Question

Debt covenant? =

1. Company ABC is your firm’s audit client. By the end of 2016, ABC had only two outstanding 7-year bank loans, $100 million from Bank of America and $150 million from Banc of California. When your firm audits its FY2017 accounting books, there is $140 million of loan outstanding from Banc of California. As an auditor, do you still need to send loan confirmation to Bank of America? Why or why not?

2. For bank loan (or corporate bonds), audit client firms are required to disclose relevant terms, conditions, and restrictions. Please list at least three important disclosure items that should be reported in the footnotes in the annual report.

Answer 1

1 ) Yes , Because

An external confirmation is audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in paper form, or through electronic or other medium. It can be useful in obtaining audit evidence about relevant financial statement assertions regarding such items as receivables and payable's, bank and other third party deposits and liabilities, investments, inventory, guarantees, contingent liabilities, significant transactions outside the normal course of business, and related party transactions.

So even if the loan account was closed in the F.Y it is necessary to send loan conformation letter to bank of america to know the fact that whether account was properly closed and balance in our account in bank statement was showing Zero balance.

2 ) Following are the important disclosure's for foot note purpose :

(i ) Borrowings shall further be sub-classified as secured and unsecured. Nature of security shall be specified separately in each case.

(ii) Where loans have been guaranteed by directors or others, the aggregate amount of such loans under each head shall be disclosed.

(iii) Bonds/debentures (along with the rate of interest and particulars of redemption or conversion, as the case may be shall be stated in descending order of maturity or conversion, starting from farthest redemption or conversion date, as the case may be. Where bonds/debentures are redeemable by instalments, the date of maturity for this purpose must be reckoned as the date on which the first instalment becomes due.

(iv) Particulars of any redeemed bonds/debentures which the company has power to reissue shall be disclosed.

(v) Terms of repayment of term loans and other loans shall be stated.

(vi) Period and amount of continuing default as on the balance sheet date in repayment of loans and interest, shall be specified separately in each case.