Audit procedures, long-term liabilities

Question 1

What are examples of long-term liabilities?

Answer 1

Debentures, loan stock, and other loans repayable more than one year after the year-end.

Question 2

Why is the correct classification between current and long-term liabilities important in financial statements?

Answer 2

To ensure accurate disclosure, as it affects financial ratios and debt obligations presented to users.

Question 3

What are the main risks of misstatement for long-term liabilities?

Answer 3

Non-disclosure

Incorrect disclosure

Incorrect interest payable calculations (amount and timing).

Question 4

What should the auditor consider regarding loan conditions/covenants?

Answer 4

The auditor should be aware of any loan conditions or covenants the client must comply with, as failure could affect loan terms or result in reclassification.

Question 5

What sources of information assist in auditing long-term liabilities?

Answer 5

Loan schedules and prior year audit file details
Loan agreements
Bank letter or confirmations from lenders
Cash/bank nominal ledger details
Board minutes
Client calculations/documents
Accounting policies (in the financial statements)
Statutory books (e.g., register of debentures).

Question 6

How does the auditor verify Completeness for long-term liabilities?

Answer 6

Obtain direct confirmation from lenders for balances, accrued interest, and any security held against the loan.

Inspect board minutes for evidence of new loans.

Confirm repayments align with loan agreements.

Question 7

What is the audit procedure for Presentation and Disclosure of long-term liabilities?

Answer 7

Recalculate the split between current and non-current liabilities.
Review the disclosure note in the financial statements for adequacy.

Question 8

How is Accuracy and Cut-Off verified for long-term liabilities?

Answer 8

Recalculate the interest charged for the period and confirm the accuracy of any accrued interest.