1. Audit of the Capital Acquisition and Repayment Cycle
Chapter 22

2. Identify the accounts and the unique characteristics of the
Learning Objective 1
Identify the accounts and the
unique characteristics of the
capital acquisition and
repayment cycle.

3. Characteristics of the Capital Acquisition and Repayment Cycle
Few transactions affect the account
balances, but each one is often
highly material in amount. 1
The exclusion of a single transaction
could be material in itself. 2

4. Characteristics of the Capital Acquisition and Repayment Cycle
There is a legal relationship between the
client entity and the holder of the stock,
bond, or similar ownership document. 3
There is a direct relationship between
the interest and dividends accounts
and debt and equity. 4

5. 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

6. 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

7. Methodology for Designing Tests of Balances – Notes Payable
Phase I
Identify client business risks
affecting notes payable.
Set tolerable misstatement and assess
inherent risk for notes payable.
Assess control risk for notes payable.

8. Methodology for Designing Tests of Balances – Notes Payable
Phase II
Design and perform tests of controls
and substantive tests of transactions.

9. Methodology for Designing Tests of Balances – Notes Payable
Phase III
Design and perform analytical procedures
for notes payable balance.
Design tests of details of notes payable balance
to satisfy balance-related audit objectives.
Audit
procedures
Items to
select
Sample
size
Timing

10. Design and perform audit tests of notes payable and related
Learning Objective 2
Design and perform audit tests
of notes payable and related
accounts and transactions.

11. Notes Payable A note payable is a legal obligation to a creditor.
It may be unsecured
or secured by assets.

12. Notes Payable and the Related Interest Accounts
Interest Expense
Cash in Bank
Interest Payable
Payments of
principal
Beginning balance
Issue of
new notes
Payments of
Interest
expense
interest
Beginning
balance
Issue of new notes
Ending balance
Ending

13. Internal Controls Proper authorization for 1 the issue of new notes
Adequate controls over the repayment
of principal and interest 2

14. Internal Controls Proper documents and records 3
Periodic independent verification 4

15. Tests of Controls and Substantive Tests of Transactions
Tests of notes payable transactions
involve the issue of notes and the
repayment of principal and interest.

16. Analytical Procedures for Notes Payable
Recalculate possible
interest expense on the
basis of average interest
rates and overall monthly
notes payable.
Misstatement of interest
expense and accrued
interest, or omission
of an outstanding
note payable.
Possible misstatement

17. Analytical Procedures for Notes Payable
Possible misstatement
Compare individual notes
outstanding with those
of the prior year.
Omission or
misstatement of
a note payable.
Compare total balance in
notes payable, interest
expense, and accrued
interest with prior-year
balances.
Misstatement of interest
expense and accrued
interest or notes
payable.

18. Major Balance-Related Audit Objectives in Notes Payable
Existing notes payable are
included (completeness). 1
Notes payable in the schedule are
accurately recorded (accuracy). 2
Notes payable are properly presented and
disclosed (presentation and disclosure). 3

19. Types of Audit Tests for Notes Payable
Cash in Bank
Notes Payable
Payments of principal
Issue of new notes
Payments
of interest
Interest Payable
Ending
balance
TOC + STOT + AP + TDB
= Sufficient competent evidence per GAAS
Audited by
TOC, STOT,
and AP
AP and TDB
TOC and STOT

20. Types of Audit Tests for Notes Payable
Interest Payable
Interest Expense
Interest expense
Audited by
TOC, STOT,
and AP
Ending
balance
Ending
balance
Audited by
AP and TDB
Audited by AP
TOC + STOT + AP + TDB
= Sufficient competent evidence per GAAS

21. Identify the primary concerns
Learning Objective 3
Identify the primary concerns
in the audit of owners’
equity transactions.

22. Owners’ Equity
Publicly held
corporation
Closely held
corporation

23. Owners’ Equity and Dividend Accounts
Cash in Bank
Capital Stock –
Common
Paid-in Capital in Excess
of Par – Common
Redemption
of stock
Beginning
balance
Issue of
stock
Ending

24. Owners’ Equity and Dividend 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

25. Internal Controls Proper authorization of transactions
Proper record keeping and segregation of duties
Independent registrar and stock transfer agent

26. Design and perform tests of controls, substantive tests of
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.

27. Audit of Capital Stock and Paid-in Capital
Existing capital stock transactions
are recorded (completeness). 1
Recorded capital stock transactions
exist and are accurately recorded
(existence and accuracy). 2

28. Audit of Capital Stock and Paid-in Capital
Capital stock is accurately
recorded (accuracy). 3
Capital stock is properly presented and
disclosed (presentation and disclosure). 4

29. 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).

30. 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

31. = Sufficient competent evidence per GAAS
Types of Audit Tests
TOC + STOT + AP + TDB
= Sufficient competent evidence per GAAS
Issue of stock
Redemption of stock
Both audited by TOC and STOT
Audited by
TDB
Cash in
Bank
Capital Stock and Paid-in
Capital in excess of Par
Ending
balance

32. = Sufficient competent evidence per GAAS
Types of Audit Tests
Cash in
Bank
Dividends
Payable
Payment of dividends
Audited by
TOC and STOT
Ending
balance
Audited by
TDB
TOC + STOT + AP + TDB
= Sufficient competent evidence per GAAS

33. = Sufficient competent evidence per GAAS
Types of Audit Tests
Dividends
Payable
Retained
Earnings
Dividends declared
Net earnings
Audited by
TOC and STOT
Audited by
TOC, STOT,
AP, and TDB
Ending
balance
Ending
balance
Audited by
TDB
Audited by
TDB
TOC + STOT + AP + TDB
= Sufficient competent evidence per GAAS

34. Identify capital acquisition issues for Internet-based companies.
Learning Objective 5
Identify capital acquisition issues
for Internet-based companies.

35. E-Commerce and Capital 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.

36. End of Chapter 22