Question

Ingrid Cox, an adult senior, was given the task of auditing Apple Ltd, an investment company. Her firm had not performed the audit before; however, from a discussion with the previous year’s auditors, she found that the following transaction occurred during the previous year;

- Payment of debenture interest.

- Accrual of debenture interest, payable at the year end.

- Redemption of outstanding debentures.

- Purchase of portfolio shares.

Ingrid has been asked to detail audit procedures for this year’s audit based on the assumptions that similar transactions will occur.

Required;

i) Identify the substantive procedures that Ingrid would need to perform to verify each of the above transactions and the assertions to which it relates.

ii) Indicate the type of evidence obtained from each of the procedures noted in (I) ABOVE.

Answer 1

Substantive procedures for Payment of debenture interest

1. On verifying the payment of interest, the auditor should vouch the payment with the acknowledgement received from the debenture holders or with the coupon surrendered for the bearer Debentures.

2. The auditor should ascertain the total amount payable as debenture interest, the amount paid and the balance interest payable.

3. He should also ensure that the amount payable as debenture interest for the period is debited to the Profit
& Loss Account.

Substantive procedures for accrual of debenture interest

1. In case the due date lies on date other than the financial year end, the interest shall be accrued for time lying in current financial year. Ex: if the due date of debenture is say 31 may, then interest for the period from 1 june to 31 march that is in current year which will be paid in the next year will be booked as expense provisionally.

if the yearly interest is 1200 then 1200*10/12= 1000 will be accrued at year end.

entry will be Interest expense Dr.(P&L) 1000

To Interest expense payable/ Provision for Interest expense(current liability) 1000

2. It should also be checked in the next year that at the time of payment the provision is paid, expense should not be booked again

entry will be Interest expense payable/ Provision for Interest expense(current liability) Dr.(P&L) 1000

To Bank / Debenture holder 1000

3. And if the debenture interest is payable at year end then accrual entry will be throughout the year(Same as in 1) or alternatively, it can booked directly on year end and payment will be as in year 2.

Ex: if in the same example, assuming we want to book quarterly expense, then we will book the provision for 300 as in 1 and at the year end pay it.

Substantive procedures for redemption of outstanding debenture

1. The auditor can calculate an aging analysis to understand the remaining life of the outstanding debentures, also check the debenture deed.

2. Also, the auditor should re-compute any gains or losses on the redemption of the debentures through the debenture deed and compare it with figures in the financial statements (Profit& loss, Debenture A/c) and also see the actual payment through bank.

Such procedure will check the correct accounting and accuracy of transaction.

Substantive procedures for purchase of portfolio of shares

1. Auditor should check that there was proper authorisation (minutes of meetings, mails for approval of directors, etc as per the laws) or approval of the transaction, also check broker advice.

2. Now check the documents for purchase, contract notes, accounting in books, proper verification i.e. approvals, etc.

Evidences obtained:

1. Debenture trust deed

2. Accounting data matched with deed terms

3. Approvals on mails, minutes, etc

4. Contract notes

5. Broker's advice