Finance Costs

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Finance Costs Audit Case Example: ABC Manufacturing Company

Context

For ABC Manufacturing Company, finance costs represent the expenses incurred from the company’s financing activities. Accurate accounting and reporting of these costs are crucial for stakeholders to assess the company’s financing efficiency and overall cost of capital.

Audit Objective

To obtain reasonable assurance that finance costs recorded in ABC Manufacturing Company’s financial statements are accurate, complete, appropriately classified, and disclosed in accordance with the applicable financial reporting framework, such as IFRS or US GAAP.

Types of Audit Evidence and Documentation for Finance Costs Assertions

1. Completeness

• Case: Ensure that all finance costs incurred during the period are recorded in the financial statements.

• Documentation: Document procedures for testing completeness, such as reconciling interest expenses per the accounting records with interest statements from lenders and reviewing agreements for unrecorded finance costs.

2. Accuracy

• Case: Verify the accuracy of the finance costs recorded, including the correct application of interest rates and calculation of finance charges.

• Documentation: Document specific testing procedures and recalculations performed to verify the accuracy of finance costs recorded, including the examination of interest rate application and amortization of finance fees.

3. Occurrence

• Case: Confirm that the finance costs recorded relate to actual financing transactions of the company.

• Documentation: Summarize the inspection of relevant financing agreements and confirmations from lenders to substantiate the occurrence of finance costs.

4. Classification

• Case: Evaluate whether finance costs are appropriately classified in the income statement, distinguishing between those related to operating activities and those that should be capitalized in accordance with the company’s capitalization policy.

• Documentation: Note the assessment of the classification of finance costs, including the review of accounting policies for capitalization of borrowing costs and the proper allocation of interest expenses.

5. Presentation and Disclosure

• Case: Review the financial statements to ensure finance costs are correctly presented and adequately disclosed, including disclosure of the nature and amount of finance costs and the accounting policies applied.

• Documentation: Evaluate the presentation and disclosure of finance costs, verifying compliance with financial reporting standards and the clarity of disclosures regarding the composition of finance costs and policies for recognition and measurement.

Additional Considerations

• Interest Capitalization: If ABC Manufacturing Company capitalizes interest as part of the cost of qualifying assets, document the review of the capitalization process, including the determination of the capitalization rate and the period of capitalization.

• Deferred Financing Costs: Assess and document the treatment of deferred financing costs, including amortization methods and periods, ensuring they are in line with the financial reporting framework.

• Analytical Procedures: Apply analytical procedures to finance costs, comparing current period expenses to prior periods and budgeted amounts to identify trends or variances that may require further investigation.

• Internal Controls Evaluation: Evaluate the design and effectiveness of internal controls over the recording and reporting of finance costs, documenting any identified control deficiencies and their implications for the audit.

• Communication with Those Charged with Governance: Discuss significant findings or issues identified during the audit of finance costs with management and those charged with governance, especially concerning the adequacy of disclosures and compliance with the financial reporting framework.

Conclusion

The audit of finance costs is vital for ensuring that these expenses are accurately measured, properly recorded, and adequately disclosed in the financial statements. Documenting the audit procedures and findings related to each relevant assertion provides a foundation for the auditor’s opinion on the financial statements, enhancing the credibility and transparency of financial reporting related to financing activities.