Audit of the Capital Acquisition and Repayment Cycle Chapter 22 http://downloadslide.blogspot.com ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 Characteristics of the Capital Acquisition and Repayment Cycle Relatively 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 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - Characteristics of the Capital Acquisition and Repayment Cycle A legal relationship exists between the client entity and the holder of the stock, bond, or similar ownership document A direct relationship exists between the interest and dividends accounts and debt and equity ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - Learning Objective Identify the accounts and the unique characteristics of the capital acquisition and repayment cycle ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - Accounts in the Cycle          Notes payable Contracts payable Mortgages payable Bonds payable Interest expense Accrued interest Appropriations of retained earnings Treasury stock Dividends declared ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 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 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - Methodology for Designing Tests of Balances for Notes Payable Identify client business risks affecting notes payable Phase I Set tolerable misstatement and assess inherent Phase I risk for notes payable Assess control risk for notes payable ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Phase I 22 - Methodology for Designing Tests of Balances for Notes Payable Design and perform tests of controls and substantive tests of Phase II transactions for capital acquisition and repayment cycle ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - Methodology for Designing Tests of Balances for Notes Payable Design and perform analytical procedures Phase III for notes payable Design tests of details of notes payable to satisfy balance-related audit objectives Audit procedures Sample size Items to select Phase III Timing ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - Learning Objective Design and perform audit test of notes payable and related accounts and transactions ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 10 Analytical Procedures for Notes Payable Analytical procedure Possible misstatement 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 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 16 Analytical Procedures for Notes Payable Analytical procedure Possible misstatement Compare individual notes outstanding with those of the prior year Omission or misstatement of a note payable 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 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 17 Major Balance-related Audit Objectives in Notes Payable The two most important balancerelated audit objectives in notes payable are: Completeness: Existing notes payable are included Accuracy: Notes payable in the schedule are accurately recorded ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 18 Types of Audit Tests for Capital Acquisition and Repayment Cycle Cash in Bank Payments of interest Audited by TOC, STOT, and AP Notes Payable Payments of principal Audited by TOC and STOT Issue of new notes Audited by TOC and STOT Interest Payable Ending balance Audited by AP and TDB TOC + STOT + AP + TDB = Sufficient appropriate evidence ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 19 Types of Audit Tests for Notes Payable Interest Payable Interest Expense Interest expense Ending balance Audited by AP and TDB Audited by TOC, STOT, and AP Ending balance Audited by AP TOC + STOT + AP + TDB = Sufficient appropriate evidence ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 20 Learning Objective Identify the primary concerns in the audit of owners’ equity transactions ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 21 Owners’ Equity Publicly held corporation Versus Many shareholders Frequent transactions ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Closely held corporation Simple, few transactions Few shareholders Occasional transactions 22 - 22 Owners’ Equity and Dividend Accounts Cash in Bank Capital Stock – Common Redemption Beginning of stock balance Paid-in Capital in Excess of Par – Common Redemption Beginning of stock balance Issue of stock Issue of stock Ending balance Ending balance ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 23 Internal Controls  Proper authorization of transactions Proper record keeping and segregation of duties Independent registrar and stock transfer agent ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 24 Learning Objective Design and perform tests of controls, substantive tests of transactions, and tests of details of balances for capital stock and retained earnings ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 25 Audit of Capital Stock and Paid-in Capital Auditor concerns in auditing Capital Stock and Paid-in-Capital accounts Completeness Occurrence and Accuracy Accuracy Presentation and disclosure ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 26 Audit of Dividends Occurrence: Recorded dividends occurred Completeness: Existing dividends are recorded Accuracy: Dividends are accurately recorded ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 27 Audit of Dividends Occurrence: Dividends are paid to stockholders that exist Completeness: Dividends payable are recorded Accuracy: Dividends payable are accurately recorded ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 28 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 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 22 - 29 End of Chapter 22 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 ... the interest and dividends accounts and debt and equity ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 22 - Learning Objective Identify the accounts and the unique... Publishing, Auditing 14/e, Arens/ Elder/Beasley 22 - Learning Objective Design and perform audit test of notes payable and related accounts and transactions ©2012 Prentice Hall Business Publishing, Auditing. .. Publishing, Auditing 14/e, Arens/ Elder/Beasley 22 - 25 Audit of Capital Stock and Paid-in Capital Auditor concerns in auditing Capital Stock and Paid-in-Capital accounts Completeness Occurrence and Accuracy