Question

You are a senior auditor at KR P/L. In early February 2019, your audit client ABC P/L took out a substantial loan from XYZ Bank to help fund overseas expansion. The loan includes a strict debt covenant that’s based on the entity’s working capital ratio. If the ratio falls below the agreed ratio, XYZ Bank has the right to recall the loan, and ABC P/L will be required to pay it back in full immediately.

Required: Determine and explain the impact this loan will have on the overall planning, resource allocation and timing of the audit.

Answer 1

Impact of Loan taken by ABC P/L on the Audit Planning, resource allocation and timming of audit:
At the the time of Audit planning timming of audit shall be planed. As in this case on continue basis recurring
audit need to be done. As an Auditor, we have to verify on daily basis. Is term of working capital ratio
violated ? We self compute the working capital ratio after analysing accounts and validating the accuracy of data.
We should also discuss the same with management of company, whether ratio got deviate at any point of time or
not. Our planning shall be in this way that our responsibility to report the fact be complied. We will also get
confirmation from bank site to verify the same.
Audit team shall be decided for this specific audit requirement, the person who is expert in fancial analytics
shall be considered fit as a member for this audit task. The same person with the junior assistant shall visit
for this audit on recurring basis.
Some time we shall also visit as surprise check to know the accuracy of working capital ratio and accounting
records. All this planning shall be including of the object of true & fair presentation of data and compliance
reporting without any misstatement of information with high accuracy.