Auditing and Assurance Services Study Set 4

Business

Quiz 15 :
Auditing the Financinginvesting Process

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Quiz 15 :
Auditing the Financinginvesting Process

The auditor follows a reliance strategy under the following conditions: • If the entity must deal with frequent financing activities • If the internal control of the entity is properly evaluated • If the tests of control on financial records are performed in order to set control risk

Properly signed lending agreement contains the authorization to issue long-term debts. This document also helps in checking and verifying whether the note or bond is properly authorized.

Substantive Analytical Procedures - Interest Expense To assure that the long-term debt is not materially stated, the auditor should audit interest expense using substantive analytical procedures. Long-term debt and interest expense are directly related to each other. The reasonableness of interest expense is assessed by first estimating the interest expense by multiplying the twelve monthly balances for long-term debt by the average monthly interest rate. Then, the auditor compares the estimated interest expense with the recorded value. If both values are materially same, then it is concluded that the interest expense is fairly stated. If the estimated interest expense value is materially more than the recorded value, the auditor concludes that the client has failed to record a portion of interest expense. If the estimated interest expense value is materially lower than the recorded value, it is concluded that the client has failed to record the debt.