2011

30th MAY

AUDIT REPORT

VOUCHING OF LOANS

Vouching of Loans

VOUCHING OF LOANS
REPORT

Submitted To:
Prof. Imran Shehzad

Submitted By:
Ahmad Zubair (L3F09BCOM2528)

UsmanTahir

(L3F09BCOM2530)

UmairIlyas

(L3F09BCOM2531)

Submission date:
30/05/2011

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Contents
LOAN: ______________________________________________________________________ 4 TYPES OF LOAN: ______________________________________________________________ 4
Open-Ended and Closed-Ended Loans __________________________________________________ 4 Secured and Unsecured Loans ________________________________________________________ 5 Conventional Loans ________________________________________________________________ 5

How Does Having Co-Signer for My Loan Affect My Credit Score? ______________________ 5
Credit Score ______________________________________________________________________ 5 Co-Signer_________________________________________________________________________ 6 Risk _____________________________________________________________________________ 6 What Is A Loan Audit? ______________________________________________________________ 6

VOUCHING: __________________________________________________________________ 7 The Technique of Vouching In the Audit ___________________________________________ 7 CHARTS OF ACCOUNTS: ________________________________________________________ 8 Audit Work Program Long term loans and advances _________________________________ 9 EXAMPLES OF VOUCHING OF LOANS ____________________________________________ 15
Vouching/verifying the Borrowings from Bank. _________________________________________ 15 Vouching/verifying the Contingent Liabilities. __________________________________________ 15 Vouching/verifying the Trade Creditors. _______________________________________________ 15

MCQS FOR ASSIGNEMNT ______________________________________________________ 17 Bibliography ________________________________________________________________ 19

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LOAN:
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same amount. The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants. Although this article focuses on monetary loans, in practice any material object might be lent. Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds is a typical source of funding.

TYPES OF LOAN:
There are many different types of loans you can take out. When youre looking to borrow money, its important that you know your options.

Open-Ended and Closed-Ended Loans

Open-ended loans are loans that you can borrow over and over. Credit cards and lines of credit are the most common types of open-ended loans. With both of these loans, you have a credit limit that you can purchase against. Each time you make a purchase, your available credit decreases. As you make payments, your available increases allowing you to use the same credit over and over. Closed-ended loans cannot be borrowed once theyve been repaid. As you make payments on closed-ended loans, the balance of the loan goes down. However, you dont have any available credit you can use on closed-ended loans. Instead, if you need to borrow more money, youd have to apply for another loan. Common types of closed-ended loans include mortgage loans, auto loans, and student loans.

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Secured and Unsecured Loans

Secured loans are loans that rely on an asset as collateral for the loan. In the event of loan default, the lender can take possession of the asset and use it to cover the loan. Interests rates for secured loans may be lower than those for unsecured loans. The asset may need to be appraised before you can borrow a secured loan. Unsecured loans dont have asset for collateral. These loans may be more difficult to get and have higher interest rates. Unsecured loans rely solely on your credit history and your income to qualify you for the loan. If you default on an unsecured loan, the lender has to exhaust collection options including debt collectors and lawsuit to recover the loan.

Conventional Loans
When it comes to mortgage loans, another term conventional loan is often used.Conventional loans are those that arent insured by a government agency like the Federal Housing Administration (FHA), Rural Housing Service (RHS), or the Veterans Administration (VA). Conventional loans may be conforming, meaning they follow the guidelines set forth by Fannie Mae and Freddie Mac. Non-conforming loans dont meet Fannie and Freddie qualifications.

Loans to Avoid
Certain types of loans should be avoided. Payday loans are short-term loans borrowed using your next paycheck as guarantee for the loan. Payday loans have notoriously high annual percentage rates (APRs) and can be difficult to pay off. If youre in a financial crunch, seek alternatives before taking out a payday loans. Advance-fee loans arent really loans at all. In fact, theyre simply scams to get money from you. Advance-fee loans use different tactics to convince borrowers to send money to obtain the loan. Once the money is sent (usually wired), the lender typically disappears without ever sending the loan.

How Does Having Co-Signer for My Loan Affect My Credit Score?

Credit Score
o

When you apply for a loan, the bank will check your credit score, as well as your credit history. Your credit history involves how often you pay bills on time, how much money you have in savings, how long you've had your current job, what your current debt is, etc. Basically, banks use your credit history as a way to decide how likely it is that you will pay back your loan.

