Introduction
In this article, we will cover the audit procedures for loan and advances. This includes the objective, key assertions as well as the specific audit procedures for the audit of loan and advances.
The auditor should evaluate the client’s internal control system for loans and advances to determine the nature, timing and extent of audit procedures. They should particularly perform the review on various aspects of internal control in relation with the debtors, loans and advances. Loans and advances are significant part of other assets in the financial statements; especially for group companies and sufficient testing procedures are required to perform by auditors.
Objective of Loan and Advances Audit
The main objective of the loan and advance audit is to ensure completeness and accuracy. Auditors should check the existence of the loan and advances to ensure that they actually exist and are in accordance with legal requirements.
Key Assertions of Loan and Advances Audit
Key assertions for loan and advances audit are described below:
Completeness
Completeness is ensuring that all loans and advances has been completely recorded. Auditor should obtain the listing of loans and advances and reconcile with trial balance to see if there is any difference.
Classification
Auditors need to check all loans and advance transactions are classified in accordance with applicable accounting standards.
Accuracy
Accuracy is checking the amounts and other data related to loans and advances are recorded at the correct amounts.
Valuation
Valuation is ensuring loans and advances are recorded at appropriate value and all doubtful debts has been written off.
Presentation and Disclosure
Auditors should check presentation and disclosure of loans and advances has been made as per relevant accounting standards.
Key Audit Procedures for Loan and Advances Audit
- At first auditor should assess the reasonableness of the entity’s internal control system and carry out documentation of any internal control deficiencies related to loan and advances.
- Select a sample of transactions and test whether relative controls were exercised on transactions.
- For a sample of repayments received during the year, auditors need to ensure that the date and amount of the repayment was in accordance with the agreement and the interest recovery is in accordance with the policy.
- Auditor should send confirmation to related parties and match replies with the amounts outstanding against each party.
- They should obtain ageing of long-term loans and advances to verify that loans are classified in correct categories, maturity has been correctly calculated, value of securities are available against each loan and check the subsequent recovery of loans.
- They should ensure loans and advances to related undertakings are granted after due compliance with legal requirements.
- They should ensure loans and advances are measured at amortized cost using effective interest rate method.
- Auditor should select a sample of transactions and re-perform calculation of interest income to verify rate of interest from agreement and check the number of days for which interest income is charged.
- They should review and check the loan agreements and legal documents to verify the terms and conditions of the loans and advances.
- They should ensure the closing balance is as per working paper and the general ledger.
- Finally they should check proper disclosure has been made as per relevant accounting standards.
