09-16-2003, 11:56 AM
Dear Raza!
The prime facia evidence in this situation is the agreement that the client signed at the time of restructing. Generally, these agreements provide for additional mark up once the client defaults on the loan payments. In any event, you stated that the auditor is of the opinion that the additional mark up should be accrued in the company books.
After revewing the restructuring agreement, if auditor still holds the opinion that accrual is requied. Then he should determine the materiality of the amount involved. (i don't need to go into mechanics of this excercise as we do this on fairly regular basis).
If auditor determines that amount is material, then non accrual of it will be a DEPARTURE FROM GAAPs. Non recognition of liability is a clear departure from GAAPs.
The next step auditor has to take is to determine whether the departure
(a) does not impair the overall usefulness of the F/S to the reader
(b) departure can be explained so that the reader is in a position to
----assess the impact of it on the F/S.
If the answer to both the above questions are YES, then the auditor has to qualify the report. Qualifying the report means an overall positive report with an except for paragraph explaining what the departure is and what its effects are on the F/S.
However, if the auditor is of the opinion that F/S are not presented fairly in accordance with GAAPs to the extent that they are misleading or virtually useless to the reader when read in conjunction with auditor's report, then he should express an adverse opinion.
In my opinion, the liability is not contingent but factual. It is born out of the restructing agreement. The only time we can mention it in the notes is when the agreement specifically prohibits the bank from accruing additional mark up in case of default by the borrower.
In such a case, bank's claim of additional mark up becomes disputed and the co has fairly good chance of denying these claims.
I hope this claifies the situation for you. Don't hestitate to ask if you need further clarification.
Take Care
Edited by - Pervez on Sep 16 2003 070141 AM
The prime facia evidence in this situation is the agreement that the client signed at the time of restructing. Generally, these agreements provide for additional mark up once the client defaults on the loan payments. In any event, you stated that the auditor is of the opinion that the additional mark up should be accrued in the company books.
After revewing the restructuring agreement, if auditor still holds the opinion that accrual is requied. Then he should determine the materiality of the amount involved. (i don't need to go into mechanics of this excercise as we do this on fairly regular basis).
If auditor determines that amount is material, then non accrual of it will be a DEPARTURE FROM GAAPs. Non recognition of liability is a clear departure from GAAPs.
The next step auditor has to take is to determine whether the departure
(a) does not impair the overall usefulness of the F/S to the reader
(b) departure can be explained so that the reader is in a position to
----assess the impact of it on the F/S.
If the answer to both the above questions are YES, then the auditor has to qualify the report. Qualifying the report means an overall positive report with an except for paragraph explaining what the departure is and what its effects are on the F/S.
However, if the auditor is of the opinion that F/S are not presented fairly in accordance with GAAPs to the extent that they are misleading or virtually useless to the reader when read in conjunction with auditor's report, then he should express an adverse opinion.
In my opinion, the liability is not contingent but factual. It is born out of the restructing agreement. The only time we can mention it in the notes is when the agreement specifically prohibits the bank from accruing additional mark up in case of default by the borrower.
In such a case, bank's claim of additional mark up becomes disputed and the co has fairly good chance of denying these claims.
I hope this claifies the situation for you. Don't hestitate to ask if you need further clarification.
Take Care
Edited by - Pervez on Sep 16 2003 070141 AM
