Barley Company is a medium-sized industrial firm that has been audited by your firm for several years. The only interest-bearing debt owed by Barley is a $300,000 long-term notes payable held by First National Bank. The notes were issued 4 years earlier

Question

and will mature in 8 more years. Barley is highly profitable, has no pressing needs for additional financing and has excellent internal controls of the recording of loan and related interest cost transactions. REQUIRED: 1 . Based on this scenario, describe the auditing procedures that you think will be necessary for notes payable and related interest accounts. 2 . How will you answer differ if instead Barley Company was unprofitable, needed additional financing and had ineffective internal controls?

Answer 1

1 . Auditing necessary for Barley's notes payable and related interest accounts in this scenario would be minimal. Aside from checking interest calculations and postings to the proper accounts as a matter of audit routine, the only major audit procedure would be to confirm the amount and provisions of the note with First National Bank.
2 . If Barley was unprofitable, needed additional financing, and had ineffective internal controls, the story would be much different. It would be necessary to search for unrecorded notes by obtaining standard bank confirmations with specific reference to the existence of notes payable, reviewing the bank statements and reconciliations for new notes credited directly to the bank account by the bank, and analyzing interest expense to uncover a payment to a creditor who is not included on the notes payable schedule.