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Hi
If there is a risk that bank has attached minimum profits target as part of loan covenants, so it would be a valid impact or explanation na that there is risk that management may overstate profits to meet covenants of bank?
Yes, part of management bias risk which also includes overstating profits to get larger bonuses and higher share prices. Basically, an incentive to overstate profits, either deliberately or by having judgememts distorted.
If there is a risk that management is due to be paid significant annual bonus based on value of year end assets so it would be a valid impact that there is a risk that they may overstate year end assets to earn more bonus, and its response that hire the services of an expert to ensure assets are properly valued and there is no overstatement
Obviously there is a risk.
Whether experts are appropriate depends on the assets. Most audits are conducted without experts. Experts might be appropriate when looking at the revaluation of assets, assessment of mineral reserves in a mine etc. Experts are not needed when valuing cash, receivables, most inventory.
The more general responsemis that the auditors should increase their testing of asset existence and valuation eg more physical inspection and work to ensure depreciation is adequate.
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