Your firm has just acquired a new audit client. The new client is highly leveraged with borrowing from several institutions. It is planning to expand the business by obtaining additional debt finance in the near future. Based on these facts, which one of the following should be most carefully examined?
A) Transactions that result in healthy revenues
B) Large market capitalization
C) Loans and other financing transactions between related entities
D) Dividend paid out in the previous year

Question

Quizplus · Accepted Answer

Given that the new client is highly leveraged with borrowing from several institutions and is planning to expand the business by obtaining additional debt finance in the near future, loans and other financing transactions between related entities should be carefully examined to ensure that the client is not engaging in any fraudulent or unethical activities to obtain financing. It is important to verify that the client is not misrepresenting financial information or transactions to lenders, as this could have serious consequences for both the client and the audit firm. Transactions that result in healthy revenues and large market capitalization may also be important to examine, but they are not as critical as understanding the client's financing activities. Dividends paid out in the previous year may be a consideration, but they are not directly relevant to understanding the client's leverage and financing activities.

Your Firm Has Just Acquired a New Audit Client