Accounting treatment and auditor’s obligation with respect to financial guarantees
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- Last Updated on 15 January, 2022
The company has given a financial guarantee and is required to follow Ind AS 109 (Financial Instruments), Ind AS 107 (Financial Instruments: Disclosures), and Ind AS 32 (Financial Instruments: Presentation) in respect of the financial guarantee, since as per clarification issued “Where there is a contractual obligation of the entity by issuing comfort letter/letter of financial support to make specified payment in case the other party does not make the payment then such comfort letter/letter of financial support would be considered as a financial guarantee and will be accounted for in accordance with Ind AS 109”.
Practical problem with respect to financial guarantees which may occur while conducting the audit
Suppose X Ltd. has issued a letter of comfort in respect of a loan availed by its subsidiary but fails to treat such letter of comfort as a financial liability. Further, the management of the company provides auditors reasons that letter of comfort does not meet the recognition criteria and thus there was no obligation to pay in case defaults so not applied Ind AS 109 and auditor satisfied with reason provided by management and no verification was made by the auditors. What are the responsibilities that an auditor lacks while performing an audit of a financial guarantee and what should be the procedure he should follow?
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