2. Chapter 15 Prepared by Richard J. Campbell Copyright 2011, Wiley and Sons Auditing Assets, Liabilities, and Equity Related to the Financing Cycle

3. Learning Objectives 1. Describe the activities, controls, accounting standards, and audit steps for cash, near cash, and cash equivalents. 2. Describe the activities, transactions, controls, accounting standards, and audit steps for investments. 3. Explain the audit processes for other comprehensive income and the consolidation process. 4. Recognize important issues for auditing disclosures of assets in the financing cycle. 5. Describe the activities, transactions, controls, accounting standards, and audit steps for long-term debt and other long-term accounts. 6. Explain the audit processes for auditing pensions and postretirement benefits and taxes. Chapter 15-1

4. Learning Objectives 7. Recognize important issues for auditing disclosures of liabilities in the financing cycle. 8. Describe the activities, transactions, controls, accounting standards, and audit steps for equity accounts 9. Explain the audit processes for mergers and acquisitions, and retained earnings. 10. Recognize important issues for auditing disclosures of equity in the financing cycle. 11. Discuss the risks, accounting standards, and audit procedures for related parties and related party transactions in the financing cycle. Chapter 15-2

5. Cash and Near Cash Learning Objective #1Chapter 15 -3  Common items considered near cash or cash equivalents are certificates of deposit, United States Treasury bills, and commercial paper.  The overall audit goal for cash and near cash is to determine whether the amount is fairly presented in the financial statements and the disclosure is adequate.  An important part of the audit of cash is to simultaneously consider all bank accounts.  This simultaneous examination is needed because of the risk that funds transferred between bank accounts might be counted twice.

6. Interbank Transfer Schedule Learning Objective #1Chapter 15 -4

7. Proof of Cash Learning Objective #1Chapter 15 -5

8. Investments Chapter 15 -6Learning Objective #2  When the period of time before the funds need to be disbursed is longer, a company typically puts the funds in a different kind of investment with a greater earnings return or yield.  Derivatives is a term used to describe certain types of investments.  Derivatives are often the type of financial instruments used as investments to hedge against business risks.  Equity security investments that represent a company’s ownership interest in another business, or its rights related to an ownership interest, can be marketable securities if they are traded on a stock exchange.

9. Key Terms for Fair Value Chapter 15 -7Learning Objective #2 EXHIBIT 15-1

10. Financial Assets and Financial Liabilities Eligible for the Fair Value Option Chapter 15 -8Learning Objective #2 EXHIBIT 15-2

11. Auditing Fair Value Measurements and Disclosures Chapter 15 -9Learning Objective #2 EXHIBIT 15-3

12. Information Used to Determine Fair Value Learning Objective #2Chapter 15-10

13. Examples of Controls and Related Tests for Investments Learning Objective #2Chapter 15-11 EXHIBIT 15-4

14. Examples of Controls and Related Tests for Investments Learning Objective #2Chapter 15-12 EXHIBIT 15-4

15. Examples of Controls and Related Tests for Investments Learning Objective #2Chapter 15-13 EXHIBIT 15-4

16. Examples of Controls and Related Tests for Investments Learning Objective #2Chapter 15-14 EXHIBIT 15-4

17. Examples of Controls and Related Tests for Investments Learning Objective #2Chapter 15-14 EXHIBIT 15-4

18. Examples of Controls and Related Tests for Investments Learning Objective #2Chapter 15-16 EXHIBIT 15-4

19. Summary of Tests Related to Sophisticated Financial Instruments Learning Objective #2Chapter 15-17 EXHIBIT 15-5

20. Auditing Other Comprehensive Income Learning Objective #3Chapter 15-18  Comprehensive income is defined in FASB codification 220- 10, Comprehensive Income. It is also defined in FASB Concepts Statement No. 6. Both describe it as a business enterprise’s change in equity resulting from transactions and other events from nonowner sources.  The auditor obtains information about OCI as a result of auditing the changes in the related balance sheet accounts that make up its components, for example, financial assets and financial liabilities.

