©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/ 21 - 1 Audit of the Capital Acquisition and Repayment Cycle Chapter 21
Apr 01, 2015
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 21 - 1
Audit of the CapitalAcquisition and
Repayment Cycle
Chapter 21
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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 CapitalAcquisition and Repayment
Cycle
Few transactions affect the accountbalances, but each one is oftenhighly material in amount.
The exclusion of a single transactioncould be material in itself.
1
2
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Characteristics of the CapitalAcquisition and Repayment
Cycle
There is a legal relationship between theclient entity and the holder of the stock,bond, or similar ownership document.
There is a direct relationship betweenthe interest and dividends accountsand debt and equity.
3
4
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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
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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
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Methodology for Designing Tests of
Balances – Notes Payable
Identify client business risksaffecting notes payable.
Set tolerable misstatement andassess inherent risk for notes payable.
Assess control risk for notes payable.
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Methodology for Designing Tests of
Balances – Notes Payable
Design and perform tests ofcontrols and substantive tests
of transactions.
Design and perform analyticalprocedures for notes payable
balance.
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Methodology for Designing Tests of
Balances – Notes Payable
Design tests of detailsof notes payable to
satisfy balance-relatedaudit objectives.
Audit proceduresSample size
Items to selectTiming
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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 legalobligation to a creditor.
It may be unsecuredor secured by assets.
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Notes Payable and the Related Interest Accounts
Notes Payable Interest Expense
Cash in Bank
Interest Payable
Paymentsofprincipal
Beginning balance
Issue ofnew notes
Payments ofprincipal
Interestexpense
Paymentsofinterest
Beginningbalance
Issue of new notes
Ending balance
Payments ofinterest
InterestexpenseEndingbalance
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1. Proper authorization for the issue of new notes2. Adequate controls over the repayment of principal and interest3. Proper documents and records4. Periodic independent verification
Internal Controls
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Tests of notes payable transactionsinvolve the issue of notes and the
repayment of principal and interest.
Tests of Controls and Substantive
Tests of Transactions
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Analytical Proceduresfor Notes Payable
Analytical Procedure Possible Misstatement
Recalculate approximate Misstatement ofinterest expense on the interest expense andbasis of average interest accrued interest, orrates and overall monthly omission of annotes payable. outstanding note
payable
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Analytical Proceduresfor Notes Payable
Analytical Procedure Possible Misstatement
Compare individual notes Omission oroutstanding with those of misstatement of athe prior year. note payable
Compare total balance in Misstatement ofnotes payable,interest interest expense andexpense, and accrued interest accrued interest orwith prior year balances. notes payable
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Major Balance-Related Audit Objectives in Notes Payable
Existing notes payable are included(completeness).
Notes payable in the schedule areaccurately recorded (accuracy).
Notes payable are properly presented anddisclosed (presentation and disclosure).
1
2
3
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Types of Audit Testsfor Notes Payable
Cash in Bank Notes PayablePayments of principal
Issue of new notes
Paymentsof interest Interest Payable
Endingbalance
TOC + STOT + AP + TDP= Sufficient competent evidence per GAAS
Audited byTOC, STOT,
and AP
Audited byAP and TDP
Audited byTOC and STOT
Audited byTOC and STOT
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Types of Audit Testsfor Notes Payable
Interest Payable
Endingbalance
Audited byAP and TDP
Audited byTOC, STOT,
and AP
Interest Expense
Interest expense
Endingbalance
Audited byAP
TOC + STOT + AP + TDP= Sufficient competent evidence per GAAS
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Learning Objective 3
Identify the primary concerns
in the audit of owners’
equity transactions.
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Publicly heldcorporation
Closely heldcorporation
Owners’ Equity
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Owners’ Equity andDividend Accounts
Cash in Bank
Capital Stock – Common
Paid-in Capital in Excessof Par – Common
Redemptionof stock
Redemptionof stock
Beginningbalance
Issue ofstock
Endingbalance
Beginningbalance
Issue ofstock
Endingbalance
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Owners’ Equity andDividend Accounts
Cash in Bank
Dividends Payable Retained Earnings
Payment ofdividends Dividends
declared
Beginningbalance
Dividendsdeclared
Endingbalance
Beginningbalance
Netearnings
Endingbalance
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Proper authorization of transactions
Proper record keeping and segregation of duties
Independent registrar and stock transfer agent
Internal Controls
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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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1Existing capital stock transactions arerecorded (completeness).
2Recorded capital stock transactionsexist and are accurately recorded(existence and accuracy).
Audit of Capital Stockand Paid-in Capital
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3Capital stock is accurately recorded(accuracy).
4Capital stock is properly presented anddisclosed (presentation and disclosure).
Audit of Capital Stockand Paid-in Capital
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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).
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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– appropriations of retained earnings
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Learning Objective 5
Identify capital acquisition issues
for Internet-based companies.
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Auditors may identify specific business risksassociated with the method used by start-up
companies to acquire capital.
The complexity of the capital transactionsmay create unique financial reporting
and disclosure issues.
E-Commerce andCapital Acquisition
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End of Chapter 21