DEBENTURE LOANS AND BORROWINGS
A debenture is a certificate of agreement of loans which is given under the
company’s stamp and carries an undertaking that the debenture holder will
get a fixed return in terms of interest rates and the principal amount whenever
the debenture matures. It is a long-term debt instrument used by governments
and large companies to obtain funds. It can also be defined as “a debt secured
only by the debtor’s earning power, not by a lien on any specific asset.” A
debenture is usually unsecured in the sense that there are no liens or pledges
on specific assets. It is, however, secured by all properties not otherwise pledged.
In the case of bankruptcy, debenture holders are considered general creditors.
The advantage of debentures to the issuer is that they leave specific assets
burden free, and thereby leave them open for subsequent financing. Debentures
are generally freely transferable by the debenture holder. Debenture holders
have no voting rights and the interest given to them is a charge against profit.
In auditing, debentures verification is given the same treatment as long term
loans. The following are the verification procedures for debentures:
(a) Request for a schedule of the amounts due at the beginning of the year,
additions during the year, redemptions during the year, and the total
sub due at the end of the year;
(b) Make a record for the audit file the terms and conditions of the debenture
loans as evidenced in the debenture deed;
(c) Agree opening balances with previous years working papers;
(d) Vouch new debenture loans with prospectus, board minutes,
memorandum and articles of association, and register of debenture
holders;
(e) Vouch payments with debenture deeds, ensure that terms are correctly
interpreted, check entries into cash book, and trace repayments to
register of debenture holders;
(f) Interest payments should be checked to debenture deeds, cash book and
ensure that the amount paid is agreed to the percentage of the amount
outstanding;
(g) Agree total amount outstanding with register of debenture holders; and
(h) Ensure that disclosure is in accordance with the Companies and Alied
Matters Act.
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