chapter 19 audit of the capital acquisition and repayment cycle
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CHAPTER 19 Audit of the Capital Acquisition and Repayment Cycle. What are the major accounts of the capital acquisition and repayment cycle?. What are the major accounts of the capital acquisition and repayment cycle?. - long-term liabilities and related accounts. examples?. - PowerPoint PPT PresentationTRANSCRIPT
19 - 1Copyright 2003 Pearson Education Canada Inc.
CHAPTER 19Audit of the Capital
Acquisition and Repayment Cycle
19 - 2Copyright 2003 Pearson Education Canada Inc.
What are the major accounts What are the major accounts of the capital acquisition and of the capital acquisition and
repayment cycle? repayment cycle?
19 - 3Copyright 2003 Pearson Education Canada Inc.
What are the major accounts What are the major accounts of the capital acquisition and of the capital acquisition and
repayment cycle? repayment cycle?
- long-term liabilities and related accounts
examples?
19 - 4Copyright 2003 Pearson Education Canada Inc.
What are the major accounts What are the major accounts of the capital acquisition and of the capital acquisition and
repayment cycle? repayment cycle? - long-term liabilities and related accounts
~ notes payable ~ contracts payable ~ mortgages payable ~ bonds payable ~ interest expense ~ accrued interest ~ cash
19 - 5Copyright 2003 Pearson Education Canada Inc.
What are the major accounts What are the major accounts of the capital acquisition and of the capital acquisition and
repayment cycle? repayment cycle? - long-term liabilities and related accounts- owners’ equity accounts
examples?
19 - 6Copyright 2003 Pearson Education Canada Inc.
What are the major accounts What are the major accounts of the capital acquisition and of the capital acquisition and
repayment cycle? repayment cycle? - long-term liabilities and related accounts- owners’ equity accounts
~ common stock~ preferred stock~ treasury stock~ contributed surplus in~ proprietorship capital~ partnership capital
19 - 7Copyright 2003 Pearson Education Canada Inc.
What are the major accounts What are the major accounts of the capital acquisition and of the capital acquisition and
repayment cycle? repayment cycle? - long-term liabilities and related accounts- capital stock accounts- retained earnings and appropriations
19 - 8Copyright 2003 Pearson Education Canada Inc.
What are the major accounts What are the major accounts of the capital acquisition and of the capital acquisition and
repayment cycle? repayment cycle? - long-term liabilities and related accounts- capital stock accounts- retained earnings and appropriations- dividends declared and payable
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In auditing the capital acquisition In auditing the capital acquisition and repayment cycle, the auditor and repayment cycle, the auditor
should consider:should consider:
??
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In auditing the capital acquisition In auditing the capital acquisition and repayment cycle, the auditor and repayment cycle, the auditor
should consider:should consider:
Relatively fewtransactions affect the
account balances, but eachtransaction is often highly
material in amount.
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In auditing the capital acquisition In auditing the capital acquisition and repayment cycle, the auditor and repayment cycle, the auditor
should consider:should consider:
The exclusion of a single transac-
tion could be materialin itself.
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In auditing the capital acquisition In auditing the capital acquisition and repayment cycle, the auditor and repayment cycle, the auditor
should consider:should consider:
There is alegal relationship be-
tween the client and theholder of the stock, bond,
or similar ownershipdocument.
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In auditing the capital acquisition In auditing the capital acquisition and repayment cycle, the auditor and repayment cycle, the auditor
should consider:should consider:
There is adirect relationship be-
tween the interest and divi-dends account and debt
and equity.
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In auditing the internal controls In auditing the internal controls related to long-term liabilities, related to long-term liabilities,
the auditor will consider:the auditor will consider:
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- proper authorization for issues of notes or bonds
In auditing the internal controls In auditing the internal controls related to long-term liabilities, related to long-term liabilities,
the auditor will consider:the auditor will consider:
Ace CompanyBond
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- proper authorization for issues of notes or bonds- adequate controls over payment of interest and principal
In auditing the internal controls In auditing the internal controls related to long-term liabilities, related to long-term liabilities,
the auditor will consider:the auditor will consider:
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- proper authorization for issues of notes or bonds- adequate controls over payment of interest and principal- proper documents and records
In auditing the internal controls In auditing the internal controls related to long-term liabilities, related to long-term liabilities,
the auditor will consider:the auditor will consider:
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- proper authorization for issues of notes or bonds- adequate controls over payment of interest and principal- adequate documents and records- periodic independent verification
In auditing the internal controls In auditing the internal controls related to long-term liabilities, related to long-term liabilities,
the auditor will consider:the auditor will consider:
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What are the primary audit What are the primary audit objectives with regard to long-objectives with regard to long-
term liability account balances?term liability account balances?
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- completeness
What are the primary audit What are the primary audit objectives with regard to long-objectives with regard to long-
term liability account balances?term liability account balances?
notes payable
bonds payable
mortgage payable
contracts payable
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- completeness- accuracy
What are the primary audit What are the primary audit objectives with regard to long-objectives with regard to long-
term liability account balances?term liability account balances?
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- completeness- accuracy- presentation and disclosure
What are the primary audit What are the primary audit objectives with regard to long-objectives with regard to long-
term liability account balances?term liability account balances?
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Long-term Liabilities Audit ProceduresLong-term Liabilities Audit Procedures
perform analytical
proceduresto test the
reasonablenessof long-term liabilities and
interest expense
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Long-term Liabilities Audit ProceduresLong-term Liabilities Audit Procedures
enquire of management
regarding:- completeness of liabilities
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Long-term Liabilities Audit ProceduresLong-term Liabilities Audit Procedures
inquire of management
regarding:- completeness of liabilities- debt-related restrictions on assets
19 - 26Copyright 2003 Pearson Education Canada Inc.
Long-term Liabilities Audit ProceduresLong-term Liabilities Audit Procedures
inquire of management
regarding:- completeness of liabilities- debt-related restrictions on assets- ability to pay interest
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DebtCovenant
Long-term Liabilities Audit ProceduresLong-term Liabilities Audit Procedures
review contractual provisions of
long-term liabilities
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Long-term Liabilities Audit ProceduresLong-term Liabilities Audit Procedures
review contractual provisions of
long-term liabilities- consider pledging of assets related to debt (disclosure)- determine client adherence to contractual requirements (payment dates, working capital, ratios)
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Long-term Liabilities Audit ProceduresLong-term Liabilities Audit Procedures
confirm debt balances, interest payments, and client compliance with contractual
agreements with the creditorsauditor
creditor
Canada 48
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Long-term Liabilities Audit ProceduresLong-term Liabilities Audit Procedures
for all long-term liabilities,
recalculate interest expense, interest payable,
and amortizations of discounts or
premiums
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Trace receipt of borrowed amounts from cash receipts journal to bank statement
Long-term Liabilities Audit ProceduresLong-term Liabilities Audit Procedures
cash receipts journaldescription _ $$ _May 23, 2004Bank loan 14,000
Bank Statement5/31/04
Deposits:5/23 $14,000
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Trace receipt of borrowed amounts from cash receipts journal to bank statement to deposit
slips
cash receipts journaldescription _ $$ _May 23, 2004Bank loan 14,000
Long-term Liabilities Audit ProceduresLong-term Liabilities Audit Procedures
Bank Statement5/31/04
Deposits:5/23 $14,000
DepositSlip
5/23/04
14,000
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Trace receipt of borrowed amounts from cash receipts journal to bank statement to deposit
slips to debt agreement.
cash receipts journaldescription _ $$ _May 23, 2004Bank loan 14,000
Long-term Liabilities Audit ProceduresLong-term Liabilities Audit Procedures
Bank Statement5/31/04
Deposits:5/23 $14,000
Debt Covenant Bank of Montreal hereby loans Ace Co. $14,000 on 5/23/04
DepositSlip
5/23/04
14,000
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Trace payments of principal and interest from cash payments journal to bank statement
Long-term Liabilities Audit ProceduresLong-term Liabilities Audit Procedures
cash payments journaldescription _ $$ _November 23, 2004interest payment- Bank loan 700
Bank Statement11/30/04
Deposits:
Payments:
11/26 $700
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Trace payments of principal and interest from cash payments journal to bank statement to
cancelled cheques
cash payments journaldescription _ $$ _November 23, 2004interest payment- Bank loan 700
Long-term Liabilities Audit ProceduresLong-term Liabilities Audit Procedures
Bank Statement11/30/04
Deposits:
Payments:
11/26 $700
Ace Corporation 324
$ 700.00Bank of Montrealpay to the order of
date 11/23/04
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Trace payments of principal and interest from cash payments journal to bank statement to
cancelled cheques to debt agreement.
cash payments journaldescription _ $$ _November 23, 2004 interest payment- Bank loan 700
Long-term Liabilities Audit ProceduresLong-term Liabilities Audit Procedures
Bank Statement11/30/04
Deposits:
Payments:
11/26 $700
Debt CovenantAce agrees to pay semi-annual interest of 10%
on principal.
Ace Corporation 324
$ 700.00Canadian Bankpay to the order of
date 11/2304
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What are the auditor’s What are the auditor’s primary concernsprimary concerns with regard to with regard to owners’ equityowners’ equity??
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- authorization
What are the auditor’s What are the auditor’s primary concernsprimary concerns with regard to with regard to owners’ equityowners’ equity??
