Audit Program for Debt Obligations

Transcription

1 Form AP 60 Index Reference Audit Program for Debt Obligations Legal Company Name Client: Balance Sheet Date: Instructions: The auditor should refer to the audit planning documentation to gain an understanding of the financial reporting system and the planned extent of testing for debt obligations. Modification to the auditing procedures listed below may be necessary in order to achieve the audit objectives. All audit work should be documented in attached working papers, with appropriate references noted in the right column below. Audit Objectives Recorded debt obligations include all notes payable, long-term debt, finance lease obligations, and other debt equivalents. Debt obligations and related expenses are authorized and recorded correctly as to account, amount, and period. Debt obligations are properly classified in the balancesheet between current and noncurrent liabilities, and adequate disclosures are made in accordance with IAS, including: Financial Statement Assertions Existence or occurrence Completeness Rights and obligations Existence or occurrence Completeness Rights and obligations Valuation or allocation Presentation and disclosure

2 1. Prepare or obtain from the client an analysis of notes payable, long-term debt, finance lease obligations, other financing arrangements (e.g., line of credit), and related interest, including (a) issue date, (b) maturity date, (c) face amount, (d) interest rate, (e) collateral, (f) principal balance at the beginning of the period, (g) current-period additions and payments, (h) principal balance at the end of the period, (i) accrued interest and unamortized premium/discount at the beginning of the period, (j) current-period expense and payments, and (k) accrued interest and unamortized premium/discount at the end of the period, and perform the following: a. Test the arithmetical accuracy of the analysis and trace balances to the general ledger. b. Determine if debt incurred in the current period was authorized by the appropriate person(s). c. Mail requests for confirmation for (1) debt with outstanding balances as of the balance sheet date and (2) all debts retired during the year. Confirm the following information: terms of the debt, restrictive covenants, and other pertinent conditions. Compare amounts and information shown per the confirmation replies to the amounts and information shown per the analysis obtained in step 1. d. Obtain copies of new debt agreements, and review terms, conditions, and restrictive covenants. e. Test the reasonableness of interest expense, amortization of debt discount/premium, and related accrued interest. f. Consider the need to impute interest on non-interest bearing notes. g. Determine if any assets are pledged in connection with the debt obligations. h. Examine debt agreements for guarantees, including related-party guarantees. Performed By Workpaper Reference

3 2. Prepare or obtain from the client a summary of all leases in force. For all finance leases identified, determine that the related obligations are properly recorded in accordance with IAS 17. (Coordinate this procedure with the procedures performed in the audit program for Fixed Assets.) Performed Workpaper 3. Review compliance with restrictive covenants and determine effect on and disclosures required in financial statements. In connection with this review, consider performing procedures such as the following: a. Carefully evaluate potential audit adjustments and how they would affect loan covenant provisions. b. Obtain specific written management representations regarding known covenant violations and any communications with lenders regarding violations or waivers during the year. c. Consider obtaining an opinion from the entity s attorney regarding technical covenant violations. d. Read loan amendments that management represents as constituting waivers of covenant violations. e. Obtain written confirmation from lenders regarding (1) waivers of loan covenant violations and/or (2) the lender s lack of knowledge of any violations or intents to call the debt. f. Evaluate all waivers carefully and assess whether the lender has truly waived its right to call the debt. 4. Prepare or obtain from the client (and test) a schedule the maturities of long-term debt for each of the five years following the balance-sheet date. 5. Determine whether disclosures of long-term debt and finance leases including terms, interest rates, maturities, and collateral are properly made in the financial statements. 6. Perform the following analytical procedures for debt obligations and investigate any significant fluctuations or deviations from the expected balances:

4 Performed Workpaper a. Compare the current year s account balances with the prior year s account balances for notes payable, longterm debt, finance lease obligations, interest expense, and accrued interest. b. Compute the following ratios and relationships for the current year and compare with the prior year s data: (1) Debt to assets ratio. (2) Debt to equity ratio. (3) Average debt outstanding. (4) Average interest rate. 7. If disclosures about fair value are required (IAS 32 and 39), perform the following: a. Obtain information about the fair values of financial liabilities (notes payable and long-term debt) and determine that fair value amounts are supported by reasonable underlying documentation. b. Determine that the method of estimation and significant assumptions used are properly disclosed in the notes to the financial statements. 8. For extinguishments of liabilities, determine that a liability has been derecognized only if either of the following conditions is met: a. The debtor pays the creditor and is relieved of its obligations for the liability. This includes (a) the transfer of cash, other financial assets, goods, or services or (b) the debtor s reacquisition of its outstanding debt securities, whether the securities are canceled or held as treasury bonds. b. The debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor.

5 9. If the auditor is concerned about the risk of fraud, audit procedures such as the following should be considered in addition to the ones listed above: Performed Workpaper a. Perform search of public records. b. Vouch and trace loan proceeds and debt payments. c. Insist on inspecting original supporting documents rather than copies. 10. Obtain, document and test information for required disclosures in the financial statements, including the following: a. Interest rates, maturities, restrictive covenants, and other significant features of the debt obligations. b. Discounts and premiums reported as direct deductions from or additions to the face amounts of the debt. c. The combined aggregate amounts of debt maturities for each of the five years following the balance-sheet date. d. Appropriate disclosures for finance lease obligations. e. Nature and amount of collateral, liens, and security agreements. Based on the procedures performed and the results obtained, it is my opinion that the objectives listed in this audit program have been achieved. Performed by Reviewed and approved by Date Date Conclusions: Comments: