CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements
Nirmal Steel Ltd shows a long-term loan of Rs 8 crore from a bank, secured by a charge on plant. The auditor finds that the charge was created in February but not yet filed with the Registrar, and the loan agreement has a covenant breach clause making the loan repayable on demand if the debt-equity ratio exceeds 2:1. The ratio at year end is 2.4:1 and the bank has not waived the breach before the balance sheet date. Which audit conclusion is most appropriate?
The auditor should challenge the non-current classification, since an unwaived covenant breach at the balance sheet date makes the loan repayable on demand and so generally current. The unregistered charge should also be evaluated for compliance and reporting. Neither matter can be dismissed as merely legal.
- AThe loan can remain classified as non-current since the bank has not demanded repayment
- BThe loan should be examined for classification as current, and non-registration of charge and covenant breach should be evaluated for disclosure and reportingCorrect
- COnly the registration of charge matters; the covenant has no effect on classification
- DBoth matters are outside the auditor's scope because they are legal issues
Explanation
If a covenant breach at the balance sheet date gives the lender a right to demand repayment and no waiver was obtained by then, the liability is generally classified as current. The auditor must also consider the unregistered charge for compliance and the report. Treating the matters as legal or irrelevant ignores audit responsibilities. Absence of an actual demand does not preserve non-current status.
Did you get it right without looking?
One question tells you little. A timed set on Audit of Items of Financial Statements shows your real accuracy, how long you take and where you lose marks.
More Audit of Items of Financial Statements questions
- While auditing the cash balance of Tulsi Retail Ltd, the auditor plans to verify cash in hand at the year-end at multiple branches. Which ap…
- In auditing the fixed assets of Bharat Steels Ltd, the auditor notes a machine costing ₹60 lakh was added during the year, and the invoice i…
- Auditor of Sagar Infra Ltd discovers that management has not made any provision for a lawsuit where the company's own legal counsel states t…
- During the audit of Kaveri Textiles Ltd, the auditor finds that a large fixed-asset purchase of Rs 40 lakh was recorded in the books before …
- While auditing Sahyadri Foods Ltd, the auditor selects a sample of trade receivables for confirmation. For a material customer, management r…
- In auditing the liabilities of Neelkanth Foods Ltd, the auditor wants assurance that all purchases of goods received before year-end are rec…