In the audit of interest-bearing debt auditors identify audit objectives and then determine appropriate audit procedures.a. List the audit objectives for substantive tests of interest-bearing debt.b. List seven substantive tests for interest-bearing debt to help the auditors meet the audit objectives.
What will be an ideal response?
a. The audit objectives for substantive tests of interest-bearing debt are:
1. Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to debt.
2. Obtain an understanding of internal control over debt.
3. Assess the risks of material misstatement and design tests of controls and substantive procedures that: a. Substantiate the existence of debt and the occurrence of the related transactions.
b. Establish the completeness of recorded debt.
c. Verify the cutoff of transactions affecting debt.
d. Determine that the client has obligations to pay the recorded debt.
e. Establish the proper valuation of debt and the accuracy of transactions affecting debt.
f. Determine that the presentation and disclosure of information about debt are appropriate, including disclosure of the major provisions of loan agreements.
b. Substantive tests for interest-bearing debt include (seven required):
1. Obtain or prepare analyses of debt accounts and related interest, premium, and discount accounts.
2. Examine copies of notes payable and supporting documents.
3. Confirm debt with payees or appropriate third parties.
4. Vouch borrowing and repayment transactions to supporting documents.
5. Perform analytical procedures to test the overall reasonableness of interest-bearing debt and interest expense.
6. Test the valuation of debit, computations of interest expense, interest payable, and amortization of discount or premium.
7. Evaluate whether debt provisions have been met.
8. Trace authority for issuance of debt to corporate minutes.
9. Review notes payable paid or renewed after the balance sheet date.
10. Perform procedures to identify notes payable to related parties.
11. Send confirmation letters to financial institutions to obtain information about financing arrangements.
12. Evaluate proper financial statement presentation and disclosure of debt and related transactions.
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What will be an ideal response?
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