Loans and borrowings audit checklist

Auditing loans and borrowings means verifying each facility against its sanction letter and loan agreement, confirming any security or charge created is actually registered with the Registrar of Companies, checking compliance with financial covenants attached to the facility, recomputing interest for the period against the sanctioned rate and the actual drawn balance, and classifying the outstanding balance between current and non-current based on the repayment schedule as of the balance sheet date.

Sanction letters and terms

1. 01Obtain the sanction letter and the executed loan agreement for every borrowing outstanding during the yearNot just the facilities outstanding at year end — a facility fully repaid during the year still needs its terms verified for the interest and any prepayment charge recognised before repayment.
2. 02Confirm the sanctioned amount, rate of interest (fixed or linked to a benchmark such as repo rate or MCLR), repayment schedule, and tenureFor a floating rate loan, confirm the benchmark used and the spread, and check that rate resets during the year were applied in the interest computation at the correct dates.
3. 03Verify the amount actually drawn down against the sanctioned limitA term loan sanctioned for one amount but disbursed in tranches needs each tranche traced to the bank statement, with interest computed from the date each tranche was actually received, not from the sanction date.
4. 04Check for any amendment, restructuring or one-time settlement during the yearA restructured loan often carries a different rate, a revised schedule, or waived interest — confirm the restructuring is documented and the accounting reflects the revised terms, not the original ones.

Security and charge verification against ROC records

Where a loan is secured, the company is required to register the charge with the Registrar of Companies, and the audit should independently verify that what the loan agreement describes as security actually appears as a registered charge, rather than relying on the loan agreement alone.

• Download the charge details for the company from the MCA portal and compare against every secured facility in the loan register — a charge described in the loan agreement but absent from the ROC filing is a compliance gap worth raising.
• Confirm the amount and description of the charge registered matches the facility and the assets actually pledged, hypothecated or mortgaged.
• For charges satisfied during the year (loan repaid, security released), confirm the satisfaction of charge has also been filed with the ROC — a charge that stays open on the register after the loan is repaid can block the company's ability to raise fresh secured finance.
• Where security includes a pledge of shares, inventory hypothecation or a mortgage of property, check for independent evidence of the pledge or mortgage beyond the loan agreement — a share pledge confirmation from the depository, or a mortgage-registered document, as applicable.

Covenant compliance

Term loans, and particularly larger working capital facilities, usually carry financial covenants — a minimum debt service coverage ratio, a maximum debt-to-equity ratio, a minimum current ratio, or a restriction on further borrowing or dividend payment without the lender's consent.

1. 01Extract every financial covenant from the loan agreement into a single working paperCovenants are often buried in schedules several pages into the agreement and easy to miss on a first read.
2. 02Recompute each covenant ratio using the audited figures as of the balance sheet dateNot the client's own covenant certificate, which may use different adjustments than the agreement actually specifies.
3. 03Check for a breach and, where one exists, check whether the lender has waived it or reserved the right to recall the loanA covenant breach that gives the lender the right to recall the loan on demand affects the current/non-current classification regardless of the loan's own repayment schedule.
4. 04Confirm covenant certificates were actually submitted to the lender where the agreement requires periodic certificationA missed covenant certificate is itself sometimes an event of default under the agreement, independent of whether the underlying ratios were met.

Interest computation

• Recompute interest for the year using the drawn balance, the applicable rate for each period, and the exact number of days, rather than accepting an annualised approximation.
• For cash credit and overdraft facilities, interest is usually charged on the daily outstanding balance — confirm the computation basis matches, since a flat average-balance approximation will not reconcile to the bank's own interest debit.
• Trace interest actually debited by the bank, per the statement, to the amount recognised as interest expense, and investigate any variance beyond a small rounding difference.
• Check processing fees, prepayment penalties and other loan-related charges are expensed or amortised consistent with the applicable accounting standard, rather than netted silently against the loan balance.

Current versus non-current classification