How can loans be tested for their validity?

Testing the validity of loans is a critical aspect of an audit, as it helps ensure that the recorded liabilities reflect the true financial obligations of the entity. Comparing outstanding loan balances to current balances is an effective method for validating loans. This process involves examining the agreement terms, payment schedules, and the amounts recorded in the financial statements against the bank statements or loan agreements.

By performing this comparison, the auditor can confirm that the amounts reported as liabilities align with what is actually owed at the date of the financial statements. Any discrepancies could indicate errors in data entry, potential fraud, or mismanagement of loans, thus providing valuable insights into the financial health of the business.

The other options do not directly address the validity of loans. For example, inspecting upcoming inventory deliveries pertains to assessing inventory management rather than loan obligations, while requesting a breakdown of salaries focuses on payroll and personnel expenses. Similarly, obtaining written representations of stock values relates to the valuation of inventories, which is unrelated to loan testing. Understanding these distinctions is essential for effective audit processes.