Question

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

• payment of debenture interest
• accrual of debenture interest, payable at the year end
• redemption of outstanding debentures
• purchase of a portfolio of shares
Ingrid has been asked to detail audit procedures for this year’s audit based on the assumptions that similar transactions will occur.

Which of the following procedures should be performed with respect to the accrual of debenture interest payable at year end?

Check the details to the debenture certificate.

Recalculate accruals.

Vouch to remittance advices accompanying the payment.

Perform an analytical review of interest compared to expectations.

Recalculate interest received.

Review receipts subsequent to year end.

Ensure gains or losses have been correctly calculated and recorded.

Answer 1

Answer

a. Check the details to the debenture certificate.

b. Recalculate accruals.

c. Vouch to remittance advices accompanying the payment.

d. Perform an analytical review of interest compared to expectations

Explanation:

a) Check the details to the debenture certificate: Debenture certificate should be checked to ascertain the rate of interest payable on the debenture issued so as to calculate the accrued interest payable on that rate for the period.

b) Recalculate accruals: The auditor should recalculate the total interest accrued during the period to confirm the audit assertion of accuracy, i.e., the interest recorded in the books is accurate and correct as per debenture par value and rate of interest mentioned in the debenture certificate.

c) Vouch to remittance advices accompanying the payment: The remittance advice shows details of the amount and date of payment made. Remittance advice should be checked by the auditor to ensure that amount of interest already paid is not included in the amount recorded as accrual of debenture interest payable in the books.

d)    Perform an analytical review of interest compared to expectations: Analytical Review refers to the process of comparing the actual amount with the expectations to ascertain the variations from the expectations. The rate of interest on debenture is fixed and auditor should calculate the total interest and compare the same with the amount recorded in the financial statements.

e)    Recalculate interest received: The Company is liable to pay interest on debentures. Thus, no interest received is required to be calculated by the auditor.

f)    Review receipts subsequent to year end: There are no receipts for the accrual of debenture interest payable thus no receipt is required to be reviewed subsequent to year end.

g)     Ensure gains or losses have been correctly calculated and recorded: On recording accrual of debenture interest payable at year end, no gains or losses are incurred, thus no concept of ensuring gains or losses correctly calculated and recorded comes into picture.