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19 - 1 Copyright  2003 Pearson Education Canada Inc. CHAPTER 19 Audit of the Capital Acquisition and Repayment Cycle.

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Presentation on theme: "19 - 1 Copyright  2003 Pearson Education Canada Inc. CHAPTER 19 Audit of the Capital Acquisition and Repayment Cycle."— Presentation transcript:

1 19 - 1 Copyright  2003 Pearson Education Canada Inc. CHAPTER 19 Audit of the Capital Acquisition and Repayment Cycle

2 19 - 2 Copyright  2003 Pearson Education Canada Inc. What are the major accounts of the capital acquisition and repayment cycle?

3 19 - 3 Copyright  2003 Pearson Education Canada Inc. What are the major accounts of the capital acquisition and repayment cycle? - long-term liabilities and related accounts examples?

4 19 - 4 Copyright  2003 Pearson Education Canada Inc. What are the major accounts of the capital acquisition and repayment cycle? - long-term liabilities and related accounts ~ notes payable ~ contracts payable ~ mortgages payable ~ bonds payable ~ interest expense ~ accrued interest ~ cash

5 19 - 5 Copyright  2003 Pearson Education Canada Inc. What are the major accounts of the capital acquisition and repayment cycle? - long-term liabilities and related accounts - owners’ equity accounts examples?

6 19 - 6 Copyright  2003 Pearson Education Canada Inc. What are the major accounts of the capital acquisition and repayment cycle? - long-term liabilities and related accounts - owners’ equity accounts ~ common stock ~ preferred stock ~ treasury stock ~ contributed surplus in ~ proprietorship capital ~ partnership capital

7 19 - 7 Copyright  2003 Pearson Education Canada Inc. What are the major accounts of the capital acquisition and repayment cycle? - long-term liabilities and related accounts - capital stock accounts - retained earnings and appropriations

8 19 - 8 Copyright  2003 Pearson Education Canada Inc. What are the major accounts of the capital acquisition and repayment cycle? - long-term liabilities and related accounts - capital stock accounts - retained earnings and appropriations - dividends declared and payable

9 19 - 9 Copyright  2003 Pearson Education Canada Inc. In auditing the capital acquisition and repayment cycle, the auditor should consider: ?

10 19 - 10 Copyright  2003 Pearson Education Canada Inc. In auditing the capital acquisition and repayment cycle, the auditor should consider: Relatively few transactions affect the account balances, but each transaction is often highly material in amount.

11 19 - 11 Copyright  2003 Pearson Education Canada Inc. In auditing the capital acquisition and repayment cycle, the auditor should consider: The exclusion of a single transac- tion could be material in itself.

12 19 - 12 Copyright  2003 Pearson Education Canada Inc. In auditing the capital acquisition and repayment cycle, the auditor should consider: There is a legal relationship be- tween the client and the holder of the stock, bond, or similar ownership document.

13 19 - 13 Copyright  2003 Pearson Education Canada Inc. In auditing the capital acquisition and repayment cycle, the auditor should consider: There is a direct relationship be- tween the interest and divi- dends account and debt and equity.

14 19 - 14 Copyright  2003 Pearson Education Canada Inc. In auditing the internal controls related to long-term liabilities, the auditor will consider:

15 19 - 15 Copyright  2003 Pearson Education Canada Inc. - proper authorization for issues of notes or bonds In auditing the internal controls related to long-term liabilities, the auditor will consider: Ace Company Bond

16 19 - 16 Copyright  2003 Pearson Education Canada Inc. - proper authorization for issues of notes or bonds - adequate controls over payment of interest and principal In auditing the internal controls related to long-term liabilities, the auditor will consider:

17 19 - 17 Copyright  2003 Pearson Education Canada Inc. - proper authorization for issues of notes or bonds - adequate controls over payment of interest and principal - proper documents and records In auditing the internal controls related to long-term liabilities, the auditor will consider:

18 19 - 18 Copyright  2003 Pearson Education Canada Inc. - proper authorization for issues of notes or bonds - adequate controls over payment of interest and principal - adequate documents and records - periodic independent verification In auditing the internal controls related to long-term liabilities, the auditor will consider:

19 19 - 19 Copyright  2003 Pearson Education Canada Inc. What are the primary audit objectives with regard to long- term liability account balances?

20 19 - 20 Copyright  2003 Pearson Education Canada Inc. - completeness What are the primary audit objectives with regard to long- term liability account balances? notes payable bonds payable mortgage payable contracts payable

21 19 - 21 Copyright  2003 Pearson Education Canada Inc. - completeness - accuracy What are the primary audit objectives with regard to long- term liability account balances?

22 19 - 22 Copyright  2003 Pearson Education Canada Inc. - completeness - accuracy - presentation and disclosure What are the primary audit objectives with regard to long- term liability account balances?

