1. Chapter 15
Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders′ Equity, and Income Statement Accounts
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Auditing Long-Term Debt
The auditor must be assured that the amounts shown on the balance sheet for the various types of long-term debt are not materially misstated. This assurance extends to the recognition of interest expense. For the vast majority of entities, it is more efficient to follow a strategy of conducting substantive testing.
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3. Inherent Risk Assessment – Long-Term Debt
The inherent risk for notes and bonds would normally be assessed as low to moderate because the volume of transactions are low, the accounting is not complex, and the client often receives third-party statements or amortization tables.
However, the amounts are usually large and the financial markets have developed sophisticated instruments that have characteristics of both debt and equity. The inherent risk associated with these instruments is normally high.
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4. Control Risk Assessment – Long-Term Debt
When a substantive strategy is followed, the auditor still needs a sufficient understanding of the entity’s internal control system over debt.
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5. Assertions and Related Control Activities
LO# 3
Assertions and Related Control Activities
Occurrence and Authorization
Completeness
Valuation
Disclosure - Classification
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6. Substantive Procedures of Long-Term Debt
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7. Substantive Procedures of Long-Term Debt
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8. Auditing Stockholders’ Equity
LO# 5
Auditing Stockholders’ Equity
The following three types of transactions are of importance to the auditor:
1. Issuance of stock including transactions such as sale of stock for cash; the exchange of stock for assets, services, or convertible debt; and issuance of stock for stock splits.
2. Repurchase of stock including both the reacquisition of stock and retirement of stock.
3. Payment of dividends including cash and stock dividends.
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9. Control Risk Assessment – Stockholders’ Equity
LO# 6
Control Risk Assessment – Stockholders’ Equity
A substantive strategy is often used to audit stockholders’ equity because the number of transactions is usually small. The auditor must still understand the types of controls that are in place to prevent the misstatement of equity transactions.
Large, publicly traded companies use an independent registrar, transfer agent, and dividend-disbursing agent to process and record equity transaction. Relevant information about equity transactions may be confirmed with those parties.
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10. Assertions and Related Control Activities
LO# 7
Assertions and Related Control Activities
Occurrence Verify that stock and dividend transactions comply with corporate charter.
Accuracy Verify that stock and dividend transactions have been properly posted and summarized in the accounting records.
Authorization Verify that stock and dividend transactions have been properly approved.
Valuation Verify that stock and dividend transactions have been properly valued.
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11. Segregation of Duties
LO# 8
When possible, the following duties should be segregated:
The individuals responsible for issuing, transferring, and canceling stock certificates should not have any accounting responsibilities.
The individual responsible for maintaining the detailed stockholders’ records should be independent of the maintenance of the general ledger control accounts.
The individual responsible for maintaining the detailed stockholders’ records should not also process cash receipts or disbursements.
Appropriate segregation of duties should be established among the preparation, recording, signing, and mailing of dividend checks.
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12. Auditing Capital-Stock Accounts
LO# 9
Auditing Capital-Stock Accounts
Occurrence and Completeness
Valuation
Completeness of Disclosure
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13. LO# 10
Auditing Dividends
All dividends declared and paid will be audited because of concerns of violations of corporate bylaws or debt covenants.
When an independent dividend-disbursing agent is used, the auditor can confirm the amount disbursed with the agent. This amount is agreed with the amount authorized by the board of directors.
When an independent agent is not used, the auditor can recomputed the amount of the dividend authorized by the board of directors and trace the amount to cash disbursements or dividends payable.
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14. Auditing Retained Earnings
LO# 11
Under normal circumstances, retained earnings are affected by the current year’s income or loss and the dividends declared and or paid.
The major exceptions are the existence of prior period adjustments, correction of errors, stock retirements, and changes in appropriations of retained earnings.
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15. Auditing Income Statement Accounts
LO# 12
Auditing Income Statement Accounts
The audit of revenue and expense accounts depends on the extent of work conducted on the entity’s control system and balance sheet accounts. Substantive procedures on selected income statement accounts include:
The results of testing controls for the various business processes.
The results of the detailed tests of balance sheet accounts and the related income statement accounts.
Performance of substantive analytical procedures on income statement accounts.
Detailed tests of selected income statement accounts.
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16. End of Chapter 15
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