APP_II_Chapter_6,_Slide_Audit_of_Acquisition_and_Payment_Cycle.ppt

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 21 - 1
Audit of the Capital
Acquisition and
Repayment Cycle
Chapter 21

Learning Objective 1
Identify the accounts and the
unique characteristics of the
capital acquisition and
repayment cycle.

Characteristics of the Capital
Acquisition and Repayment
Cycle
Few transactions affect the account
balances, but each one is often
highly material in amount.
The exclusion of a single transaction
could be material in itself.
1
2

Characteristics of the Capital
Acquisition and Repayment
Cycle
There is a legal relationship between the
client entity and the holder of the stock,
bond, or similar ownership document.
There is a direct relationship between
the interest and dividends accounts
and debt and equity.
3
4

Accounts in the Cycle
 Notes Payable
 Contracts Payable
 Mortgages Payable
 Bonds Payable
 Interest Expense
 Accrued Interest
 Cash in the Bank
 Capital Stock – Common
 Capital Stock – Preferred

Accounts in the Cycle
 Paid-in Capital in Excess of Par
 Donated Capital
 Retained Earnings
 Appropriations of Retained Earnings
 Treasury Stock
 Dividends Declared
 Dividends Payable
 Proprietorship – Capital Account
 Partnership – Capital Account

Methodology for Designing Tests
of
Balances – Notes Payable
Identify client business risks
affecting notes payable.
Set tolerable misstatement and
assess inherent risk for notes payable.
Assess control risk for notes payable.

of
Design and perform tests of
controls and substantive tests
of transactions.
Design and perform analytical
procedures for notes payable
balance.

of
Design tests of details
of notes payable to
satisfy balance-related
audit objectives.
Audit procedures
Sample size
Items to select
Timing

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

Notes Payable
A note payable is a legal
obligation to a creditor.
It may be unsecured
or secured by assets.

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

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
Internal Controls

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

Analytical Procedures
for Notes Payable
Analytical Procedure Possible Misstatement
Recalculate approximate Misstatement of
interest expense on the interest expense and
basis of average interest accrued interest, or
rates and overall monthly omission of an
notes payable. outstanding note
payable

Analytical Procedures
for Notes Payable
Analytical Procedure Possible Misstatement
Compare individual notes Omission or
outstanding with those of misstatement of a
the prior year. note payable
Compare total balance in Misstatement of
notes payable,interest interest expense and
expense, and accrued interest accrued interest or
with prior year balances. notes payable

Major Balance-Related Audit
Objectives in Notes Payable
Existing notes payable are included
(completeness).
Notes payable in the schedule are
accurately recorded (accuracy).
Notes payable are properly presented and
disclosed (presentation and disclosure).
1
2
3

Types of Audit Tests
for Notes Payable
Cash in Bank Notes Payable
Payments of principal
Issue of new notes
Payments
of interest Interest Payable
Ending
balance
TOC + STOT + AP + TDP
= Sufficient competent evidence per GAAS
Audited by
TOC, STOT,
and AP
Audited by
AP and TDP
Audited by
TOC and STOT
Audited by
TOC and STOT

Types of Audit Tests
for Notes Payable
Interest Payable
Ending
balance
Audited by
AP and TDP
Audited by
TOC, STOT,
and AP
Interest Expense
Interest expense
Ending
balance
Audited by
AP
TOC + STOT + AP + TDP
= Sufficient competent evidence per GAAS

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

Publicly held
corporation
Closely held
corporation
Owners’ Equity

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

Owners’ Equity and
Dividend Accounts
Cash in Bank
Dividends Payable Retained Earnings
Payment of
dividends Dividends
declared
Beginning
balance
Dividends
declared
Ending
balance
Beginning
balance
Net
earnings
Ending
balance

Proper authorization of transactions
Proper record keeping and segregation of duties
Independent registrar and stock transfer agent
Internal Controls

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

1
Existing capital stock transactions are
recorded (completeness).
2
Recorded capital stock transactions
exist and are accurately recorded
(existence and accuracy).
Audit of Capital Stock
and Paid-in Capital

3
Capital stock is accurately recorded
(accuracy).
4
Capital stock is properly presented and
disclosed (presentation and disclosure).
Audit of Capital Stock
and Paid-in Capital

Audit of Dividends
1. Recorded dividends exist (existence).
2. Existing dividends are recorded (completeness).
3. Dividends are accurately recorded (accuracy).
4. Dividends as paid to stockholders exist (existence).
5. Dividends payable are recorded (completeness).
6. Dividends payable are accurately recorded
(accuracy).

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

Identify capital acquisition issues
for Internet-based companies.

Auditors may identify specific business risks
associated with the method used by start-up
companies to acquire capital.
The complexity of the capital transactions
may create unique financial reporting
and disclosure issues.
E-Commerce and
Capital Acquisition

End of Chapter 21

APP_II_Chapter_6,_Slide_Audit_of_Acquisition_and_Payment_Cycle.ppt

More Related Content

Similar to APP_II_Chapter_6,_Slide_Audit_of_Acquisition_and_Payment_Cycle.ppt (20)

More from newaybeyene5 (16)

Recently uploaded (20)

APP_II_Chapter_6,_Slide_Audit_of_Acquisition_and_Payment_Cycle.ppt