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Sir, for PYQ Sep/Dec 2015 Q2 part (a)(ii) “Audit procedure in relation to going concern matters identified”
1. In this case, is it the borrowing facilities and the bank loan is referred to the same thing?and therefore from the same bank? as the borrowing facilities ‘s covenant included the ratio of bank loan to operating profit
2.for the 7th point,how to calculate the average payment period for trade payables in this case as no cost of sales here?so using the operating expense instead?
Thank you.
1. No the facility (whether for a loan or an overdraft) is the total amount that has been agreed – the loan/overdraft is then the amount that is “drawn” against the facility.
(Overdrafts are an expensive source of finance – generally, a business won’t want to use it unless it has to. A bank overdraft balance is going to fluctuate daily (like any cash at bank balance) but should remain within the facility otherwise the bank may “call it in” (as technically repayable on demand.2. Just because the extracts provided for the purpose of the question include only operating expenses doesn’t mean that this is all the information that will be available for the audit. At some stage the auditor will have a detailed analysis of operating expenses including cost of sales. At this level (AAA rather than AA) you should appreciate that trade payables would include amounts due to suppliers of services not just purchases of goods included in costs of sales. A meaningful calculation of trade payable days would therefore include all costs of goods and services provided on credit and exclude payroll costs.
1.Why the bank loan and the borrowing facilities are reviewed by different date?
For bank loans was extended in March 2015 and the borrowing facilities review by the bank in April 2016?Thank you
They are not. The extension of the loan is drawing on an existing (already negotiated) facility.
Consider – I ask the bank for a loan of $10,000 for my business for the next 12 months – the bank agrees. I don’t need it all immediately – so I draw $3,000 initially. Some months later I draw another $2,000, etc. I don’t have to ask the bank on each occasion. After a year I sit down with my friendly bank manager to discuss my needs for the next 12 months.
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