auditing report
Part A
1)
a)Although a client/company is engaged to perform audits for the 2nd year, it does not allow sufficient time for auditor to detect material misstatement. This is due to lack of experience in understanding of the company? Repeat engagement over the years to come would reduce inherent risk Thus, the 2nd year of audit would increase inherent risk.
b)The bank requires that a/ the company’s interest coverage ratio should be above 9, in order to provide loans to the client. From the extract of the audit client’s financial data in 2012, the interest coverage ratio is at 9.5.
Calculation of interest coverage ratio in 2012.
2012
Net Profit
3204600
Interest Expense
337300
Interest Coverage Ratio:
9.5
Another reason why theinterest coverage ratio can be below 9, is the client’s ability to manipulate net profit through interest expense. The CFO who has responsibility on financial issue is able to increase sales revenue or reduce interest expense in the record and manipulate the sale in order to meet the interest coverage ratio even though cost has been incur so this affect the profit to decrease. Because Banks are only able to identify interest coverage ratios through the client’s financial report, lack of management’s integrity or intentionally making misstatement would conclude to fraud for bank loan. Therefore, influence the inherent risk is high.
c)Forcing employees to improve sales and reduce the cost by CEO cannot maintain satisfactory levels. This brings incentive to overstate the sales revenue intentionally to cover profit growth. This could mean that they have conducted fraud by creating and increasing the sale revenue due to the inability to maintain satisfactory profit growth. Occurrence fraud can also increase inherent risk.
d)The close relationship between CEO and CFO gives a high possibility for fraudulent behavior. CFO would have strong incentive and opportunities to commit fraud by using the trust of CEO. This is also
1)
a)Although a client/company is engaged to perform audits for the 2nd year, it does not allow sufficient time for auditor to detect material misstatement. This is due to lack of experience in understanding of the company? Repeat engagement over the years to come would reduce inherent risk Thus, the 2nd year of audit would increase inherent risk.
b)The bank requires that a/ the company’s interest coverage ratio should be above 9, in order to provide loans to the client. From the extract of the audit client’s financial data in 2012, the interest coverage ratio is at 9.5.
Calculation of interest coverage ratio in 2012.
2012
Net Profit
3204600
Interest Expense
337300
Interest Coverage Ratio:
9.5
Another reason why theinterest coverage ratio can be below 9, is the client’s ability to manipulate net profit through interest expense. The CFO who has responsibility on financial issue is able to increase sales revenue or reduce interest expense in the record and manipulate the sale in order to meet the interest coverage ratio even though cost has been incur so this affect the profit to decrease. Because Banks are only able to identify interest coverage ratios through the client’s financial report, lack of management’s integrity or intentionally making misstatement would conclude to fraud for bank loan. Therefore, influence the inherent risk is high.
c)Forcing employees to improve sales and reduce the cost by CEO cannot maintain satisfactory levels. This brings incentive to overstate the sales revenue intentionally to cover profit growth. This could mean that they have conducted fraud by creating and increasing the sale revenue due to the inability to maintain satisfactory profit growth. Occurrence fraud can also increase inherent risk.
d)The close relationship between CEO and CFO gives a high possibility for fraudulent behavior. CFO would have strong incentive and opportunities to commit fraud by using the trust of CEO. This is also