## Audit of Loans & Advances and Other Current Assets

Audit of this balance sheet head is organised around three financial statement assertions: Existence, Completeness, and Valuation.

---

### A. Existence

Direct Confirmation Procedures (SA 505) – Send confirmation requests covering both principal and interest balances outstanding.

---

### B. Completeness

Obtain a complete list of all loans, advances, and other current assets.
Compare each item against balances in the ledger.
Verify loan agreements and acknowledgements of the borrowing parties for outstanding loans.
For material loans or advances – verify the entity's AoA / MoA (Articles and Memorandum of Association) and inspect Board of Directors' meeting minutes for sanction.
For Related Party Loans & Advances – check:
Proper authorisation by the Board
Transaction at arm's length
Verify loan acknowledged by party and check if security / deposit is in place.
Ascertain that loan repayment is regular as per installment schedule.
For GST Input / Statutory Dues – prepare a reasonability test; verify statutory returns filed.

---

### C. Valuation

Procedure	Details
Ageing Report	Obtain ageing schedule of Loans & Advances
Litigation List	Obtain list of Loans & Advances under litigation
Foreign Currency	Restate foreign currency loans as per AS 11 (closing exchange rate)
Doubtful items	Scrutinise L&A that appear doubtful; discuss with management about provisioning
Allowance for Doubtful Accounts	Review company's policy; check consistency with prior year; verify appropriateness of method
Bad Loan Write-off	Assess write-off schedule; prepare a review schedule

Worked example

### Example 1

Example – Direct Confirmation (SA 505): Company has advanced ₹25 lakhs to ABC Ltd. Auditor sends a confirmation request to ABC Ltd asking them to confirm:

(i) Outstanding principal = ₹25 lakhs

(ii) Interest accrued = ₹1.5 lakhs

If ABC Ltd responds with different figures, auditor investigates the discrepancy.

### Example 2

Example – Related Party Loan: Company X (subsidiary) advanced ₹1 crore to its holding company. Audit procedure: (1) Check Board resolution sanctioning the loan; (2) Verify it is at arm's length (same interest rate as market); (3) Confirm in Related Party Disclosures; (4) Check if AoA permits such advances.

### Example 3

Example – Foreign Currency Loan Restatement: Company gave a USD loan of $1,00,000 when exchange rate was ₹80/USD. At year-end, rate is ₹83/USD. Recorded balance = ₹80 lakhs. Required balance per AS 11 = ₹83 lakhs. Auditor checks this difference (₹3 lakhs exchange gain to the company) is properly booked:

Dr. Loan to Party A/c ₹3,00,000

Cr. Foreign Exchange Gain A/c ₹3,00,000

⚠️ Common exam mistakes

Not sending direct confirmations for both principal AND interest – auditors sometimes confirm only the principal balance.
Skipping Board minutes verification for material advances – loans sanctioned without Board approval may be ultra vires.
Failing to restate foreign currency loans at the closing exchange rate per AS 11.
Not preparing an ageing report – old outstanding loans may need provision for doubtful recovery.
Treating related party loans the same as third-party loans – related party transactions require additional checks on authorisation and arm's length pricing.

Bare-Act text Para 39 · AS 11 – The Effects of Changes in Foreign Exchange Rates (ICAI) · click to expand

An enterprise should disclose the amount of exchange differences included in the net profit or loss for the period and the amount of exchange differences arising on foreign currency transactions of monetary items.

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →