Question

Zaheer Co has been an audit client of Mohsin & Co for the last eight years, preparing financial statements to 31 March each year. Throughout this period, the managing partner at your firm, Frances Stein, has taken personal responsibility for the audit and has increased the total fee income from the client to the level where it represented 16·2% of Mohsin & Co’s total fee income in 2015 (15·4%: 2014). In addition to performing the annual audit, Mohsin & Co also provides accounting and bookkeeping services for Zaheer Co. The accounting and bookkeeping services include the preparation of the monthly payroll for the client and maintaining all of the financial records of a small, immaterial division of the company.

The managing director of Zaheer Co, Ahsan Ali, has asked your firm for assistance in the preparation of the share prospectus document which will be used to support the company’s flotation. The contents of the prospectus document will include the following elements:

– Key historical financial information prepared to 31 August 2015;

– Profit forecasts;

– A summary of the key risks relating to the client’s business; and

– A business plan outlining the future prospects of the company and recommending the shares to investors.

Required:

Comment on the ethical and professional issues arising as a result of Zaheer Co’s planned listing and the services which it has requested from Mohsin & Co.

Answer 1

Answer :

1. Information expressed in financial terms in relation to a particular entity, which is derived primarily from that entity accounting system and relates to events occurring in past time periods or about conditions or circumstances at points in time in the past.

(i) A single financial statement, for example, an income statement or balance sheet.

(ii) Accounts receivable.

(iii) Impairment of asset accounts.

(iv) Inventory.

(v) The liability for accrued benefits of a defined benefits plan.

(vi) The recorded value of identified intangible assets.

(vii) Pro-forma historical financial information and adjustments.

(viii) The liability for incurred but not reported†claims in an insurance portfolio, including related explanatory notes.

(b) Other information derived from financial records, such as:

(i) A schedule of externally managed assets and income of a private pension plan, including related explanatory notes.

(ii) A schedule of net tangible assets, including related explanatory notes.

(iii) A schedule of disbursements in relation to a leased property, including related explanatory notes.

(iv) A schedule of profit participation or employee bonuses, including related explanatory notes.

(c) Financial statements prepared in accordance with a financial reporting framework that is not designed to achieve fair presentation, such as condensed financial statements and an entity internal management accounts. Hypothetical assumptions made by the responsible party in preparing prospective financial information in the form of a projection about future events and management actions which may not necessarily be expected to take place or that may be expected to take place, and may not be based on reasonable grounds.

2. There are four main types of forecasting methods that financial analysts use to predict future revenues, expenses, and capital costs for a business. While there are a wide range of frequently used quantitative budget forecasting tools, in this article we focus on the top four methods:

(1) straight-line,

(2) moving average,

(3) simple linear regression,

(4) multiple linear regression.

Technique Use Math involved Data needed

1. Straight line Constant growth rate - Minimum level Historical data

2. Moving average - Repeated forecasts Minimum level Historical data

3. Simple linear regression - Compare one independent with one dependent variable Statistical knowledge required A sample of relevant observations

4. Multiple linear regression - Compare more than one independent variable with one dependent variable Statistical knowledge required A sample of relevant observations..

3 . Business risk refers to a threat to the company ability to achieve its financial goals. In business, risk means that a companyâ or an organizations plans may not turn out as originally planned or that it may not meet its target or achieve its goals.

ETHICAL & PROFESSIONAL ISSUES ARISING :

1 . Prevention of Lawful Disclosure..
2 . Pressure from Management..
3 . Influencing objectivity and integrity of internal auditors..
4 . Delay by Management in timely completion of audits...
5 . Internal auditors failing to maintain independence.

CONCLUSION :

Most organisations and firms are required by legislation to disclose financial and non
-financial results to state agencies which may include regulators or law enforcement
agencies. To provide the required assurance internal auditors must review the infor-
mation before it is released. In most cases, internal auditors are prevented from re-
viewing such information or where they are allowed..