23 19 - 23 Copyright  2003 Pearson Education Canada Inc. Long-term Liabilities Audit Procedures perform analytical procedures to test the reasonableness of long-term liabilities and interest expense

24 19 - 24 Copyright  2003 Pearson Education Canada Inc. Long-term Liabilities Audit Procedures enquire of management regarding: - completeness of liabilities

25 19 - 25 Copyright  2003 Pearson Education Canada Inc. Long-term Liabilities Audit Procedures inquire of management regarding: - completeness of liabilities - debt-related restrictions on assets

26 19 - 26 Copyright  2003 Pearson Education Canada Inc. Long-term Liabilities Audit Procedures inquire of management regarding: - completeness of liabilities - debt-related restrictions on assets - ability to pay interest

27 19 - 27 Copyright  2003 Pearson Education Canada Inc. Debt Covenant Long-term Liabilities Audit Procedures review contractual provisions of long-term liabilities

28 19 - 28 Copyright  2003 Pearson Education Canada Inc. Long-term Liabilities Audit Procedures review contractual provisions of long-term liabilities - consider pledging of assets related to debt (disclosure) - determine client adherence to contractual requirements (payment dates, working capital, ratios)

29 19 - 29 Copyright  2003 Pearson Education Canada Inc. Long-term Liabilities Audit Procedures confirm debt balances, interest payments, and client compliance with contractual agreements with the creditors auditor creditor Canada 48

30 19 - 30 Copyright  2003 Pearson Education Canada Inc. Long-term Liabilities Audit Procedures for all long-term liabilities, recalculate interest expense, interest payable, and amortizations of discounts or premiums

31 19 - 31 Copyright  2003 Pearson Education Canada Inc. Trace receipt of borrowed amounts from cash receipts journal to bank statement Long-term Liabilities Audit Procedures cash receipts journal description _ $$ _ May 23, 2004 Bank loan 14,000 Bank Statement 5/31/04 Deposits: 5/23 $14,000

32 19 - 32 Copyright  2003 Pearson Education Canada Inc. Trace receipt of borrowed amounts from cash receipts journal to bank statement to deposit slips cash receipts journal description _ $$ _ May 23, 2004 Bank loan 14,000 Long-term Liabilities Audit Procedures Bank Statement 5/31/04 Deposits: 5/23 $14,000 Deposit Slip 5/23/04 14,000

33 19 - 33 Copyright  2003 Pearson Education Canada Inc. Trace receipt of borrowed amounts from cash receipts journal to bank statement to deposit slips to debt agreement. cash receipts journal description _ $$ _ May 23, 2004 Bank loan 14,000 Long-term Liabilities Audit Procedures Bank Statement 5/31/04 Deposits: 5/23 $14,000 Debt Covenant Bank of Montreal hereby loans Ace Co. $14,000 on 5/23/04 Deposit Slip 5/23/04 14,000

34 19 - 34 Copyright  2003 Pearson Education Canada Inc. Trace payments of principal and interest from cash payments journal to bank statement Long-term Liabilities Audit Procedures cash payments journal description _ $$ _ November 23, 2004 interest payment- Bank loan 700 Bank Statement 11/30/04 Deposits: Payments: 11/26 $700

35 19 - 35 Copyright  2003 Pearson Education Canada Inc. Trace payments of principal and interest from cash payments journal to bank statement to cancelled cheques cash payments journal description _ $$ _ November 23, 2004 interest payment- Bank loan 700 Long-term Liabilities Audit Procedures Bank Statement 11/30/04 Deposits: Payments: 11/26 $700 Ace Corporation 324 $ 700.00 Bank of Montreal pay to the order of date 11/23/04

36 19 - 36 Copyright  2003 Pearson Education Canada Inc. Trace payments of principal and interest from cash payments journal to bank statement to cancelled cheques to debt agreement. cash payments journal description _ $$ _ November 23, 2004 interest payment- Bank loan 700 Long-term Liabilities Audit Procedures Bank Statement 11/30/04 Deposits: Payments: 11/26 $700 Debt Covenant Ace agrees to pay semi-annual interest of 10 % on principal. Ace Corporation 324 $ 700.00 Canadian Bank pay to the order of date 11/2304

37 19 - 37 Copyright  2003 Pearson Education Canada Inc. What are the auditor’s primary concerns with regard to owners’ equity?

38 19 - 38 Copyright  2003 Pearson Education Canada Inc. - authorization What are the auditor’s primary concerns with regard to owners’ equity?

39 19 - 39 Copyright  2003 Pearson Education Canada Inc. - authorization - presentation and disclosure What are the auditor’s primary concerns with regard to owners’ equity?

