CHAPTER 19 Audit of the Capital Acquisition and Repayment Cycle

1. CHAPTER 19Audit of the Capital Acquisition and Repayment Cycle

2. What are the major accounts of the capital acquisition and repayment cycle?

3. What are the major accounts of the capital acquisition and repayment cycle? - long-term liabilities and related accounts examples?

4. 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. What are the major accounts of the capital acquisition and repayment cycle? - long-term liabilities and related accounts - owners’ equity accounts examples?

6. 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. 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. 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. In auditing the capital acquisition and repayment cycle, the auditor should consider: ?

10. 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. 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. 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. 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. In auditing the internal controls related to long-term liabilities, the auditor will consider:

15. In auditing the internal controls related to long-term liabilities, the auditor will consider: - proper authorization for issues of notes or bonds Ace Company Bond

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

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

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

19. What are the primary audit objectives with regard to long-term liability account balances?

20. What are the primary audit objectives with regard to long-term liability account balances? - completeness notes payable contracts payable mortgage payable bonds payable

21. What are the primary audit objectives with regard to long-term liability account balances? - completeness - accuracy

22. What are the primary audit objectives with regard to long-term liability account balances? - completeness - accuracy - presentation and disclosure

23. Long-term Liabilities Audit Procedures perform analytical procedures to test the reasonableness of long-term liabilities and interest expense

24. Long-term Liabilities Audit Procedures enquire of management regarding: - completeness of liabilities

25. Long-term Liabilities Audit Procedures inquire of management regarding: - completeness of liabilities - debt-related restrictions on assets

26. Long-term Liabilities Audit Procedures inquire of management regarding: - completeness of liabilities - debt-related restrictions on assets - ability to pay interest

27. Debt Covenant Long-term Liabilities Audit Procedures review contractual provisions of long-term liabilities

28. 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. Canada 48 Long-term Liabilities Audit Procedures confirm debt balances, interest payments, and client compliance with contractual agreements with the creditors auditor creditor

30. Long-term Liabilities Audit Procedures for all long-term liabilities, recalculate interest expense, interest payable, and amortizations of discounts or premiums

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

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

33. Bank Statement 5/31/04 cash receipts journal description _ $$ _ May 23, 2004 Bank loan 14,000 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 Long-term Liabilities Audit Procedures Trace receipt of borrowed amounts from cash receipts journal to bank statement to deposit slipsto debt agreement.

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

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

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

37. What are the auditor’s primary concerns with regard to owners’ equity?

38. What are the auditor’s primary concerns with regard to owners’ equity? - authorization

39. What are the auditor’s primary concerns with regard to owners’ equity? - authorization - presentation and disclosure

40. What are the auditor’s primary concerns with regard to owners’ equity? - authorization - presentation and disclosure - accuracy

41. Owners’ Equity Audit Procedures perform analytical procedures to test the reasonableness of owners’ equity accounts (including dividends)

42. READ: - articles of incorporation, bylaws Owners’ Equity Audit Procedures Ace Company Articles of Incorporation

43. Owners’ Equity Audit Procedures READ: - articles of incorporation, bylaws - minutes of meetings Note discussion of dividends, stock options, stock issues, etc.

44. Owners’ Equity Audit Procedures Confirm shares outstanding with the independent registrar and the stock transfer agent.

45. Owners’ Equity Audit Procedures Confirm shares outstanding with the independent registrar and the stock transfer agent. Who are they?

46. Owners’ Equity Audit Procedures 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

47. Owners’ Equity Audit Procedures 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

48. Owners’ Equity Audit Procedures 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.

49. Bank Statement 5/31/04 cash receipts journal description _ $$ _ May 23, 2004 Joe Ace 23,000 Deposits: 5/23 $23,000 Owners’ Equity Audit Procedures Trace receipts from stock issues from cash receipts journal to bank statement

50. Bank Statement 5/31/04 Owners’ Equity Audit Procedures Trace receipts from stock issues from cash receipts journal to bank statementto deposit slips cash receipts journal description _ $$ _ May 23, 2004 Joe Ace 23,000 Deposits: 5/23 $23,000 Deposit Slip 5/23/04 23,000