Audit Long Term Debt Substantive Procedures

Summary

This video script provides an in-depth overview of the substantive audit procedures related to long-term debt. It covers key assertions such as completeness, accuracy, and classification, along with detailed tests for account balances, including accrued interest, amortization of premiums or discounts, and lease liabilities. The script emphasizes the importance of reviewing loan agreements, debt disclosures, and proper classification of short-term versus long-term liabilities to ensure financial statements are accurately presented. The focus is on verifying debt transactions, interest payments, and compliance with accounting standards.

Takeaways

• 😀 Interest accruals are crucial in financial accounting, especially for short periods where the interest hasn't been fully paid yet.
• 😀 Semi-annual bond payments require accruing interest between payment dates to reflect accurate financial data.
• 😀 Amortization of premiums and discounts on bonds should follow the effective interest method unless deemed immaterial.
• 😀 Proper classification between current and long-term debt is essential for accurate financial reporting.
• 😀 The auditing process should verify the calculations of bond amortization, including premiums or discounts.
• 😀 Lease classification between capital and operating leases can impact both the balance sheet and income statement, requiring careful evaluation.
• 😀 The adjusting entry for accrued interest should be thoroughly reviewed to ensure all interest obligations are accurately reflected.
• 😀 Loan covenants need to be carefully reviewed during the audit to ensure compliance with the terms and restrictions set in the loan agreements.
• 😀 Presentations and disclosures in the financial statements should be complete, relevant, and in line with accounting standards.
• 😀 The audit process includes reviewing debt schedules and the associated interest to ensure correct classification and calculation of financial obligations.

Q & A

What are substantive procedures in relation to long-term debt?

Substantive procedures involve testing and verifying long-term debt accounts by examining agreements, confirmations, and financial transactions. This includes assessing inherent risk, control risk, and detection risk to determine the extent of testing needed.

How does the auditor approach testing for long-term debt in ongoing versus new engagements?

In a continuing engagement, the auditor focuses on new debt agreements and changes during the current period, while for a new engagement, a more thorough examination of all prior and current debt agreements is required.

What role do analytical procedures play in auditing long-term debt?

Analytical procedures help auditors assess the relationship between interest expense and long-term debt by using ratios and other methods to identify any inconsistencies or unrecorded debt.

What is the significance of confirming balances with outside parties during an audit of long-term debt?

Confirming balances with creditors, such as through bank confirmations, helps verify the existence of liabilities and ensures completeness, particularly by identifying any loans not recorded in the books.

How does an auditor test for completeness in long-term debt?

To test for completeness, auditors trace significant cash receipts and payments to source documents and the general ledger, ensuring that all debt-related transactions are properly recorded.

What is the importance of cutoff testing in the audit of long-term debt?

Cutoff testing ensures that transactions occurring just before or after the year-end are recorded in the correct period. This includes verifying loan agreements and interest payments around the cutoff date to confirm proper timing.

Why is lease classification critical in long-term debt audits?

Lease classification is critical because it determines whether a lease should be treated as an operating lease or a capital lease. Capital leases require recording a liability, while operating leases are expensed as incurred.

What does the authorization assertion ensure during the audit of long-term debt?

The authorization assertion ensures that the company has proper internal controls for approving new debt, such as board approval for significant loans or bonds, which is verified through board minutes and other documents.

What is involved in testing the accuracy of long-term debt?

Testing the accuracy of long-term debt involves examining new debt agreements to ensure they are recorded at the correct value and verifying calculations of accrued interest, premiums, or discounts associated with debt.

How does the auditor evaluate the classification between current and long-term debt?

The auditor evaluates the classification by analyzing the due dates of debt obligations, ensuring that amounts due within the next year are classified as current liabilities, and confirming that long-term obligations are properly categorized.