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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. 1.

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learning objective 1
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
Characteristics of the CapitalAcquisition and Repayment Cycle

1

Few transactions affect the account

balances, but each one is often

highly material in amount.

2

The exclusion of a single transaction

could be material in itself.

characteristics of the capital acquisition and repayment cycle1
Characteristics of the CapitalAcquisition and Repayment Cycle

3

There is a legal relationship between the

client entity and the holder of the stock,

bond, or similar ownership document.

4

There is a direct relationship between

the interest and dividends accounts

and debt and equity.

accounts in the cycle
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 cycle1
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
Methodology for Designing Tests ofBalances – 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.

methodology for designing tests of balances notes payable1
Methodology for Designing Tests ofBalances – Notes Payable

Design and perform tests of

controls and substantive tests

of transactions.

Design and perform analytical

procedures for notes payable

balance.

methodology for designing tests of balances notes payable2
Methodology for Designing Tests ofBalances – Notes Payable

Design tests of details

of notes payable to

satisfy balance-related

audit objectives.

Audit procedures

Sample size

Items to select

Timing

learning objective 2
Learning Objective 2

Design and perform audit tests

of notes payable and related

accounts and transactions.

notes payable
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 and the Related Interest Accounts

Notes Payable

Interest Expense

Payments

of

principal

Beginning balance

Interest

expense

Issue of new notes

Interest Payable

Ending balance

Payments

of

interest

Beginning

balance

Cash in Bank

Interest

expense

Issue of

new notes

Payments of

principal

Ending

balance

Payments of

interest

internal controls
Internal Controls

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

tests of controls and substantive tests of transactions
Tests of Controls and SubstantiveTests of Transactions

Tests of notes payable transactions

involve the issue of notes and the

repayment of principal and interest.

analytical procedures for notes payable
Analytical Proceduresfor 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 payable1
Analytical Proceduresfor 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
Major Balance-Related Audit Objectives in Notes Payable

1

Existing notes payable are included

(completeness).

2

Notes payable in the schedule are

accurately recorded (accuracy).

3

Notes payable are properly presented and

disclosed (presentation and disclosure).

types of audit tests for notes payable
Types of Audit Testsfor Notes Payable

Cash in Bank

Notes Payable

Payments of principal

Audited by

TOC andSTOT

Ending

balance

Issue of new notes

Audited by

TOC andSTOT

Audited by

AP and TDP

Payments

of interest

Interest Payable

Audited by

TOC,STOT,

and AP

TOC+STOT+AP+TDP

= Sufficient competent evidence per GAAS

types of audit tests for notes payable1
Types of Audit Testsfor Notes Payable

Interest Payable

Interest Expense

Interest expense

Audited by

TOC,STOT,

and AP

Ending

balance

Ending

balance

Audited by

AP and TDP

Audited by

AP

TOC+STOT+AP+TDP

= Sufficient competent evidence per GAAS

learning objective 3
Learning Objective 3

Identify the primary concerns

in the audit of owners’

equity transactions.

owners equity
Owners’ Equity

Publicly held

corporation

Closely held

corporation

owners equity and dividend accounts
Owners’ Equity andDividend Accounts

Cash in Bank

Capital Stock –

Common

Paid-in Capital in Excess

of Par – Common

Redemption

of stock

Beginning

balance

Redemption

of stock

Beginning

balance

Issue of

stock

Issue of

stock

Ending

balance

Ending

balance

owners equity and dividend accounts1
Owners’ Equity andDividend Accounts

Cash in Bank

Dividends Payable

Retained Earnings

Beginning

balance

Beginning

balance

Payment of

dividends

Dividends

declared

Dividends

declared

Net

earnings

Ending

balance

Ending

balance

internal controls1
Internal Controls

Proper authorization of transactions

Proper record keeping and segregation of duties

Independent registrar and stock transfer agent

learning objective 4
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.

audit of capital stock and paid in capital
Audit of Capital Stockand Paid-in Capital

1

Existing capital stock transactions are

recorded (completeness).

Recorded capital stock transactions

exist and are accurately recorded

(existence and accuracy).

2

audit of capital stock and paid in capital1
Audit of Capital Stockand Paid-in Capital

3

Capital stock is accurately recorded

(accuracy).

Capital stock is properly presented and

disclosed (presentation and disclosure).

4

audit of dividends
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
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

learning objective 5
Learning Objective 5

Identify capital acquisition issues

for Internet-based companies.

e commerce and capital acquisition
E-Commerce andCapital Acquisition

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.