Describe how substantive analytical procedures may be used to provide evidence on the reasonableness of interest expense
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total answers (1)
total answers (1)
Accounting
- The auditor can estimate interest expense by multiplying the twelve monthly balances for long-term debt by the average interest rate.
- The reasonableness of interest expense can then be assessed by comparing this estimate to the interest expense amount recorded in the general ledger.
- If the two amounts are not materially different, the auditor can conclude that interest expense is fairly stated.
- If the estimated amount of interest expense is materially higher than the recorded amount, the auditor might conclude that the entity has failed to record a portion of interest expense.
- On the other hand, if the recorded amount of interest expense was materially higher than the estimated amount, the entity may have failed to record debt.
- It is important to remember that the inputs (i.e., interest rates, monthly balances) must be audited in order to obtain assurance from the substantive analytical procedure.
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