Managerial Accounting : Budgeting - its implication to auditor

We would like to discuss some managerial accounting matters that are related to our audit. The first matter we want to discuss relates to the budgeting process of your audit client. Some blog readers may wonder, given that budgeting is likely to be related to management accounting, hence, not really related to financial accounting. Hence, as auditor, we should not be overly concerned about the budgeting process of the audit client. The truth is, budgeting process is part of the internal controls and assessments carried out / ought to be carried out by management of audit client - this has a significant impact on the extent of our audit and key areas of audit focus.

A comprehensive budgeting process allows management to understand the financial results of the company, identify significant developments not expected, identify key risk areas and identify unusual transactions recorded but not identified. Comparing the actual results against budgeted results and developing understanding on the variance, management is able to make better decision in its resource allocation.

An audit client with no budgeting process in place indicate a relatively higher risk profile of the audit client - as your audit client may not be able to gain the complete picture of the financial affairs of the Company. At this juncture, auditor may have to extend the testing of entity-level controls to review for absence of mitigating controls. Also, a higher level of professional skepticism need to be exercised during the course of our audit to detect any unusual transactions, for which a budgeting process may assist to discover.

The extent of our audit testing may be reduced, if the audit client's entity level controls, including: budgeting process is working effectively. This is because, if the client's process is able to identify risks / unusual transactions - we would be able to rely on the client's process on certain areas.

Please feel free to contact us if you need service on how to develop a comprehensive budget. Please drop us a note at myauditing@gmail.com

Settlement of account receivable via shares / interest in the Company

Let us explore something that is not common but it may have happened in the real business world.

Your audit recorded an account receivable from a particular customer, who is understood to be in financial difficulty. As a result, your audit client had determined that the colleatability of this debt is not uncertain, hence, they had provided for with provision.

After a while, this external customer in financial diffulty situation went through some restructuring, and they had agreed to settle the debt by issuing its own shares to the creditors as a partial settlement plan. As a result, your audit client may hold hold interest in this external customer.

What is the accounting implication to management? Management is required to assess the value of the shares obtained via this arrangement - due to the financial difficulty encountered by this external cutomer, it is probably worth minimal. Nevertheless, it is important to remove the accont receivable and provision for doubtful debt previously provided for - as there is no more such balance.

Instead, the management should record the value of this investment - and this amount should not be higher than the gross account receivable previously recorded, whilst the Company may reverse the provision amount by the value of investment received.

The above scenario is not straightforward and may involve complex discussion. Please feel free to seek clarification from us - myauditing@gmail.com