1. Audit of the Capital Acquisition and Repayment Cycle
Chapter 21

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 Cycle1
Few transactions affect the account
balances, but each one is often
highly material in amount. 2
The exclusion of a single transaction
could be material in itself.

4. Characteristics of the Capital Acquisition and Repayment Cycle3
There is a legal relationship between the
client entity and the holder of the stock,
bond, or similar ownership document. 4
There is a direct relationship between
the interest and dividends accounts
and debt and equity.

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
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
Design and perform tests of
controls and substantive tests
of transactions.
Design and perform analytical
procedures for notes payable
balance.

9. Methodology for Designing Tests of Balances – Notes Payable
Design tests of details
of notes payable to
satisfy balance-related
audit objectives.
Audit procedures
Sample size
Items to select
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
Payments of
principal
Beginning balance
Interest
expense
Issue of new notes
Interest Payable
Ending balance
Payments of
interest
Beginning
balance
Cash in Bank
Interest
expense
Issue of
new notes
Payments of
principal
Ending
balance
Payments of
interest

13. Internal Controls 1. Proper authorization for the issue of new notes
2. Adequate controls over the repayment of
principal and interest
3. Proper documents and records
4. Periodic independent verification

14. 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.

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

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

17. Major Balance-Related Audit Objectives in Notes Payable1
Existing notes payable are included
(completeness). 2
Notes payable in the schedule are
accurately recorded (accuracy). 3
Notes payable are properly presented and
disclosed (presentation and disclosure).

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

19. 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 TDP
Audited by AP
TOC + STOT + AP + TDP
= Sufficient competent evidence per GAAS

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

21. Owners’ Equity
Publicly held
corporation
Closely held
corporation

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

23. 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

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

25. 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.

26. Audit of Capital Stock and Paid-in Capital1
Existing capital stock transactions are
recorded (completeness). 2
Recorded capital stock transactions
exist and are accurately recorded
(existence and accuracy).

27. Audit of Capital Stock and Paid-in Capital3
Capital stock is accurately recorded
(accuracy). 4
Capital stock is properly presented and
disclosed (presentation and disclosure).

28. 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).

29. 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

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

31. 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.

32. End of Chapter 21