Learning ObjectivesLO1 Describe the finance and investment process: risk assessment, typical transactions, source documents, controls, and account balances.LO2 Outline control tests for auditing control over debt, owner’s equity, and investment transactions.LO3 Describe the typical substantive procedures used to respond to the assessed risk of material misstatement in the main account balance, and in transactions in the finance and investment process.LO4 Describe the risks associated with derivative financial instruments.LO5 Describe differential reporting requirements for qualifying enterprises.

1

Risk Assessment for Finance and Investment Process

Understanding important aspects of corporate structure requires the input of the most experienced audit team members.

Disclosure requirements for related accounts are extensive and often complicated.

Recent events and frauds have highlighted the risks involved in reporting for the finance and investment process.

LO1

2

Finance and Investment Process: Typical Activities• Financial planning and raising capital.• Interacting with the acquisition and

expenditure, production and payroll, and revenue and collection cycles.

• Entering into mergers, acquisitions, and other investments.

LO1

3

Finance andInvestment Process

Start Here

Financial planning

Production and payroll process

Mergers and acquisitions

Purchases, payables and

payments process

Sell shares or borrow

moneyRevenues,

receivables and receipts process

Invest excess funds

LO1

4

Good Corporate GovernanceThe CICA’s Guidance for Directors on Governance Processes for Control identifies the contributions of the board of directors to internal control:

approving and monitoring mission, vision, and strategy,

approving and monitoring ethical values, monitoring management control, evaluating senior management, overseeing external communications, and assessing the board’s effectiveness.

LO1

5

Debt and Shareholder Equity Capital

Transaction in debt and shareholder equity capital are typically few in number, but large in monetary amount.

These transactions are typically handled by the highest levels of management.

LO1

6

AuthorizationFinancial planning starts with a cash flow forecast and capital budget.

Sales of shares and debt financing transactions are authorized by the board of directors.

Many financing transactions are “off the balance sheet.”

LO1

7

CustodyIn large companies, custody of the share certificate books is given to a bank or trust company as registrar or transfer agent.

Small companies keep their own shareholder records.

Lenders have custody of debt instruments such as bonds or loans payable.

LO1

8

RecordkeepingRecords of notes and bonds payable, calculated liabilities and credits are usually kept by the CFO or controller.

In addition, there are a number of credit balances that represent “calculated liabilities and credits.”

These are accounting creations, and management enjoys considerable discretion in determining these amounts.

LO1

9

Periodic ReconciliationThe share register should be reconciled on a regular basis to ensure that all shares issued are recorded.

Debt can typically be confirmed and reconciled.

LO1

10

Investments and IntangiblesA company can have many investments, or only a few, and can have a wide variety of investments.

Intangible assets may be either in the form of purchased assets or in the form of accounting allocations.

LO1

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Authorization/CustodyAll investments should be approved by the board of directors or investment committee.

Custody of investments and intangibles depends on the nature of the assets.

Share and bonds can be kept in a safe deposit box, or can be held by the broker.

For other assets, custody will take the form of management responsibility.

LO1

12

RecordkeepingProcedures for purchase of share and bond investments involve authorization by the board of directors or other senior management.

Recordkeeping for investments and intangibles can be complicated.

LO1

13

Periodic Reconciliation There should be a reconciliation of negotiable security certificates to the control account on a regular basis.

LO1

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