## Audit of Borrowings

The primary assertion being tested when auditing borrowings is existence/validity — that all recorded borrowings represent genuine claims by lenders and are not fictitious or misstated.

### Core Audit Procedures

1. Board Minutes Review

Confirm that new lending agreements were authorized by the board of directors.
Ensure significant debt commitments have formal board approval.

2. Loan Agreement Verification

Agree recorded details (interest rate, nature, repayment terms) to the actual loan agreement.
Verify that any borrowing limits imposed by agreements have not been breached.

3. Independent Balance Confirmations (SA 505)

Send external confirmation requests directly to all lenders (banks, financial institutions).
This is the most direct evidence for the existence assertion.

4. Lease and Hire Purchase Contracts

Verify creditor details against the underlying contracts/agreements for each lease and hire purchase arrangement.

5. Debenture Trust Deed

Examine the trust deed for: terms and dates of redemption, borrowing restrictions, and compliance with covenants.

6. Discharge Documentation

For debt retired during the year, confirm a formal discharge/release has been received on assets that secured the debt.

7. Written Representations

Obtain a written representation from management confirming all recorded liabilities are valid claims by the respective lenders.

### Schedule III Disclosure Checklist for Short-Term Bank Loans

Classify under Current Liabilities → Short-term Borrowings → Secured.
Disclose nature of primary security (current assets) and collateral security (e.g., director's residential property).
Disclose aggregate amount of loans guaranteed by directors.
Additional Regulatory Information: Confirm whether quarterly current asset statements filed with banks agree with books; if discrepancies exist, disclose a reconciliation summary with reasons.

Worked example

### Example 1

XYZ Limited has long-term borrowings from banks, financial institutions, leasing companies, hire purchase companies, and 1,000 debenture holders. CA X's procedures: (a) review board minutes to confirm authorization of each borrowing; (b) trace recorded loan terms to loan agreements and check covenant compliance; (c) send SA 505 confirmation letters to all banks and financial institutions; (d) verify lease and HP creditor balances against underlying contracts; (e) examine the debenture trust deed for redemption schedule and covenant terms; (f) obtain management written representation that all borrowings represent valid third-party claims.

### Example 2

STU Pvt Ltd has a short-term bank loan secured by current assets, with a director's residential house as collateral and the director as personal guarantor. Schedule III requires: classification under Secured Short-term Borrowings; specify both primary security (current assets) and collateral (director's house); disclose aggregate amount of director-guaranteed loans; and disclose whether quarterly current asset statements filed with the bank agree with the books of accounts.

⚠️ Common exam mistakes

Relying only on loan agreement review without sending external confirmations — SA 505 confirmations are the primary evidence for the existence assertion on borrowings.
Overlooking the debenture trust deed when debentures form part of borrowings.
Forgetting to verify discharge documentation for loans repaid during the year.
Not obtaining written representations specifically for borrowings — this is a distinct procedure that complements other audit evidence.
Missing the quarterly current asset statement reconciliation disclosure for bank borrowings secured by current assets.

Reference:

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Audit Procedures for Verifying Borrowings

Worked example

⚠️ Common exam mistakes