الفهرس 
The General FrameworkOnly 14 pages are availabe for public view
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Abstract
Managers have operational control of the company, that’s why they have a great chance to manipulate operational activities (REM), this doesn’t mean that auditors are not concerned with the manipulation of these operational activities.
The accuracy of financial statement readers’ perceptions of an organization is guaranteed by auditors. To accomplish this, auditors must first develop trust in management’s financial accounts, which they then communicate to users through the audit opinion.
REM is considered a managerial decision that auditors don’t have the right to interfere in it. However, because of the negative consequences of REM and the possibility of REM’s effect on the fairness of financial statements and going concern, it is important to discuss the auditor’s responsibility to detect REM, and whether professional judgment is affected by REM or not.
The auditor’s responsibility to detect REM (Auditor’s professional judgment) is discussed from two perspectives, first on the short term as auditors are responsible to provide reasonable assurance that there are no substantial misstatements in the financial statement, and second in the long term because of auditor’s responsibility to ensure the organization going concern.Because of REM’s negative effects, auditors are held responsible for REM detection in the short run and in the long run, in the short run auditors are held responsible according to the Egyptian accounting standard no.1 (Presenting Financial Statements) for the fairness of financial statements which is discussed through revenue recognition and comparability, revenue recognition is considered a proxy of fairness of financial statements where channel stuffing as discussed above is considered a violation of revenue recognition standard which would affect the fairness of financial statements, the appearance of incomparable financial statements suggests that managers concealed their aggressive operational activities, thus REM activities affect the comparability of financial statements that’s why auditors are held responsible for REM detection because of REM effect on the fairness of financial statements.
Auditor’s responsibility in the long run comes from the Egyptian Auditing Standard no. 570 (Going concern), where auditors must evaluate and disclose that the organization will continue for at least a period of one year. For a variety of factors, auditors are more inclined to offer going concern reports to clients with high REM who are in financial difficulty.
Auditors are required to apply the appropriate analytical procedures to detect REM which could be summarized as follows:
For high levels of inventory production (overproduction) to understate the cost of goods sold (COGS), auditors can use the budget to actual variation analysis, also detection of fewer customer orders compared to the level of production, also inventory liquidation ratios that are considered an indicator of high inventory levels.
For cutting unit sales price for certain product lines that occur later in the reporting period that is far from competitors’ prices may reveal REM activity, auditors could ask management to adjust subsequent period sales forecast downwardly so that investors can be aware of sales DROP that could occur.
For decreasing discretionary expenses, find significant transactions (signification reduction in R&D costs or training costs, for instance) before the reporting period’s end that would, in the absence of other circumstances, allow the organization to exceed earnings projections.
Thus, auditors must exercise due professional care in applying the appropriate analytical procedure for discovering REM activities, when there are activities of essential doubt, the auditor must examine the management’s plan to overcome such activity, must get essential and reasonable audit evidences to confirm or reject the doubt in the going concern, finally, auditors must ask managers for a written report about its future plans and procedures.