## Audit of Borrowings and Loans

### Why This Matters

Borrowings are a high-risk area because misstatements can arise from unrecorded liabilities, incorrect valuations (especially for foreign currency loans), and non-compliance with regulatory or contractual limits.

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### Key Audit Objectives

Assertion	What the Auditor Checks
Completeness	No unrecorded liabilities exist
Valuation	Correct measurement including interest, discount/premium
Classification	Proper split between current and non-current
Compliance	Within MOA/AOA limits; RBI directives followed

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### Audit Procedures

#### 1. Review Subsequent Transactions (Post-Reporting Period)

Examine transactions after the end of the reporting period to identify any unrecorded liabilities that should have been accrued.

#### 2. Direct Confirmation Procedures

Obtain balance confirmation from lenders for all loan and related interest balances.
Send reminders for non-replies.
Compare book balances with confirmed balances; ask management to reconcile differences and test supporting documents.

#### 3. Valuation

Determine the entity's accounting policy for recording debt — check it is appropriate and consistently applied.
Agree loan balance to the loan payable agreement.
Recalculate interest, discount, or premium on redemption.
Foreign currency loans: verify closing exchange rates used; verify computation of restatement of foreign currency balances at year-end.

#### 4. Related Party Borrowings

Review borrowings from related parties for compliance with AS 18 (Related Party Disclosures).

#### 5. Regulatory Compliance

If entity has accepted deposits: examine whether RBI directives have been complied with.
Verify borrowings are within limits laid down by MOA and AOA.
Examine purpose of amount borrowed and check usage of funds.

#### 6. Loan Classification

Examine due dates of loans for proper classification between short-term and long-term.

#### 7. Hire Purchase Agreements

Examine hire purchase agreements for purchase of assets.
Ensure correctness of amounts and examine related security.

Worked example

### Example 1

Example — Confirming a Term Loan Balance:

ABC Ltd has a ₹5 crore term loan from HDFC Bank. The auditor:

1. Obtains a signed balance confirmation from HDFC Bank as at 31 March.

2. Compares the confirmed balance (₹4.92 crore) with the book balance (₹4.80 crore).

3. Identifies a difference of ₹12 lakhs — asks management to reconcile; management explains ₹12 lakhs is accrued interest not yet paid.

4. Verifies the interest accrual calculation independently.

### Example 2

Example — Foreign Currency Loan Restatement:

XYZ Ltd has a USD 1 million loan. At year-end, the closing rate is ₹83.50/USD. The auditor:

1. Checks the RBI reference rate or bank rate used by management (₹83.50).

2. Recalculates: USD 1,000,000 × ₹83.50 = ₹8.35 crore.

3. Verifies the exchange difference (gain/loss) is correctly recorded in P&L as per AS 11.

### Example 3

Example — Borrowing Limit Check:

A company's MOA permits borrowings up to twice its paid-up capital plus free reserves. Paid-up capital = ₹10 crore, free reserves = ₹15 crore → Limit = ₹50 crore. The auditor verifies total borrowings (₹42 crore) are within this limit.

⚠️ Common exam mistakes

Forgetting to check post-balance sheet transactions for unrecorded borrowings — a liability taken just after year-end may actually relate to the reporting period.
Accepting management's reconciliation of confirmation differences without testing the supporting documents.
Not recalculating the exchange rate restatement for foreign currency loans — management may use the wrong rate or an incorrect date's rate.
Treating the entire long-term loan as non-current without checking the repayment schedule — portions due within 12 months must be classified as current.
Overlooking RBI compliance for deposits accepted from the public — this is a separate regulatory check beyond the accounting accuracy test.

Bare-Act text Section 180(1)(c) · Companies Act, 2013 · click to expand

Every company shall, unless otherwise prescribed, obtain the approval of shareholders by a special resolution if the amount of borrowings, together with money already borrowed, exceeds the aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company's bankers in the ordinary course of business.

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