AA syllabus

Description and Response to Audit Risk 3

March / June 22 Description of Audit Risk 3

In order to finance this purchase, Esk Co obtained an interest-bearing bank loan of $2.5m during the year. The bank loan is payable in five equal annual instalments, with the first instalment due to be paid on 1 September 20X5

Describe The Audit Risk

Esk Co has borrowed $2·5m from the bank under a five‑year loan.

If the loan is not allocated correctly between non‑current and current liabilities, this would lead to a classification error with liabilities being misstated.

March / June 22 Response to Audit Risk 3

Describe the Auditors response to this risk

The audit team should recalculate the split between current and non‑current liabilities to ensure the classification is correct in accordance with relevant accounting standards and local legislation.

Details of any security offered against the loan should be agreed to the loan agreement