Long Term Borrowings

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Long-term Borrowings Audit Case Example: ABC Manufacturing Company

Context

ABC Manufacturing Company may have various forms of long-term debt, including bank loans, bonds, and finance leases, to finance its operations, purchase equipment, or expand its business. These financial obligations carry implications for the company’s liquidity and financial health over the long term.

Audit Objective

To obtain reasonable assurance that long-term borrowings recorded in ABC Manufacturing Company’s financial statements exist, the company has the obligation to repay the debts, all such borrowings are complete, accurately valued, and properly presented and disclosed according to the applicable financial reporting framework.

Types of Audit Evidence and Documentation for Long-term Borrowings Assertions

1. Existence

• Case: Verify the existence of long-term borrowings by confirming the balances directly with lenders.

• Documentation: Document the confirmation process, including requests sent, responses received, and any follow-up on discrepancies between the company’s records and confirmations.

2. Rights and Obligations

• Case: Confirm that the company has a legal obligation to repay the borrowings and that the terms of the debt agreements are correctly reflected in the financial statements.

• Documentation: Summarize the review of loan agreements, bond indentures, and other debt instruments to verify terms and obligations, including interest rates, repayment schedules, and covenants.

3. Completeness

• Case: Ensure that all long-term borrowings are recorded in the financial statements.

• Documentation: Outline procedures for testing completeness, such as reconciling the list of debt agreements with the general ledger and notes to the financial statements.

4. Valuation and Allocation

• Case: Assess the accuracy of the recorded amounts of long-term borrowings, including the correct calculation of interest expense and the current portion of long-term debt.

• Documentation: Document the verification of interest calculations, amortization of discounts or premiums, and the appropriateness of the classification between current and non-current liabilities.

5. Presentation and Disclosure

• Case: Review the financial statements to ensure that long-term borrowings are correctly classified, described, and disclosed, including the disclosure of debt maturities, interest rates, and covenants.

• Documentation: Note the evaluation of the presentation and disclosures related to long-term borrowings, verifying compliance with the financial reporting framework and the adequacy of disclosures about debt terms and conditions.

6. Assessment of Internal Controls over Long-term Borrowings

• Case: Evaluate the design and implementation of internal controls over the accounting for long-term borrowings, including controls over the authorization of new debt, interest calculation, and compliance with debt covenants.

• Documentation: Document the review of internal controls related to long-term borrowings, identifying any control deficiencies and their implications for the audit approach.

7. Inquiries of Management and Legal Counsel

• Case: Make inquiries with management regarding new borrowings, refinancing, compliance with debt covenants, and potential defaults. Consult legal counsel if necessary to understand the implications of complex debt arrangements or disputes.

• Documentation: Summarize inquiries and responses, highlighting any significant issues related to debt agreements, compliance with covenants, or potential defaults and litigation.

8. Communication with Those Charged with Governance

• Case: Discuss significant findings related to the audit of long-term borrowings with management and those charged with governance, especially issues impacting the company’s ability to meet its long-term debt obligations.

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

Conclusion

The audit of long-term borrowings is vital for assessing ABC Manufacturing Company’s financial stability and risk profile. Documenting the audit procedures and findings related to each assertion for long-term borrowings provides a foundation for the auditor’s opinion on the financial statements, ensuring stakeholders can rely on the reported information for making informed decisions about the company’s long-term financial health.