Chapter 10

1. Chapter 10 Finance and Investment Cycle Chapter 10

2. 1. Internal Control • Investments • separate functions: authorize purchasing and selling securities, receiving periodic income, recording transactions, safeguarding securities, recording market adjustments and reclassifications • documents and records: stock and bond certificates, broker’s advice, investment subsidiary ledger Chapter 10

3. 1. Substantive Tests • Investments • Agree beginning balance to prior audit • Inspect and count securities on hand or in bank safe deposit box • Confirm securities held by others • Vouch entries (examine broker’s advices, deposit slips, paid checks, cash receipts) to determine cost of purchases and gain/loss on sales • Evaluate management’s classification of securities • Review authorizations • Determine if securities are pledged as collateral for loans • Recalculate investment revenue earned (review broker's monthly statements) • Review documentation concerning fair values • Analytical procedures Chapter 10

4. 1. Substantive Tests • Investments • Existence and Occurrence • inspecting and counting, confirmation, vouching • Rights and Obligations • vouching (examine broker’s advices, deposit slips, and paid checks), confirmation • Completeness • analytical procedures, vouching, inspecting and counting, confirmation Chapter 10

5. 1. Substantive Tests • Investments • Valuation • review documentation concerning fair values, recalculate investment earned, inspection and counting • Presentation and Disclosure • compare statement presentation to GAAP • numerous disclosures are required regarding fair values, and realized and unrealized gains and losses Chapter 10

6. 2. Internal Control • Long-term Debt • separate functions: authorization, independent trustee, interest and principal payments • documents and records: loan and bond contracts, subsidiary ledgers Chapter 10

7. Substantive Tests • Long-term Debt • Agree beginning balance to prior audit • Confirmation • Vouch transactions • Reconcile interest expense • Determine business purpose of loan (and how purchase of fixed assets financed) • Obtain and review loan agreements • Ensure debt covenants are met • Review authorizations • Review current portion of long-term debt • Recalculate discount or premium amortization (part of interest expense) • Recalculate gain/loss on retirement • Analytical procedures Chapter 10

8. 2. Substantive Tests • Long-term Debt • Existence and Occurrence • confirmation, vouching, review authorizations, determine business purpose • Rights and Obligations • examine loan agreements, confirmation, vouching , determine business purpose • Completeness • reconciling interest expense, reading BOD meeting minutes, analytical procedures Chapter 10

9. 2. Substantive Tests • Long-term Debt • Valuation • vouch transactions, confirmation, review current portion, recalculate discount/premium amortization • Presentation and Disclosure • compare statement presentation to GAAP • review terms, covenants, commitments, retirement provisions Chapter 10

10. 3. Internal Control • Stockholder’s Equity • separate functions: authorization, independent trustee or stockholder’s records, dividends • documents and records: articles of incorporation, by laws, stock certificate book, stockholder’s subsidiary ledger, dividend bank account, treasury stock Chapter 10

11. 3. Substantive Tests • Stockholder’s Equity • Agree beginning balance to prior audit • Confirmation with outside agents • Reconcile stock certificate book • Vouch transactions • Determine that correct number of shares is used in EPS calculation • Review articles of incorporation and bylaws • Review authorizations • Determine all transactions are recorded • Verify allocation between capital stock account and paid in capital • Inspect treasury stock certificates Chapter 10

12. 3. Substantive Tests • Stockholder’s Equity • Existence and Occurrence • confirmation, reconciling stock records, vouching transactions, inspect treasury stock shares • Rights and Obligations • confirmation, reconciling stock records, vouching transactions • Completeness • confirming, inspecting stock certificate book Chapter 10

13. 3. Substantive Tests • Stockholder’s Equity • Valuation • vouching transactions • Presentation and Disclosure • compare statement presentation to GAAP • review par or stated values, shares authorized, issued and outstanding, dividend and liquidation preferences, dividends in arrears, stock compensation plans, recompute EPS calculations Chapter 10

14. Timeline for Major Activities in Audit Year-End Date (date of the financial statements) Audit report release date Date of the auditors’ report (audit completion date) Beginning of year Audit planning Interim testing (tests of controls and substantive procedures) • Completing substantive procedures • Attorney’s letters • Management representation letter • Going-concern assessment • Adjusting journal entries • Audit documentation review • Subsequent events • Communicate with those charged with governance Subsequently discovered facts • Subsequently discovered facts • Omitted audit procedures • Management letter • Communications with those charged with governance 11-14

15. Review Questions for Discussion • Chapter 10 10.1 10.3 10.7 10.11 10.15 10.16 Chapter 1