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If your credit score isn't good enough, then a bank will turn you down for a loan and you won't be able to get them to loan you money. One option to temporarily improve your score is to get a co-signer on your loan.

Co-Signer
o

A co-signer on a loan is added insurance for a bank. If you are not able to get a loan by yourself (usually due to bad or no credit), then you can ask someone to co-sign with you. Effectively that person is saying that he is vouching for you, and if he has a much better credit score than you do, it will make the bank or lending institution reconsider whether to approve you for a loan. If you do receive a loan due to a co-signer, then the loan will begin showing on your credit history and positively affect your credit score---though not as much as having a loan without a co-signer---if you make all payments in full on time. Of course, a co-signer is doing more than just vouching for you; if your payments fall behind, then the loan falls on the co-signer's shoulders as well.

Risk
o

If you receive a loan through having a co-signer but then begins missing payments that will not only affect your credit score, but also the credit score of your co-signer. Since both parties names are on the loan, it's as though the loan was given to both of you. This is why a person should consider carefully whether to co-sign a loan. If you can't keep up your end of the loan agreement, then the co-signer's credit score and history can quickly be ruined. However, if you can keep up with payments and everything goes well, then both your credit score, and that of the co-signer will improve (somewhat) since both your names are on a loan that's being paid back. However, having a co-signer could negatively affect your future loans, since banks aren't inclined to trust someone who's needed co-signers. This is something both parties should consider when applying for a loan

What Is A Loan Audit?

A loan audit, simply put, is a review of your mortgage documents to ensure that they comply with all relevant local, state, and federal laws. A borrower must receive certain notices on a specifically defined time frame depending on the type of mortgage applying for. If the lender fails to provide these notices then you have a right to rescind your loan in many cases and could be entitled to a refund of your payouts. Its not a difficult process getting a loan audit. Your loan auditor should tell you right up front how long you can expect to wait to get your results in and how long the entire process should take beginning to end. Thats not to say you can know for sure the exact length of your situation (they all vary), but a general idea is a good start. If you think you may need a loan audit then contact an attorney and request one.

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VOUCHING:
Vouching generally means Providing evidence or assurance. The act of examining vouchers is referred to as vouching. It is the practice followed in an audit, with the objective of establishing the authenticity of the transactions recorded in the primary books of account. It essentially consists of verifying a transaction recorded in the books of account with the relevant documentary evidence and the authority on the basis of which the entry has been made; also confirming that the amount mentioned in the voucher has been posted to an appropriate account which would disclose the nature of the transaction on its inclusion in the final statements of account.

The Technique of Vouching In the Audit

At the time of conducting the vouching the following points must be borne in mind:

In order to ensure that valuable time is not lost in vouching, the client should produce to the auditor all the vouchers arranged in the order in which entries appear in the books of account. The auditor must satisfy himself that the dates given on the vouchers which are recorded in the books fall in the year under review. Satisfaction must be made in respect of the head of account debited or credited from the availability documentary evidence. While examining the documentary evidence it should be carefully seen that the transaction pertains to the business. Care must be given to those vouchers which are in the personal names of the partners, managers, secretary and directors. Every voucher has been passed by the authorized official. Attention should also be paid to the point where the voucher bears proper revenue stamp. Complete notes should be taken in respect of such items as require further clarifications or evidence. Attention should also be paid to the amount to ensure that it agrees both in words and figures. Any alternation particularly in respect of the figure on the receipts and vouchers must be fully inquired into.

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CHARTS OF ACCOUNTS:
Current Liabilities 2400 Other Taxes Payable 2410 Employee Benefits Payable 2000 Accounts Payable 2420 Current Portion of Long-term Debt 2300 Accrued Expenses 2440 Deposits from Customers 2310 Sales Tax Payable 2480 Other Current Liabilities 2320 Wages Payable Long-term Liabilities 2330 401-K Deductions Payable 2335 Health Insurance Payable 2340 Federal Payroll Taxes Payable 2350 FUTA Tax Payable 2360 State Payroll Taxes Payable 2370 SUTA Payable 2380 Local Payroll Taxes Payable 2390 Income Taxes Payable 2700 Notes Payable 2702 Land Payable 2704 Equipment Payable 2706 Vehicles Payable 2708 Bank Loans Payable 2710 Deferred Revenue 2740 Other Long-term Liabilities

