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Discuss on verification of Long-term liabilities during auditing

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Long term liabilities mainly include term loans and debentures repayable within a period of more
than one year. Such liabilities are usually evidenced by an agreement called a debenture. They
may be secured by a fixed charge over a specific asset or secured by a floating charge on all the
assets or they may be unsecured in which case they are called naked debentures.

Audit objectives
To ascertain that:
i. All long-term liabilities are included in the financial statements i.e. completeness and
accuracy.
ii. A ll long-term liabilities are genuine obligations of the entity.
iii. All long-term liabilities are properly presented and disclosed in the financial statement.
All information that is relevant such as terms of the facilities should be disclosed.

Verification Procedures
•• Obtain a schedule detailing the sums due at the beginning of the year, additions and
redemption’s and the sum due at the year-end.
•• Obtain the terms and conditions of the loan as evidenced in the deed. This includes the
amount lent, maturity date, repayment terms, interest payable etc.
•• Agree the opening balances with last year’s accounts and working papers.
•• If any new loans have been received, verify that this was authorized by inspecting the
minutes of the board meetings.
•• Repayments made should be vouched through the cash book and the register of
debenture holders and charges.
•• Interest payments should be vouched through the cash book and any outstanding
amounts should be correctly accounted for.
•• If the loans are secured, confirm that the charge is registered at the registrar of
companies.
•• Agree total amounts outstanding with the register of debenture holders or the lender.
•• Review restrictive terms of the contract and provisions relating to default in payment of
interest and principal. If the company defaults in repayment determine the effect on the
financial statements such as the need to provide for penalties. In extreme cases the
company could be put under receivership.
•• If the facility was acquired for a specific purpose, verify that it was actually applied for
that intended purpose.
•• Ensure disclosure is in accordance with companies act requirements, clearly stating
the date of redemption of the debentures.

Wilfykil answered the question on April 12, 2019 at 06:47

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