In the Audit of Loans Payable, It Is Common to Include

question 66

Multiple Choice

In the audit of loans payable, it is common to include tests of principal and interest payments as a part of the audit of the acquisitions and payment cycle, because the payments are in the cash payments journal that is being sampled.It is also normal to test these transactions as part of the capital acquisitions and repayment cycle, because:

• A) due to the infrequency of these transactions, in many cases no transactions involving loans payable are included in the sample tests of acquisitions and payments.
• B) it is not unusual for the auditor to duplicate a process, thereby gathering a larger quantity of evidence.
• C) the tests done in the acquisitions and payments cycle will look only at the cash credit side, so the tests done in the capital acquisitions and repayment cycle will look at the debit side of the transaction.
• D) replicating the evidence will provide the auditor with a higher level of assurance.

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Definitions:

Duration

A measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates, usually expressed in years.

Perpetuity

A financial term for a constant stream of identical cash flows with no end.

Yield

The earnings from an investment, like dividends or interest, shown as a percentage of the investment's original cost or its current market valuation.

Perpetuity

A type of financial instrument that provides an infinite stream of interest payments.