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Audit Work Program Long term loans and advances
AUDIT WORK PROGRAM LONG TERM LOANS AND ADVANCES

Audit Program (d) Long term loans and advances

WP Ref.: Prepared by: Date: Reviewed by Date

Client: Period: Subject: Long term loans and advances

Amount in Rs. Account balances: Long term loan and advances Provision against long term loan and advances

Classes of transactions: Interest income

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S. No. Audit Objectives Assertions Risk Assessment IR 1. Long term loans and advances are completely and accurately recorded All recorded long term loans and advances actually exist. CR ROSM

CA

2.

3.

Long term loans and advances are recorded at appropriate values and all bad and doubtful balances have been provided for/ written off. V Long term loans and advances recorded are the right of the company. Long-term loans and advances to associated undertaking were in accordance with legal requirements. Long term loans and advances are presented and all disclosures have been given in accordance with the Fourth Schedule of the Companies Ordinance, 1984 and relevant IASs.

4.

5.

Laws & Regulation

6.

OCAL RVU

S. No.

Audit Procedures

Objective

Done by

W. P. Ref.

Test of Controls 1. Assess the reasonableness of design of system of internal control by enquiring relevant client personnel and documenting the same (if not a documented system manual has been developed by the client). A walk through test would be necessary to confirm the understanding as documented. Identify the preventive (exercised before ALL

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S. No. Audit Procedures incurrence of transactions and event) and detective (exercised after incurrence of transactions and event) controls established by management to support its assertions. 2. Check on sample of selected transactions covering the whole period that all preventive controls are exercised on all transactions. ALL Objective Done by W. P. Ref.

3.

Check that proper subsidiary records have ALL been maintained and entries are made in the same on prompt and consistent basis and the same is reconciled with general ledger. Check on a sample of transactions that detective controls are appropriately been exercised and in case of any detection of error/ fraud, proper steps have been taken to avoid recurrence of the same. For sample of disbursements made during the year: (a) Check approval of appropriate level of management. (b) Check that the employee has fulfilled all formalities necessary before disbursement of loans. CE

4.

5.

EV

S. No. 6.

Audit Procedures Ensure that management does not override the designed controls by

Objective

Done by

W. P. Ref.

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S. No. Audit Procedures Enquiring from the designated staff person Remain skeptical during performing test of design and test of effective operation 7. Document the conclusion after performing test of controls and required level of assurance from substantive procedures. N/A Objective Done by W. P. Ref.

Analytical Procedures 1. Compare current year balances and expense with last year balances and ensure that any significant variation should be properly and logically reasoned. CEA

Test of Details 1. Obtain a employee-wise movement schedule of principal amount of loans and advances and interest thereon and trace the opening balances from the general ledger, subsidiary records, and last year working papers. Check casting and cross casting of the schedule. For disbursements made during the year check disbursements of funds with disbursement register and bank statement. CE

2.

S. No. 3.

Audit Procedures For a sample of repayments made during

Objective EVR

Done by

W. P. Ref.

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S. No. Audit Procedures the year: (a) Ensure that amount and date of repayment was accordance with repayment schedule or agreement. (b) Check receipt of funds with receipt records and bank statement. (c) Recovery of interest is in accordance with the policy (i.e. along with principal or after recovery of full principal, as the case may be). 4. Circularize confirmations to selected parties. Match replies with the amounts outstanding against each party. Obtain age-analysis of long-term loans and advances and perform the following:(a) Verify that loans have been classified in correct categories. (b) Current maturity has been appropriately calculated and separately disclosed. (b) Consider the value of securities available against each loan for the purpose of calculation of provision for doubtful loans and advances. 6. 7. Check subsequent recovery of loans etc. Ensure that all loans and advances to associated undertakings are granted after due compliance with legal requirements. EV Laws etc. CER Objective Done by W. P. Ref.

5.

