Addthis Arens Chapter22

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Audit of the Capital

Acquisition and

Repayment Cycle

Chapter 22

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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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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.

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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.

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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

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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

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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

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

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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

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Learning Objective 2

Design and perform audit tests

of notes payable and related

accounts and transactions.

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Notes Payable

_{A note payable is a legal obligation to a creditor}

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Notes Payable

Objectives of the audit of notes payable:

_{Internal controls over notes payable are adequate} _{Transactions for principal and interest are properly} authorized and recorded

_{The liability for notes payable and the related}

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Notes Payable and the Related

Interest Accounts

Notes Payable Interest Expense

Cash in Bank

Interest Payable

new notes Payments ofprincipal

Interest Issue of new notes

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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.

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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 an outstanding

note payable

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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

Misstatement of interest expense and accrued interest or notes

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Major Balance-related Audit

Objectives in Notes Payable

1. Completeness:

Existing notes payable are included.

2. Accuracy:

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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

TOC and STOT

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Types of Audit Tests for

Notes Payable

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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}

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Owners’ Equity and Dividend

Accounts

Cash in Bank

Capital Stock –

Common Paid-in Capital in Excessof Par – Common Redemption

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Owners’ Equity and Dividend

Accounts

Cash in Bank

Dividends Payable Retained Earnings

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_{Proper authorization of transactions}

_{Proper record keeping and segregation of duties}

_{Independent registrar and stock transfer agent}

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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

1. Completeness:

Existing capital stock transactions are recorded.

2. Occurrence and accuracy:

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Audit of Capital Stock and

Paid-in Capital

3. Accuracy:

Capital stock is accurately recorded.

4. Presentation and disclosure:

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Audit of Dividends

1. Occurrence:

Recorded dividends occurred.

2. Completeness:

Existing dividends are recorded.

3. Accuracy:

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Audit of Dividends

4. Occurrence:

Dividends are paid to stockholders that exist.

5. Completeness:

Dividends payable are recorded.

6. Accuracy:

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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}

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