Audit and Risk

Auditing financial instruments: long-

term loans
Topic 2.2 Practice question

Solution

Task 1
Controls are not effective. Therefore, the audit approach will be substantive procedures and consist of tests of details
only.

Task 2
Review comments:

• This procedure only provides some evidence over the accuracy of amounts. Other procedures need to be performed
to address the key assertions at risk.
• There is no evidence on the lead sheet nor the repayment schedule worksheet that the balance has been agreed to
the trial balance.
• Key terms from the loan agreement should be agreed to the executed loan agreement, not to an email from the CFO
nor to the schedule provided.
• There is no evidence documenting that proof of repayment on 31.12.20X3 was obtained.
• Preparer details are missing (date, name).
• The objective for the procedure is missing.
• The conclusion for the procedure, including the results of the recalculation and mathematical accuracy checks is
missing.

Evaluation of sufficiency and appropriateness of evidence:

The procedure does not provide sufficient appropriate evidence. Sufficiency of evidence relates to the quantity of audit
evidence. In this case more evidence would be required to address other relevant assertions at risk.

Appropriateness relates to the relevance and reliability of the evidence. The evidence was relevant as it provided a
connection between the audit procedure and the assertion being tested. However, the reliability of the evidence should
be increased by agreeing to the source documentation or obtaining evidence from an independent source.

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 Task 3
The risks of material misstatement for the loan-term loans balance are accuracy, valuation and allocation, as well as
completeness and rights and obligations. In addition to addressing the review points above, further procedures to
address the key risks could include:

• Obtain external confirmation from A Bank as at 31 December 20X3, including confirmation of outstanding balance,
relevant maturity and repayment terms and restrictive covenants; agree confirmed amounts to the loan schedule and
financial statements.
• For any loan payments made during the year, agree the cash outflow to the bank statements.
• Review board minutes to confirm approval of the loan.
• Review the loan agreement for details of covenants and recalculate to identify any breaches in these.

© 2023 Chartered Accountants Australia and New Zealand ABN 50 084 642 571. All rights reserved.
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