# Audit of Borrowings

Borrowings are a high-risk area because they involve significant amounts, complex agreements, and are a common area for misstatement (both understatement and overstatement).

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## a) Existence Assertion

Objective: Verify that borrowings recorded represent valid claims by banks/lenders against the entity.

Audit Procedure	Purpose
Review Board Meeting minutes	Confirm new lending is authorised by Board of Directors
Check significant debt commitments	Verify approved by BOD
Agree loan details to loan agreement	Confirm terms (amount, rate, tenure) match records
Obtain Balance Confirmation from lender (SA 505)	Independent third-party verification of outstanding balance
Examine trust deed for Debentures	Verify terms and conditions of debenture issue
Obtain Written Representation (WIR)	Management confirms all liabilities represent valid claims
Agree lease/hire purchase details to underlying agreements	Confirm lease liabilities are genuine obligations

> SA 505 — External Confirmations is the primary standard governing balance confirmations from lenders. Confirmations should be sent directly by the auditor and received directly (not routed through the client).

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## b) Completeness Assertion

Objective: Verify that all borrowings of the entity are recorded — no undisclosed liabilities.

Step 1 — Obtain a Short-term Schedule of Borrowings:

```

Opening Balance of Borrowings XXX

Add: Borrowings taken during year XXX

Less: Repayments during year (XXX)

-----

Closing Balance XXX

```

Step 2 — Perform additional corroborating procedures:

Procedure	Purpose
Examine minutes of BOD meetings	Identify any additional debt approved/obtained not in schedule
Review significant contracts	Detect financing arrangements embedded in contracts
Obtain confirmation from banks/lenders	Cross-check that all facilities are captured
Trace closing balance per schedule to the General Ledger	Confirm reconciliation of subsidiary records to main ledger

Worked example

### Example 1

Existence via SA 505: The auditor sends a confirmation request directly to the bank asking for the outstanding loan balance as at 31/3. The bank confirms ₹2 crore outstanding, matching the books. This provides strong evidence for the Existence assertion — the borrowing is a valid claim by the lender.

### Example 2

Completeness via schedule: The auditor prepares: Opening ₹5 cr + New loans ₹3 cr − Repayments ₹2 cr = Closing ₹6 cr. This matches the general ledger. The auditor then reads BOD minutes to check if any further debt was approved — none found. Completeness is supported.

### Example 3

Existence — Debentures: ABC Ltd has ₹10 crore of debentures outstanding. The auditor examines the trust deed, confirms the trustee's records, and obtains a balance confirmation from the debenture trustee. The trust deed also reveals a charge on specific assets — the auditor checks this charge is properly disclosed.

### Example 4

Completeness risk scenario: The auditor finds a significant raw material supply contract in the legal files. On closer reading, it contains a 'take-or-pay' clause that represents a financial commitment. This would not appear in the borrowings schedule but needs evaluation as a contingent liability — caught only through review of significant contracts.

### Example 5

WIR limitation: Management provides a Written Representation that all liabilities are genuine. The auditor notes this supports the Existence assertion but does not rely on it alone — independent bank confirmation (SA 505) is still mandatory for material borrowings.

⚠️ Common exam mistakes

Relying solely on WIR (Written Representation) for the Existence assertion — WIR is corroborating evidence; balance confirmation from the lender under SA 505 is the primary procedure.
Forgetting to examine BOD minutes for approval of debt — unauthorised borrowings (directors borrowing without board approval) are a real audit risk.
Not examining the trust deed for debentures — it contains key terms (interest rate, security/charge, redemption schedule) critical to valuation and disclosure.
Confirming only term loans and ignoring working capital facilities, overdrafts, or finance lease liabilities when testing completeness.
Treating completeness and existence as the same risk — Existence asks 'are recorded borrowings real?'; Completeness asks 'are all real borrowings recorded?'
Sending confirmation requests through the client instead of directly — this compromises the independence of the SA 505 confirmation process.

Reference: SA 505 — SA 505 — External Confirmations (ICAI Auditing Standard)

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Audit of Borrowings — Existence and Completeness

Worked example

⚠️ Common exam mistakes