SP ILP 3 SUGGESTED SOLUTION

25 marks
a. Transaction-part of loans granted

General procedures

 Inspect the general ledger account to identify any unusual entries and follow
up differences with management and supporting documentation. (1)
 Obtain a management representation that none of the directors or their
immediate family members have any financial interest related to the loans. (1)
 Inspect the Memorandum of Incorporation for any limitations on the granting
of loans. (1)

Detail procedures
 Inspect the contracts for each of the loans granted for the following:
o Inspect the loan agreement to see whether the provisions of the credit act
were met.
o Inspect whether the names on the loan contract corresponds with that on
the schedule. (1)
o Inspect the terms (5 years) and the interest rate (7.5%). (1)
o Inspect that the capital amount corresponds with the schedule and that it
does not exceed R200 000. (1)
o Inspect that no security is needed for the loans granted. (1)
o Inspect whether there are any unusual clauses, such as what happens
when interests are not paid. (1)
o Review the minutes of the directors’ meetings to confirm that no loans
were granted to any family members of directors. (1)

 Inspect the minutes of the directors’ meeting to confirm that adequate

authorisation was given for granting each of the loans. (1)
 Inspect the bank statement / EFT proof of payment to confirm that the
payments for the loans were actually paid out. (1)
 Inspect the dates on the supporting documentation that loans were recorded in
the correct accounting period. (1)
 Follow pay-outs of the loans from the cash-book through to the general ledger
to ensure that it was allocated to the correct account. (1)
TOTAL 14
MAX 12
Balance-part of loans granted

General procedures

 Compare the balance of loans granted accounting the general ledger with the
balance as shown on the trial balance and financial statements and the
underlying schedule. (1)
 Test the castings and cross-castings on the client’s prepared schedule and
compare the total with the general ledger, trial balance and financial
statements. (1)
 Scrutinise the general ledger account and the schedules for any unusual
items (on the basis of source or nature) and follow up with queries at
management. (1)

 Obtain a management representation that loans are shown completely and at

the correct value in the financial statements of the company and that loans
are not ceded to anyone else. (1)

Detail procedures


Compare the schedule’s balance with the underlying loan contracts and
dates on which the loans were granted. (1)
 With the client’s permission, obtain confirmation of the loan and interest
directly from the persons to whom the loan was granted. (1)
 Inspect the correspondence for the liquidator of Hlempu Zulu and confirm
that no liquidation payment will be received. (1)
 Direct enquiries to the financial director regarding the collectability of the
other loans and interest and whether it is necessary to provide for any other
loans and interest as bad debt. (1)
 Follow up on payments from loan holders after year-end and determine
whether more accounts must be provided. (1)
 Review the correspondence with the debtors according to their
correspondence files to detect any problems with the collectability. (1)
 Recalculate the amount of interest against the 7.5% multiplied with the
number of months since the loan was granted. (1)
 Obtain a bank confirmation letter and confirm that loans granted were not
ceded to the bank. (1)
 Correspond the total of the interest of the schedule with the interest
recorded in the general ledger and trial balance. (1)
TOTAL 13
MAX 11
Communication skills: formulation 1