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Audit of NotesPayable - Summary

Notes payable are formal agreements to pay a specific amount in the future, often used for borrowing or purchasing on credit. The audit objectives focus on the existence, completeness, rights, valuation, and proper presentation of notes payable. Key audit procedures include planning, substantive testing, and analytical procedures to identify risks such as unrecorded liabilities and misclassifications.

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61 views3 pages

Audit of NotesPayable - Summary

Notes payable are formal agreements to pay a specific amount in the future, often used for borrowing or purchasing on credit. The audit objectives focus on the existence, completeness, rights, valuation, and proper presentation of notes payable. Key audit procedures include planning, substantive testing, and analytical procedures to identify risks such as unrecorded liabilities and misclassifications.

Uploaded by

zeinchoi3
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Audit of Notes Payable – Summary

1. Definition​
Notes payable are written promises to pay a specific sum of money on a stated future date,
usually bearing interest. They may be issued to:

●​ Borrow funds from banks or other lenders,​

●​ Purchase goods or services on credit with formal agreements, or​

●​ Settle other obligations.​

2. Audit Objectives

●​ Existence – Recorded notes payable are valid obligations of the entity.​

●​ Completeness – All notes payable at year-end are recorded.​

●​ Rights & Obligations – Entity is legally obligated to settle the liabilities.​

●​ Valuation & Allocation – Notes payable are recorded at the correct amounts, including
accrued interest.​

●​ Presentation & Disclosure – Proper classification (current vs. non-current), disclosure


of collateral, related-party notes, and any covenant restrictions.​

3. Key Audit Procedures

a. Planning

●​ Understand borrowing policies, approval processes, and internal controls over debt
transactions.​

●​ Identify all sources of borrowings (banks, suppliers, related parties).​

b. Substantive Testing
●​ Inspection – Examine the original note agreements for amount, interest rate, maturity
date, and collateral.​

●​ Confirmation – Send confirmations to lenders to verify terms, outstanding balances,


and security arrangements.​

●​ Recalculation – Recompute accrued interest payable based on principal, rate, and time.​

●​ Cut-off Testing – Ensure new borrowings or repayments near year-end are recorded in
the correct period.​

●​ Search for Unrecorded Liabilities – Review bank statements, minutes of meetings,


and legal correspondence for borrowings not recorded.​

c. Analytical Procedures

●​ Compare interest expense with average note payable balances and stated interest rates.​

●​ Analyze debt-to-equity ratio trends for unusual changes.​

4. Common Audit Findings / Risks

●​ Unrecorded notes or borrowings (completeness risk).​

●​ Misclassification between current and non-current portions.​

●​ Failure to accrue interest expense.​

●​ Omission of covenant violations or pledged collateral from disclosures.​

5. Conclusion / Reporting

●​ Ensure N/P are fairly stated and disclosed in line with IFRS 9 / PFRS 9 for measurement
and IAS 1 / PAS 1 for classification.​

●​ Recommend improvements in debt monitoring, covenant compliance tracking, and timely


accrual of interest.

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