Chapter 22 Audit of the Capital Acquisition and Repayment Cycle. Copyright 2014 Pearson Education

Transcription

1 Chapter 22 Audit of the Capital Acquisition and Repayment Cycle

2 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. 22-2

3 Design and perform tests of controls, substantive tests of transactions, and tests of details of balances for capital stock and retained earnings. 22-3

4 1 Identify the accounts and the unique characteristics of the capital acquisition and repayment cycle. 22-4

5 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. 22-5

6 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. 22-6

7 Notes payable Contracts payable Mortgages payable Bonds payable Interest expense Accrued interest Appropriations of retained earnings Treasury stock Dividends declared 22-7

8 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 22-8

9 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 Phase I Phase I 22-9

10 Design and perform tests of controls and substantive tests of transactions for capital acquisition and repayment cycle Phase II 22-10

11 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 Items to select Timing Phase III 22-11

12 2 Design and perform audit test of notes payable and related accounts and transactions

13 Legal Obligation Secured or unsecured by assets 22-13

14 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 22-14

15 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

16 22-16

17 Tests of notes payable transactions involve the issue of notes and the repayment of principal and interest

18 Analytical procedure Recalculate approximate interest expense on the basis of average interest rates and overall monthly notes payable Possible misstatement Misstatement of interest expense and accrued interest, or omission of a note payable 22-18

19 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

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

21 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 Notes Payable Ending balance Audited by AP and TDB TOC + STOT + AP + TDB = Sufficient appropriate evidence 22-21

22 22-22

23 22-23

24 3 Identify the primary concerns in the audit of owners equity transactions

25 Publicly held corporation Versus Closely held corporation Many shareholders Frequent transactions Simple, few transactions Few shareholders Occasional transactions 22-25

26 22-26

27 Proper authorization of transactions Proper record keeping and segregation of duties Independent registrar and stock transfer agent 22-27

28 4 Design and perform tests of controls, substantive tests of transactions, and tests of details of balances for capital stock and retained earnings

29 Auditor concerns in auditing Capital Stock and Paid-in-Capital accounts Completeness Accuracy Occurrence and Accuracy Presentation and disclosure 22-29

30 1. Occurrence: Recorded dividends occurred. 2. Completeness: Existing dividends are recorded. 3. Accuracy: Dividends are accurately recorded

31 4. Occurrence: Dividends are paid to stockholders that exist. 5. Completeness: Dividends payable are recorded. 6. Accuracy: Dividends payable are accurately recorded

32 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 22-32

33 22-33

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