QUESTION 1) (20 pts) The amount of allowance for accounts receivable increased from the prior year,...

QUESTION 1) (20 pts)

The amount of allowance for accounts receivable increased from the prior year, but the allowance as a percentage of accounts receivable decreased from the prior year.
Total bank loans increased from the prior year, but total interest expense decreased as a percentage of bank loans.

REQUIRED: Evaluate the potential significance of each of the changes in ratios or trends identified in your analysis on the fair presentation of financial statements. As an auditor do you see any issue about the above listed findings so that you will focus more on accounts receivables and bank loans during the audit? Use the following answer sheet.

CASE 1 – Yes there is issue because I believe that this is the results of …./ No there is no issue because I believe that this is the results of …. (10 pts, 100 words)

CASE 2 – Yes there is issue because I believe that this is the results of …./ No there is no issue because I believe that this is the results of …. (10 pts, 100 words)

Solutions

Expert Solution

Case 1-: Accounts receivable

When highlighting Issue -: Yes there is issue because I believe that this is the results of an increase in the allowance of accounts receivable. And this increase is more than the materiality for the audit. Hence due to significant increase, now this is the significant account for the current year audit.

When not highlighting issue-: No there is no issue because I believe that this is the results of because of increase in underlying accounts receivable. It is obvious that when accounts receivable balance will increase related allowances will also increase. It is also to be noted that allowance as a percentage of accounts receivable is decreased as compare to previous year.

Case 1-: Bank Loans

When highlighting Issue -: Yes there is issue because I believe that this is the results of an adverse trend. With the increase in bank loan, related interest expenses should also increase.

When not highlighting issue-: No there is no issue because I believe that this is the results of payment of last year borrowings. And current year borrowings must have been taken near the end of the year. Hence it is quite obvious that interest expenses will be less for the current year as compare to previous year.

ekkarill92 answered 1 year ago

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