As Part of a Loan Agreement That It Is Thinking

question 24

Essay

As part of a loan agreement that it is thinking of obtaining,Always Quick Manufacturing Limited has decided that it will use accounts receivable and inventory as security for working capital funds.The bank has indicated that in addition to an annual financial statement audit,it would require quarterly assurance on the accounts receivable and inventory amounts.The type of assurance required has not been stated.The bank has told Jose,the owner of the company,that he would need to provide a detailed inventory list and an aged accounts receivable trial balance on the fifteenth of each month for the information as at the preceding month end.Jose would like to know what his alternatives are.
Required:
Your partner is going to meet with Jose next week and would like you to prepare a memo to file that will be used as part of the meeting.Draft a brief memo that includes a list of alternative types of engagements that could be used to provide assurance on the accounts receivable and inventory balances.

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Definitions:

Batch-Level Activities

Activities that are performed each time a batch of goods is handled or processed, regardless of how many units are in the batch. The amount of resource consumed depends on the number of batches run rather than on the number of units in the batch.

Unit-Level Activities

Tasks or processes that vary directly with the number of units produced or services provided.

Activity-Based Costing

A costing method that assigns overhead and indirect costs to specific activities based on their use of resources.

Accounting Department

A division within a company that is responsible for managing financial records, ensuring compliance with accounting laws, and preparing financial reports.