21. Auditing Disclosures Learning Objective #4Chapter 15-19 Those disclosure requirements are expected to result in the following: a. Information to enable users of its financial statements to understand management’s reasons for electing or partially electing the fair value option b. Information to enable users to understand how changes in fair values affect earnings for the period c. The same information about certain items (such as equity investments and nonperforming loans) that would have been disclosed if the fair value option had not been elected d. Information to enable users to understand the differences between fair values and contractual cash flows for certain items. (FASB codification 825-10-50-24, 25)

22. Long-Term Debt Learning Objective #5Chapter 15-20  Most companies have long-term debt as a part of their capital structures.  Important aspects of accounting for debt are:  Including all debt at the proper amounts  Classifying debt appropriately as long or short term  Providing the required presentation and disclosure

23. Examples of Controls and Related Tests for Debt Learning Objective #5Chapter 15-21 EXHIBIT 15-6

24. Examples of Controls and Related Tests for Debt Learning Objective #5Chapter 15-22 EXHIBIT 15-6

25. Examples of Controls and Related Tests for Debt Learning Objective #5Chapter 15-23 EXHIBIT 15-6

26. Substantive Analytical Procedures Learning Objective #5Chapter 15-24

27. Examples of Tests of Details of Balances for Debt Learning Objective #5Chapter 15-25 EXHIBIT 15-7

28. Examples of Tests of Details of Balances for Debt Learning Objective #5Chapter 15-26 EXHIBIT 15-7

29. Examples of Tests of Details of Balances for Debt Learning Objective #5Chapter 15-27 EXHIBIT 15-7

30. Example of a Work Paper for the Audit of Debt Learning Objective #5Chapter 15-28

31. Auditing Pensions and Postretirement Benefits Accounts Learning Objective #6Chapter 15-29  Company financial statements report expenses and liabilities related to pensions, postretirement benefits, and postemployment benefits.  Generally, pensions can be defined benefit or defined contribution plans.  Funded pension plans are often managed by a trust.  The trust itself is a separate entity from the company with its own financial statements that must be audited

32. Examples of Steps in Auditing Pension Costs Chapter 15 -30Learning Objective #6 EXHIBIT 15-8

33. Auditing Taxes Chapter 15 -31Learning Objective #6

34. Auditing Disclosures Chapter 15 -32Learning Objective #7  Disclosures for debt, pension and postretirement benefits, and taxes are extensive and specified by the accounting standards applicable to the accounts.  Therefore, to audit the disclosure, the auditor reads the information on the face of the financial statements and in the notes.

35. Equity Transactions and Activities Chapter 15 -33Learning Objective #8  Execution and recordkeeping for equity transactions are often outsourced.  In publicly traded companies, an outside registrar determines that all stock a company issues complies with its corporate charter.  To maintain a record of current stock owners, most publicly traded companies contract with an outside stock transfer agent.

36. Ratios Related to Equity Accounts Chapter 15 -34Learning Objective #8

37. Examples of Tests of Details of Balances for Equity Accounts Chapter 15 -35Learning Objective #8 EXHIBIT 15-9

38. Auditing Disclosures Chapter 15 -36Learning Objective #10  The financial statements must disclose the number of shares authorized, issued, and outstanding for each class of stock.  FASB ASC 505-10-50, Equity Disclosure, requires entities to disclose a summary of the pertinent rights and privileges of outstanding securities.

39. AUDITING RELATED PARTY TRANSACTIONS Chapter 15 -37Learning Objective #11

40. Identifying Transactions with Related Parties Chapter 15 -38Learning Objective #11 EXHIBIT 15-10

41. Red Flags for Related Party Transactions Chapter 15 -39Learning Objective #11 EXHIBIT 15-11

42. Review Question Chapter 15-40 After identifying related party transactions, (a) the auditor assumes that the transactions were arms length business transactions unless the audit client provides evidence to the contrary. (b) the auditor assumes that the transactions were outside of the ordinary course of business. (c) the auditor must obtain evidence that the transactions were on the same terms that arms length transactions would be. (d) the auditor must obtain evidence that the transactions would have occurred at the same amounts even if the parties were not related

43. Review Question Chapter 15-41 When using the work of a specialist, (a) the auditor is not responsible for anything the specialist does. (b) the auditor should understand the methods and assumptions the specialist uses. (c) the client must select the specialist or the auditor is responsible for the work. (d) the auditor may only select a specialist who is certified.

44. Review Question Chapter 15-42 For which of the following management assertions about investments is the auditor most likely to use a specialist? (a) Existence (b) Ownership (c) Completeness (d) Valuation

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