Government Loans and Redemption

Sinking Fund and Loan Redemption

• A sinking fund is constituted regularly for the redemption of loans raised by the government.
• The Audit Officer ensures that credit to such a fund is in accordance with the terms and conditions specified by the government in the loan prospectus.

Amortization Arrangements for Loans

• Amortization arrangements for unproductive loans may be related to the loan's maturity period, but it's wiser to relate them to the objects of borrowing.
• Where material assets are produced, the amortization period should never exceed the asset's life.

Amortization for Productive Loans

• Amortization arrangements for productive loans depend on each case's particular circumstances.
• If an asset's net earning power exceeds the debt's interest, amortization might not be necessary.
• If depreciation or renewal reserves are constituted for asset replacement from a loan fund, amortization is often omitted altogether.
• Normally, the amortization rate should be related to the life of the revenue-producing asset.

Guiding Principles for Audit of Sanction of Expenditure

• The audit of sanction of expenditure can challenge the sanctioning authority's decision only on the grounds of propriety if the authority has full powers in respect of a certain class of expenditure.

Audit of Sanctions with Criteria

• If the authority has powers to sanction expenditure subject to certain criteria, the audit will examine:
  • Whether the disregard of the criteria is so serious as to make the sanction perverse, or
  • Whether the facts suggest that one or more of the criteria have been disregarded.

Financial Power and Authority

• The financial power vested with the authority must be clearly expressed in precise terms, ensuring that the Audit Officer ascertains that it is obeyed in every instance.

Project Sanctions

• A group of work that forms one project is considered as one work and requires the sanction of a higher authority.
• The necessity for obtaining the sanction of a higher authority to a project cannot be avoided, even if the cost of each particular work in the project does not require such sanction.
• If any one item of a scheme requires sanction of a higher authority, the entire scheme requires sanction.

New Schemes of Expenditure

• Audit should ensure that a satisfactory accounting procedure has been adopted for new schemes of expenditure, including:
  • Detailed cost and time schedules
  • Physical targets
  • Other objects of the expenditure

This quiz covers the concepts of sinking funds and loan redemption in government borrowing, including amortization arrangements for unproductive loans.