Question

3:

MYX Company asked an audit firm to audit its financial performance for the year ended December 31, 2019 as they felt that something is wrong in the financial status of the company that they could not determine. Based on the findings of the JMC audit firm, (1) their forex transactions are giving losses due to lack of regular and strict monitoring of movements on international exchange rates, (2) some of their collectibles/ receivables are not collected on time.

Based on the above scenario:

Design and create template of an effective audit planning that will be

helpful to MYX company

. Recommend suggestions on how MYX Company can resolve the error committed. .

Answer 1

Following are required for effective Audit Planning of MYX Company

1) Their forex transactions are giving losses due to lack of regular and strict monitoring of movements on international exchange rates.

A foreign currency business operates in an extremely unpredictable business environment that is dependent on economic and political conditions in different countries.

a)Prepare Audit Program:Develop an audit program to outline the terms of engagement, focus areas and date of the exhaustive audit.

b)Inspect Business Records:Check the company’s organizational structure along with the articles of association to authenticate the authority and completeness of its business registration documents.

c)Verify Forex Transactions:Review the processed transactions for foreign exchange operations, investments and financing. Sample the intra-day and daily fluctuations of foreign exchange rates between the dollar and other international currencies. Pay particular attention to cash currency in trade, electronic transactions, foreign currency reserves, debtors’ and creditors’ balances, accruals, prepayments, and fixed assets

d)Gather Corroborating Evidence:Gather the material and analytical evidence -- that is, the substantiating information and documentations -- that will form the basis of your recommendations and conclusions at the end of the audit process.

(2) Some of their collectibles/ receivables are not collected on time.

It is because the exchange rate of the foreign currency and the company's functional currency continuously fluctuates, causing changes in the value of those payables and receivables. For example, a European company, whose functional currency is the euro sells products to a UK company, for the value of 100,000 British pounds

Following is advisable to MXY Company:

A. Initial Recognition

A foreign currency transaction is any transaction that is denominated in or needs to settle in any foreign currency. Such foreign currency transactions must be recorded, on initial recognition in reporting currency, by applying the exchange rate between the foreign currency and the reporting currency to the foreign currency amount at the date of the transaction.

B. Reporting at Subsequent Balance Sheet Dates

At every balance sheet date:

(a) all the foreign currency monetary items must be reported at the closing rate. Though, in specific circumstances, the closing rate might not exhibit with reasonable accuracy amount in the reporting currency which is expected to be realized from.

In such scenarios, the monetary items must be reported in reporting currency at the value which is expected to be realized from, or needed to disburse, such monetary item at the balance sheet date;

(b) non-monetary items that are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction; and

(c) non-monetary items that are carried at the fair value or similar valuation denominated in the foreign currency must be reported at the exchange rates prevailing when such values were determined

Recognition of Exchange Differences

Exchange differences which arise on reporting the enterprise’s monetary items at the rates different from the ones at which they’re recorded initially must be recognized the income or as an expense.