Your client has obtained a bank loan. You are concerned that the client may have falsified the accounts to meet certain debt covenants regarding current ratio and profitability. Discuss procedures you would apply to dispel the doubt about such falsification.
The financial reporting of a firm includes the submission of balance sheets, income statements, and statements of cash flow to external stakeholders of a firm. The statements are received by external parties and analyzed for compliance to requirements.
Answer and Explanation:
Financial reports submitted to a financial institutions must be accurate and reliable to aid in business decisions. Any falsification of results can cause default under loan terms. To dispel the doubt of falsifications financial reporting must be reviewed by accountants and management prior to submission to ensure proper posting of entries to the general ledger. If certain covenants are required the company could provide a management discussion of the ratios and provide a historical history of results. If any defaults on financial covenants are apparent the company should be discussed and explained to the bank along with a request for a temporary waiver.
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from Basics of AccountingChapter 2 / Lesson 7