Auditing and Assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

XYZ Hotels Ltd. has incurred loss and one of its illiterate directors wants your assistance to find out exactly what happened in the company. He suspects that the company has paid excessive interest on its borrowing. He has found average of 12-month end borrowing balance was Rs. 120 million and prevailing interest rate was 10% for the year. Interest paid for 12 months was Rs. 12 million. Suggest to the director on this matter how he can verify this matter. Give your opinions with reason.
Answer
Average interest cost on the average borrowing XYZ Hotels Ltd. is matching with prevailing interest rate. However, detailed verification of borrowing and interest expenses booked need to be carried out as following:
1) Examine the date, rate and amount of borrowing with reference to borrowing documents.
2) Verify booking date of the balances in individual accounts and total of borrowing balance.
3) Examine whether there is a procedure for obtaining confirmation of balance periodically.
4) Check calculations of interest and examine whether interest expenses have been accurately provided for with reference to the duration of borrowing.
5) Trace the amount of borrowing in to bank account and interest and loan repayment from bank account.
6) Examine whether borrowing is properly authorized and whether internal control procedures have been followed.
7) Examine that other items of liability are not booked as borrowing.



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