audit of the capital acquisition and repayment cycle · pdf filebond, or similar ownership...

Chapter 22

Audit of the

Capital Acquisition

and Repayment

Identify the accounts and the unique

characteristics of the capital acquisition

and repayment cycle.

Design and perform audit tests of notes

payable and related accounts and

transactions.

Identify the primary concerns in the audit

of owners’ equity transactions.

Design and perform tests of controls,

substantive tests of transactions, and tests

of details of balances for capital stock and

retained earnings.

Identify the accounts and the unique characteristics of the capital acquisition and repayment cycle.

1. Relatively few transactions affect the

account balances, but each one is

often highly material in amount.

2. The exclusion of a single transaction

could be material in itself.

3. A legal relationship exists between the

client entity and the holder of the stock,

bond, or similar ownership document.

4. A direct relationship exists between the

interest and dividends accounts and

debt and equity.

Notes payable

Contracts payable

Mortgages payable

Bonds payable

Interest expense

Accrued interest

Appropriations of retained earnings

Treasury stock

Dividends declared

Cash in the bank

Capital stock – common

Capital stock – preferred

Paid-in capital in excess of par

Donated capital

Retained earnings

Dividends payable

Proprietorship – capital account

Partnership – capital account

Identify client

business risks

affecting notes payable

Set performance materiality

and assess inherent

risk for notes payable

Assess control

risk for

notes payable

Phase I

Design and perform

tests of controls and

substantive tests of

transactions for

capital acquisition and

repayment cycle

Phase II

Design and perform

analytical procedures

for notes payable

Design tests of

details of notes

payable to satisfy

balance-related

audit objectives

Phase III

Audit procedures

Sample size Phase III

Items to select

Timing

Design and perform audit test of notes payable and related accounts and transactions.

Obligation

Secured or

unsecured

by assets

Objectives of the audit of notes payable:

Internal controls are adequate

Transactions are properly authorized

and recorded

The related liabilities and expenses are

properly stated

1. Proper authorization for the issue of

new notes.

2. Adequate controls over the repayment

of principal and interest.

3. Proper documents and records.

4. Periodic independent verification.

Tests of notes payable transactions

involve the issue of notes and the

repayment of principal and interest.

Analytical procedure Possible misstatement

Recalculate approximate

interest expense on the

basis of average interest

rates and overall monthly

notes payable

Misstatement of

interest expense and

accrued interest, or

omission of a

note payable

Analytical procedure

Compare individual notes

outstanding with those

of the prior year

Compare total balance in

notes payable, interest

expense, and accrued

interest with prior-year

balances

Possible misstatement

Omission or

misstatement of

a note payable

Misstatement of interest

expense and accrued

interest or notes

payable

The two most important balance- related audit objectives in notes payable are: 1. Completeness: Existing notes payable are included. 2. Accuracy: Notes payable in the schedule are accurately recorded.

Cash in Bank

Payments of interest Audited by TOC, STOT,

and AP

Payments of principal

Audited by TOC and STOT

Issue of new notes

Audited by TOC and STOT

Interest Payable

TOC + STOT + AP + TDB = Sufficient appropriate evidence

Notes Payable

Ending balance

Audited by AP and TDB

Identify the primary concerns in the audit of owners’ equity transactions.

Publicly

corporation

Many shareholders Frequent transactions

Versus

Closely

corporation

Simple, few transactions Few shareholders Occasional transactions

Proper authorization of transactions

Proper record keeping and segregation of duties

Independent registrar and stock transfer agent

Design and perform tests of controls, substantive tests of transactions, and tests of

details of balances for capital stock and retained earnings.

Auditor concerns in auditing Capital

Stock and Paid-in-Capital accounts

Completeness

Accuracy

Occurrence

Accuracy

Presentation

disclosure

1. Occurrence:

Recorded dividends occurred.

2. Completeness:

Existing dividends are recorded.

3. Accuracy:

Dividends are accurately recorded.

4. Occurrence:

Dividends are paid to stockholders

that exist.

5. Completeness:

Dividends payable are recorded.

6. Accuracy:

Dividends payable are accurately

recorded.

Transactions involving retained earnings:

Net earnings for the year

Dividends declared

There may be corrections to:

Prior-period earnings

Prior-period adjustments

Appropriations of retained earnings

Copyright

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means, electronic, mechanical, photocopying, recording, or

otherwise, without the prior written permission of the publisher.

Printed in the United States of America.

audit of the capital acquisition and repayment cycle · pdf filebond, or similar ownership...

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