Interest expenses are the money the entity pays for using other funds while the interest income is money received by the entity for lending its funds to others. Interest expenses can arise from a bank loan, overdraft or bonds. Auditor needs to ensure that the interest paid is accurate, complete and properly classified. To do so the auditor will perform a number of tests to make sure that the interest expenses and income meet the required assertion.
The following are substantive procedures for auditing interest expenses and interest income
- Inspect legal documents (e.g. loan agreement) creating the right of an entity to receive/pay interest
- Confirm reasonableness of interest in the following formula:
Interest expense = principle * applicable interest rate * period
- Vouch for payment from records to the general ledger and tracing into the bank statement
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