Finance and Investment Cycle Chapter 10 Finance and Investment Cycle Accounting 408 Chapter 10

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 Accounting 408 Chapter 10

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 Accounting 408 Chapter 10

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 Accounting 408 Chapter 10

1. Substantive Tests Investments Valuation Presentation and Disclosure 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 Accounting 408 Chapter 10

2. Internal Control Long-term Debt separate functions: authorization, independent trustee, interest and principal payments documents and records: loan and bond contracts, subsidiary ledgers Accounting 408 Chapter 10

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 Accounting 408 Chapter 10

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 Accounting 408 Chapter 10

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 Accounting 408 Chapter 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 Accounting 408 Chapter 10

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 Accounting 408 Chapter 10

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 Accounting 408 Chapter 10

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 Accounting 408 Chapter 10

Timeline for Major Activities in Audit Year-End Date (date of the financial statements) Date of the auditors’ report (audit completion date) Audit report release 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

Review Questions for Discussion Chapter 10 10.1 10.3 10.7 10.11 10.15 10.16 ACCT-4080 Chapter 1