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- authorization- presentation and disclosure
What are the auditor’s What are the auditor’s primary concernsprimary concerns with regard to with regard to owners’ equityowners’ equity??
19 - 40Copyright 2003 Pearson Education Canada Inc.
What are the auditor’s What are the auditor’s primary concernsprimary concerns with regard to with regard to owners’ equityowners’ equity??
- authorization- presentation and disclosure- accuracy
19 - 41Copyright 2003 Pearson Education Canada Inc.
Owners’ Equity Audit ProceduresOwners’ Equity Audit Proceduresperform
analytical proceduresto test the
reasonablenessof owners’
equity accounts (including dividends)
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READ:- articles of incorporation, bylaws
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
Ace CompanyArticles of
Incorporation
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READ:- articles of incorporation, bylaws- minutes of meetings
Notediscussion of dividends, stock
options, stock issues, etc.
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
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Confirm shares outstanding withthe independent registrar and the
stock transfer agent.
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
19 - 45Copyright 2003 Pearson Education Canada Inc.
Confirm shares outstanding withthe independent registrar and the
stock transfer agent.
Who arethey?
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
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Confirm shares outstanding withthe independent registrar and the
stock transfer agent.
- independent registrar - a third party paid by the client to ensure that stock is issued in accordance with articles of incorporation and board’s directions
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
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Confirm shares outstanding withthe independent registrar and the
stock transfer agent.
- stock transfer agent - a third party paid by the client to maintain shareholder records and, possibly, to disburse dividends
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
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If the client does not use an independent registrar and
stock transfer agent, the auditor must examine the
stock certificate records and test any changes.
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
19 - 49Copyright 2003 Pearson Education Canada Inc.
Trace receipts from stock issues from cash receipts journal to bank statement
cash receipts journaldescription _ $$ _May 23, 2004Joe Ace 23,000
Bank Statement5/31/04
Deposits:5/23 $23,000
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
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Trace receipts from stock issues from cash receipts journal to bank statement to deposit
slips
cash receipts journaldescription _ $$ _May 23, 2004Joe Ace 23,000
Bank Statement5/31/04
Deposits:5/23 $23,000
DepositSlip
5/23/04
23,000
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
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Trace receipts from stock issues from cash receipts journal to bank statement to deposit
slips to board minutes.
cash receipts journaldescription _ $$ _May 23, 2004Joe Ace 23,000
Bank Statement5/31/04
Deposits:5/23 $23,000
DepositSlip
5/23/04
23,000
BoardMinutes
... sell JoeAce $23,000of additionalcommon...
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
19 - 52Copyright 2003 Pearson Education Canada Inc.
Trace payments related to dividends and treasury stock from cash payments journal to bank
statement
cash payments journaldescription _ $$ _January 23, 2004dividend distribution 4300
Bank Statement1/31/04
Deposits:
Payments:
1/26 $4,300
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
19 - 53Copyright 2003 Pearson Education Canada Inc.
Trace payments related to dividends and treasury stock from cash payments journal to bank
statement to cancelled cheques
cash payments journaldescription _ $$ _January 23, 2004dividend distribution 4,300
Bank Statement1/31/04
Deposits:
Payments:
1/26 $4,300
Ace Corporation 324
$4,300.00Shareholderspay to the order of
date 1/23/04
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
19 - 54Copyright 2003 Pearson Education Canada Inc.
Trace payments related to dividends and treasury stock from cash payments journal to bank
statement to cancelled cheques to board minutes.
cash payments journaldescription _ $$ _January 23, 2004dividend distribution 4,300
Bank Statement1/31/04
Deposits:
Payments:
1/26 $4,300
Ace Corporation 324
$4,300.00Shareholderspay to the order of
date 1/23/04
BoardMinutes
... declaredividends of $4,300...
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
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Recalculate dividend distribution to common and
preferred shareholders.
preferredcommon
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
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Recalculate dividend distribution to common and
preferred shareholders.
preferredcommon
consider features of preferred(cumulative, participating)
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
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Ace Company
1 share of commonstock
Ace Company
1 share of commonstock
Ace Company
1 share of commonstock
Inspect repurchased stock (treasury stock); recalculate treasury stock
transactions.
Ace Company
1 share of commonstock
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures
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If all other accounts have been audited with satisfactory results,
Is the audit of Is the audit of retained earnings retained earnings
necessary?necessary?
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If all other accounts have been audited with satisfactory results,
Is the audit of Is the audit of retained earnings retained earnings
necessary?necessary?Possibly not, but the audit of retainedearnings is typically not time-consumingand may serve as a check on the auditof other accounts.
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Analyze all changes in
retainedearnings.
Owners’ Equity Audit ProceduresOwners’ Equity Audit Procedures