HUISWERK WEEK 3 (E6 C32 & E8 C39) + OPGAVE E7 DQP 29 & 31
 Case

6-32

a.

A review provides limited assurance about the fair presentation of financial statements in accordance with generally accepted accounting principles but far less assurance than an audit. Presumably, the bank decided that the assurances provided by a review were needed before a loan could be approved, but an audit was not necessary. A review includes a CPA firm performing analytical procedures, making inquiries about the fair presentation of the statements, and examining the information for reasonableness. Because of a CPA firm’s expertise in accounting, the accountant from the CPA firm can often identify incorrect presentations in the financial statements that have been overlooked by the accountant of the company. Reviews are common for smaller privately-held companies with relatively small amounts of debt. The bank probably did not require an audit because the additional cost of an audit was greater than the benefit the bank perceived. In many cases, the decision as to whether to have a review or an audit is negotiated between the company seeking a loan and the bank loan officer. Both the company and the bank have options in negotiating such things as the amount of the loan, the rate of interest, and whether to require an audit or a review. The bank can reject the loan request and the company can go to other banks that want to make loans. Frequently, banks have a list of CPA firms in which they have considerable confidence due to their reputation in the community or past work they have done for other bank customers.

b.

Because the amount of the loans from the bank to Mabarak Baladi increased, the bank probably wanted additional assurance about the reliability of the financial statements. It is also likely that Mabarak Baladi negotiated the one percent reduction of the interest