Breach of Debt Covenant

When a Corporation withdrawn loans from bankers, a debt covenant situation might be stated around the time period loan facility letter call for the Corporation to retain /meet specific financial position. As an illustration, the debt covenant could call for the Corporation to retain existing ratio of no less than 1, or retain net worth ( i.e. net asset) of specific amounts.

In the event the Corporation will not match the debt covenant condition, the bank is contractually qualified for get in touch with back the loans promptly. To illustrate, if Corporation ABC fail to meet debt covenant requirement of keeping existing ratio of 1, bank is entitled to get in touch with back the loans quantity promptly.

On the other hand, in practice, the Corporation will negotiate with its bankers to enhance the period of assessment ( ie. extend the timeline for the Corporation, to ensure that the Corporation to enhance its economic position).

Pertaining to auditing purpose, the Corporation ought to call for a waiver letter in the bank as an proof that the bank is not going to get in touch with back the loan promptly. Otherwise the non-current portion of term loan must be considered term loan if waiver letter was not acquired immediately after the Corporation has breached its debt covenant.
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Small Business Accounting- Interest Expense

What are the entries to record interest expense incurred on borrowings from bank ? Upon occurrence of interest expense:

Dr. Interest Expense (P/L)
Cr. Interest Payable (B/S)

Upon repayment of interest payable to bank:

Dr. Interest Payable (B/S)
Cr. Cash (B/S)
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Auditing Creditors IV

 In preceding posts in relation to auditing creditors, we pointed out about:

- Evaluation of Creditors' Statement of Account
- Acquire Cut-off testing
- Comparison of existing year balance to prior year balance

Also for the above, it will be fantastic if a creditors' turnover evaluation is performed:

Creditors Turnover (day): Purchase/ Average Trade Creditors x 365 [for periodic inventory system]
Creditors Turnover (day): Purchase/ Average Trade Creditors x 365 [for perpetual inventory system]

Auditor can evaluate the creditors' turnover (day) calculated above to common creditor term provided from the creditors to assess in the event the Corporation has been repaying on time. In the event the creditors' turnover (day) is drastically longer than the credit term provided by suppliers, this could indicate the liquidity situation the Corporation is facing.
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Cash audit- internal controls in cash process- cash payment

In our earliest entries with regards to cash audit, we evaluate in regards to the audit processes of auditing unrevealed cheques. We'll go over extra extensively for audit procedures in auditing cash and bank balances of our audit consumers.


Auditors may perhaps take into consideration test the internal controls of your client's cash course of action. We will deliver an overview of your probable audit procedures to test the internal controls in cash payment course of action:

  1. pick specific quantity of random samples, and test that payment voucher are adequately ready and authorized
  2. pick specific quantity of random samples, &test the bank reconciliations are precisely ready & reviewed
  3. pick specific quantity of random samples, & test that journal entries are adequately posted into Common Ledger
  4. pick specific quantity of random samples, and test that payment voucher facts same together with the corresponding payment facts (e.g suppliers' invoices), and so forth
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