Loans to Subs

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Loans to Subsidiaries Audit Case Example: ABC Manufacturing Company

Context

ABC Manufacturing Company may extend loans to its subsidiaries for operational funding, capital investments, or other purposes. These transactions must be carefully accounted for and disclosed to accurately represent the financial relationship between the parent and its subsidiaries.

Audit Objective

To obtain reasonable assurance that loans to subsidiaries recorded in ABC Manufacturing Company’s financial statements are proper, including confirmation of the amounts, terms, and conditions, and that they are adequately disclosed in accordance with the applicable financial reporting framework.

Types of Audit Evidence and Documentation for Loans to Subsidiaries Assertions

1. Existence

• Case: Verify the existence of loans to subsidiaries by reviewing loan agreements and confirming balances with subsidiaries.

• Documentation: Document the inspection of loan agreements and confirmation responses received from subsidiaries, noting any discrepancies and resolutions.

2. Rights and Obligations

• Case: Confirm the parent company’s right to receive repayment under the terms of the loan agreements and the obligation of subsidiaries to repay the loans.

• Documentation: Summarize the review of terms within loan agreements that establish the rights and obligations of the parent company and its subsidiaries regarding these loans.

3. Completeness

• Case: Ensure that all loans to subsidiaries are identified and recorded in the financial statements.

• Documentation: Outline procedures for testing completeness, such as reconciling loans recorded in the intercompany accounts with subsidiary confirmations and reviewing board minutes for approval of unrecorded loans.

4. Valuation and Allocation

• Case: Assess the valuation of loans to subsidiaries, including the appropriateness of the interest rate applied and any impairment indicators.

• Documentation: Document the evaluation of interest rates, repayment terms, and any impairment testing performed on loans to subsidiaries, including the basis for determining the recoverability of these loans.

5. Presentation and Disclosure

• Case: Review the financial statements to ensure loans to subsidiaries are correctly presented and disclosed, including the terms, maturity, and any restrictions or covenants associated with these loans.

• Documentation: Note the assessment of the presentation and disclosure of loans to subsidiaries, verifying compliance with the financial reporting framework and the adequacy of disclosures about intercompany financial support.

6. Assessment of Internal Controls over Loans to Subsidiaries

• Case: Evaluate the design and operating effectiveness of internal controls over the process of extending, monitoring, and recording loans to subsidiaries.

• Documentation: Document the review of internal controls related to loans to subsidiaries, identifying any control deficiencies and their implications for the audit approach.

7. Inquiries of Management

• Case: Perform inquiries with management regarding the purpose of the loans, terms and conditions, and any expected difficulties in repayment by the subsidiaries.

• Documentation: Summarize inquiries and management’s responses, including any significant judgments made in the valuation and recording of these loans.

8. Communication with Those Charged with Governance

• Case: Discuss significant findings related to the audit of loans to subsidiaries with management and those charged with governance, especially any issues that could affect the valuation and disclosure of these loans.

• Documentation: Prepare a summary of communications regarding loans to subsidiaries, including management’s responses to audit findings and any adjustments or disclosures resulting from the audit.

Conclusion

The audit of loans to subsidiaries is critical for ensuring that the financial relationship between the parent company and its subsidiaries is accurately reflected in the financial statements. Documenting the audit procedures and findings related to each relevant assertion for loans to subsidiaries provides a foundation for the auditor’s opinion on the financial statements, enhancing the transparency and reliability of reported information. This detailed approach assists stakeholders in understanding the financial linkages within the group and the associated risks.