40 19 - 40 Copyright  2003 Pearson Education Canada Inc. What are the auditor’s primary concerns with regard to owners’ equity? - authorization - presentation and disclosure - accuracy

41 19 - 41 Copyright  2003 Pearson Education Canada Inc. Owners’ Equity Audit Procedures perform analytical procedures to test the reasonableness of owners’ equity accounts (including dividends)

42 19 - 42 Copyright  2003 Pearson Education Canada Inc. READ: - articles of incorporation, bylaws Owners’ Equity Audit Procedures Ace Company Articles of Incorporation

43 19 - 43 Copyright  2003 Pearson Education Canada Inc. READ: - articles of incorporation, bylaws - minutes of meetings Note discussion of dividends, stock options, stock issues, etc. Owners’ Equity Audit Procedures

44 19 - 44 Copyright  2003 Pearson Education Canada Inc. Confirm shares outstanding with the independent registrar and the stock transfer agent. Owners’ Equity Audit Procedures

45 19 - 45 Copyright  2003 Pearson Education Canada Inc. Confirm shares outstanding with the independent registrar and the stock transfer agent. Who are they? Owners’ Equity Audit Procedures

46 19 - 46 Copyright  2003 Pearson Education Canada Inc. Confirm shares outstanding with the independent registrar and the stock transfer agent. - independent registrar - a third party paid by the client to ensure that stock is issued in accordance with articles of incorporation and board’s directions Owners’ Equity Audit Procedures

47 19 - 47 Copyright  2003 Pearson Education Canada Inc. Confirm shares outstanding with the independent registrar and the stock transfer agent. - stock transfer agent - a third party paid by the client to maintain shareholder records and, possibly, to disburse dividends Owners’ Equity Audit Procedures

48 19 - 48 Copyright  2003 Pearson Education Canada Inc. If the client does not use an independent registrar and stock transfer agent, the auditor must examine the stock certificate records and test any changes. Owners’ Equity Audit Procedures

49 19 - 49 Copyright  2003 Pearson Education Canada Inc. Trace receipts from stock issues from cash receipts journal to bank statement cash receipts journal description _ $$ _ May 23, 2004 Joe Ace 23,000 Bank Statement 5/31/04 Deposits: 5/23 $23,000 Owners’ Equity Audit Procedures

50 19 - 50 Copyright  2003 Pearson Education Canada Inc. Trace receipts from stock issues from cash receipts journal to bank statement to deposit slips cash receipts journal description _ $$ _ May 23, 2004 Joe Ace 23,000 Bank Statement 5/31/04 Deposits: 5/23 $23,000 Deposit Slip 5/23/04 23,000 Owners’ Equity Audit Procedures

51 19 - 51 Copyright  2003 Pearson Education Canada Inc. Trace receipts from stock issues from cash receipts journal to bank statement to deposit slips to board minutes. cash receipts journal description _ $$ _ May 23, 2004 Joe Ace 23,000 Bank Statement 5/31/04 Deposits: 5/23 $23,000 Deposit Slip 5/23/04 23,000 Board Minutes... sell Joe Ace $23,000 of additional common... Owners’ Equity Audit Procedures

52 19 - 52 Copyright  2003 Pearson Education Canada Inc. Trace payments related to dividends and treasury stock from cash payments journal to bank statement cash payments journal description _ $$ _ January 23, 2004 dividend distribution 4300 Bank Statement 1/31/04 Deposits: Payments: 1/26 $4,300 Owners’ Equity Audit Procedures

53 19 - 53 Copyright  2003 Pearson Education Canada Inc. Trace payments related to dividends and treasury stock from cash payments journal to bank statement to cancelled cheques cash payments journal description _ $$ _ January 23, 2004 dividend distribution 4,300 Bank Statement 1/31/04 Deposits: Payments: 1/26 $4,300 Ace Corporation 324 $4,300.00 Shareholders pay to the order of date 1/23/04 Owners’ Equity Audit Procedures

54 19 - 54 Copyright  2003 Pearson Education Canada Inc. Trace payments related to dividends and treasury stock from cash payments journal to bank statement to cancelled cheques to board minutes. cash payments journal description _ $$ _ January 23, 2004 dividend distribution 4,300 Bank Statement 1/31/04 Deposits: Payments: 1/26 $4,300 Ace Corporation 324 $4,300.00 Shareholders pay to the order of date 1/23/04 Board Minutes... declare dividends of $4,300... Owners’ Equity Audit Procedures

55 19 - 55 Copyright  2003 Pearson Education Canada Inc. Recalculate dividend distribution to common and preferred shareholders. preferred common Owners’ Equity Audit Procedures

56 19 - 56 Copyright  2003 Pearson Education Canada Inc. Recalculate dividend distribution to common and preferred shareholders. preferred common consider features of preferred (cumulative, participating) Owners’ Equity Audit Procedures

57 19 - 57 Copyright  2003 Pearson Education Canada Inc. Ace Company 1 share of common stock Ace Company 1 share of common stock Ace Company 1 share of common stock Inspect repurchased stock (treasury stock); recalculate treasury stock transactions. Ace Company 1 share of common stock Owners’ Equity Audit Procedures

58 19 - 58 Copyright  2003 Pearson Education Canada Inc. Is the audit of retained earnings necessary? If all other accounts have been audited with satisfactory results, Is the audit of retained earnings necessary?

59 19 - 59 Copyright  2003 Pearson Education Canada Inc. Is the audit of retained earnings necessary? If all other accounts have been audited with satisfactory results, Is the audit of retained earnings necessary? Possibly not, but the audit of retained earnings is typically not time-consuming and may serve as a check on the audit of other accounts.

60 19 - 60 Copyright  2003 Pearson Education Canada Inc. Analyze all changes in retained earnings. Owners’ Equity Audit Procedures


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