VK

S. No.

Audit Procedures

Objective

Done by

W. P. Ref.
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S. No. 8. Audit Procedures Ensure that none of the loans and advances are impaired or therecoverable amount of a loan or advance is not less than its carrying amount. If the carrying amount of a loan/ advance is more than its recoverable amount, then same should be reduced to recoverable amount recognising the reduction as impairment loss For items stuck-up for considerable period of time, inquire about its status from the management. Compute provisions if required and ask for management representations. Ensure that loans and advancesshould be measured at amortised cost using the effective interest rate method. Re-perform calculation of interest income on test basis: (a) Verify rate of interest from agreement/ policy. (b) Check the number of days for which interest is to be charged. 12. Test check loan agreement and legal documents to verify the terms and conditions of the advances Ensure that closing balances as per our working paper file are in match with general ledger. RU OATE Objective V Done by W. P. Ref.

9.

10.

11.

13.

CE

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EXAMPLES OF VOUCHING OF LOANS
Vouching/verifying the Borrowings from Bank.
Borrowings from a bank: Borrowings from a bank may be either in the form ofOverdraft limits; or short term or medium term or long term loans. The audit Procedures which an auditor may adopt are outlined below: Ensure that balance as per books of the client and the bank statement tally. InCase of difference between the two amounts, reconciliation statement preparedby the client should account for reasons. Examine whether borrowings from the bank have been duly authorized. Examine documents to ensure that statutory requirements, if any, with regardsto creation and registration charges have been met. Examine the loan agreement and ensure that the terms therein have been dulyComplied withAscertain the purpose for which loan has been raised and examine whether end Use of the funds have been accordingly made.

Vouching/verifying the Contingent Liabilities.

Contingent Liabilities (i) Review minutes of the meetings of the Board of Directors or other similar bodies. (ii) Review contracts, agreements and arrangements. (iii) Review list of pending law suits and obtain a certificate and opinion of the lawyerdealing with the cases. (iv) Review of records relating to contingent liabilities maintained by the company. (v) Review of terms and condition of grants and subsidy availed. (vi) Obtain representation from the management. (vii) Ensure that proper disclosure is made of all the contingent liabilities.

Vouching/verifying the Trade Creditors.

Trade creditors:
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Theadequacy of cut off procedure to ensure that transaction of nextperiod is not accounted and all transactions of year end are accounted. Check posting in the bought ledger from books of prime entry. Compare the balances in the schedule of creditors with balances in boughtledger. Compare the balances with the confirmation or statement of account receivedfrom trade creditors. Pay special attention to long outstanding items and enquire about the reason therefore. Verify subsequent payments and reversal entries in the bought ledger of yearend entries. See that trade creditors are classified and shown in the balance sheet as perrequirement of Schedule VI of the Companies Act. 1956.

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MCQS FOR ASSIGNEMNT

1) What is a loan? a) Debt b) Creditor c) Account receivables d) Bad debts

2) How many types of loan discussed in the topics? a) 1 b) 3 c) 5 d) 4

3) What does word vouching refer to? a) Make surety b) Written document c) An account d) Providing evidence 4) Credit cards and lines of credit are examples of which type of loan. a) Open-Ended and Closed-Ended Loans

b) Secured and Unsecured Loans c) Conventional Loans 5) Borrowing from a bank either in form of a) b) c) d) e)
Overdraft limits Short term Medium term Long term loans All of them

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6) In a legal loan, each of these obligations and restrictions is enforced by contract, which
can also place the borrower under additional restrictions known as? a) Loan barriers b) Loan return restrictions c) Loan covenants

7) The loan is generally provided at a cost, referred to as

a) b) c) d) Profit Interest Over amount Charges

8) Which type of loan cannot be borrowed once they are repaid? a) Closed-ended loans b) Open ended loans c) Conventional Loans

9) Which of following comes under head of close ended loans? a) b) c) d) Mortgage loans Auto loans Student loans All of them

10) Is it true that interest rate of secured loans is lower than unsecured loans? a) Yes b) No

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Bibliography
http://en.wikipedia.org/wiki/Loan [Online] // wikipedia. - feb 22, 2002. - may 21, 2011. www.about.com [Online] // About. - august 13, 2002. - may 21, 2011. www.blurtit.com [Online] // Blurt. - august 09, 2002. - may 21, 2011. www.friendsmania.com [Online] // friendsmania. - Audit notes, march 22, 2009. - may 21, 2011. www.icai.org [Online] // ICAI. - pcc compsuggans, december 17, 2006. - may 21, 2011.

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