP can be applied in the Company of Ms. Fatima. –

2. If you were Mr. Assad, design a doable recommendations on how Ms. Fatima can resolve the issues revealed in the audit findings?

Answer 1

ANS (1) The reasons which should impel Ms. Fatima to apply US GAAP in her Company are as understated —

1. Since inventories, receivable management, collection strategies are not properly done in her Company, US GAAP can provide relevant direction and benefits in terms of remodelling the structure in choosing the appropriate inventory valuation method to boost the physical flow of inventory, providing allowances, write-offs and certain adjustments to sort the receivables management and uphold advanced collection strategies.

2. Bad handling of the current asset management can be fairly treated under US GAAP as by adoption of decreasing order of liquidity mechanisms, approximate ratios and renegotiated repayments which lacks in other accounting standards.

By such usage of US GAAP, these all could demonstrate favourable accounting, fend better corporate governance and help in ad-hoc reasoning process.

ANS (2) Being in position of Mr. Assad, some of the doable recommendations that would be suggested after the issues found in audit findings, are as follows —

1. Appraising all costs at the time of purchase.

2. Inspecting asset impairment when important circumstances are about to crop up.

3. Re-analysing estimates of useful lives on an ongoing basis.

4. Endorsing a capitalisation policy.

5. Using advanced Recoverability Test at Reporting Unit.

6. Permitting component depreciation.

7. Allowing LIFO method of inventory practices.

8. Authorising Interest rate swaps and hedging.

9. Charging potential settlements for collections due.

10. Tailoring analytics to leverage existing income statement forecasts and solve liquidity crisis in the current asset mangemnet.