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

5. 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

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
Accounting 408
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
Accounting 408
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
Accounting 408
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
Accounting 408
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
Accounting 408
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
Accounting 408
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
Accounting 408
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
Accounting 408
Chapter 10

14. 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

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