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.
To ascertain that:
i. All long-term liabilities are included in the financial statements i.e. completeness and accuracy.
ii. All 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.
- 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 e.t.c.
- 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 books 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.
Verification of contingencies e.g. Pending Litigation
- The auditor should carry out procedures to become aware of any material litigation or claims involving the entity. Such procedures would include;
- Review of the client system for recording claims and disputes and the procedures for bringing this to the attention of the board.
- Examination of the minutes of the board for references to and indications of possible claims.
- Making appropriate enquiries from management including obtaining representations about the existence and nature of litigation against the company.Inspection of bills rendered by the solicitors.
- Reviewing correspondence with solicitors with an estimate of the possible ultimate liability.
- Written assurance in the form of a representation letter from an appropriate directors that he is not aware of any other matters referred to the lawyers other than those disclosed. If the auditor is in doubt he should obtain a direct confirmation from the company’s lawyers. The request must be sent by the client not the auditor.
This is a special sort of liability of a company. When share capital has been issued in a year its verification is as follows:
a. Ensure the issue is within the limits authorised by memorandum and articles of association.
b. Ensure the issue was subject to a director’s minute.
c. Ascertain and evaluate the system for control of issue.
d. Verify that the system has been properly operated. This will involve examining the prospectus (if there is one) applications, applicators, application and allotment sheets, the share register, cash received records, share certificate counterfoils, and repayment to unsuccessful applicants.
e. When the issue was one which was contingent upon permission to deal being received from stock exchange then:
- Ensure that permission has been obtained. If it has not been given, all the money subscribed must be returned.
- Ensure all the money was kept in a separate bank account until all conditions were satisfied.
- Ensure that the minimum subscription has been received. If there are not enough subscribers then the whole is returnable.
- When the issue is not for cash but for other consideration vouch the agreement and ensure that all entries are properly made.
g. Vouch the payment of underwriting and other fees. When no new issue of shares has been made the audit work will include:
- Determine the total shares of each class as stated in the balance sheet and obtain a
- list of shareholdings which in total should agree with the balance sheet total.
- Test the balances in the share register with the list and vice versa.
- If this is not possible at the balance sheet it may be permissible to do it earlier provided that the auditor is satisfied with the system of control over transfers.
- When the share register is maintained by an independent firm of registrars, the
- auditor should obtain a certificate that the above work (a & b) has been done.