Audit of the Capital Acquisition and Repayment Cycle · PDF file©2012 Prentice Hall...
Transcript of Audit of the Capital Acquisition and Repayment Cycle · PDF file©2012 Prentice Hall...
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5 - 5
Audit of the Capital Acquisition and
Repayment Cycle
Chapter 22
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 2
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.
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Characteristics of the Capital Acquisition and Repayment Cycle
4. A direct relationship exists between the interest and dividends accounts and debt and equity.
3. A legal relationship exists between the client entity and the holder of the stock, bond, or similar ownership document.
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Learning Objective 1
Identify the accounts and the unique characteristics of the capital acquisition and repayment cycle.
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Accounts in the Cycle
Notes payable Contracts payable Mortgages payable Bonds payable Interest expense Accrued interest Appropriations of retained earnings Treasury stock Dividends declared
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Accounts in the Cycle
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
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Identify client business risks
affecting notes payable
Methodology for Designing Tests of Balances for Notes Payable
Set tolerable misstatement and assess inherent
risk for notes payable
Assess control risk for
notes payable
Phase I
Phase I
Phase I
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Methodology for Designing Tests of Balances for Notes Payable
Design and perform tests of controls and substantive tests of
transactions for capital acquisition and
repayment cycle
Phase II
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Timing
Items to select
Sample size
Audit procedures
Methodology for Designing Tests of Balances for Notes Payable
Design and perform analytical procedures
for notes payable
Design tests of details of notes
payable to satisfy balance-related audit objectives
Phase III
Phase III
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Learning Objective 2
Design and perform audit test of notes payable and related accounts and transactions.
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Notes Payable
Legal Obligation
Secured or unsecured by assets
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Notes Payable
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
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Internal Controls
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.
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Notes Payable and the Related Interest Accounts
Notes Payable Interest Expense
Cash in Bank
Interest Payable
Payments of principal
Beginning balance
Issue of new notes
Payments of principal
Interest expense
Payments of interest
Beginning balance
Issue of new notes
Ending balance
Payments of interest
Interest expense
Ending balance
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Tests of notes payable transactions involve the issue of notes and the repayment of principal and interest.
Tests of Controls and Substantive Tests of Transactions
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Analytical Procedures for Notes Payable
Analytical procedure
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
Possible misstatement
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Analytical Procedures for Notes Payable
Analytical procedure
Compare individual notes outstanding with those of the prior year
Omission or misstatement of a note payable
Possible misstatement
Compare total balance in notes payable, interest expense, and accrued interest with prior-year balances
Misstatement of interest expense and accrued interest or notes payable
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Major Balance-related Audit Objectives in 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.
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Types of Audit Tests for Capital Acquisition and Repayment Cycle
Cash in Bank Notes Payable
Payments of principal
Issue of new notes
Payments of interest Interest Payable
Ending balance
TOC + STOT + AP + TDB = Sufficient appropriate evidence
Audited by TOC, STOT,
and AP
Audited by AP and TDB
Audited by TOC and STOT
Audited by TOC and STOT
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Types of Audit Tests for Notes Payable
Interest Payable
Ending balance
Audited by AP and TDB
Audited by TOC, STOT,
and AP
Interest Expense
Interest expense
Ending balance
Audited by AP
TOC + STOT + AP + TDB = Sufficient appropriate evidence
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Learning Objective 3
Identify the primary concerns in the audit of owners’ equity transactions.
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Owners’ Equity
Publicly held
corporation
Closely held
corporation Versus
Simple, few transactions Few shareholders Occasional transactions
Many shareholders Frequent transactions
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Owners’ Equity and Dividend Accounts Cash in Bank
Capital Stock – Common
Paid-in Capital in Excess of Par – Common
Redemption of stock
Redemption of stock
Beginning balance
Issue of stock
Ending balance
Beginning balance
Issue of stock
Ending balance
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Proper authorization of transactions Proper record keeping and segregation of duties
Independent registrar and stock transfer agent
Internal Controls
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Learning Objective 4
Design and perform tests of controls, substantive tests of transactions, and tests of details of balances for capital stock and
retained earnings.
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Audit of Capital Stock and Paid-in Capital
Auditor concerns in auditing Capital Stock and Paid-in-Capital accounts
Occurrence and
Accuracy
Completeness
Accuracy
Presentation and
disclosure
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Audit of Dividends
1. Occurrence: Recorded dividends occurred.
2. Completeness: Existing dividends are recorded.
3. Accuracy: Dividends are accurately recorded.
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Audit of Dividends
4. Occurrence: Dividends are paid to stockholders that exist.
5. Completeness: Dividends payable are recorded.
6. Accuracy: Dividends payable are accurately recorded.
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Audit of Retained Earnings
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
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End of Chapter 22