AUDIT OF THE CAPITAL ACQUISITION AND REPAYMENT 21 CYCLE A Dishonest Client Will get The best Of The auditor almost Every Time @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. 21 AUDIT OF THE CAPITAL ACQUISITION AND REPAYMENT CYCLE A Dishonest Client Will Get The Best Of The Auditor Almost Every Time
Characteristics of the Capital Acquisition and Repayment Cycle Few transactions affect the account balances but each transaction is often highly material in amount 2. The exclusion of a single transaction could be material in itself. 3. There is 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 Arens, Loebbecke: Aua @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. 4 Characteristics of the Capital Acquisition and Repayment Cycle 1. Few transactions affect the account balances, but each transaction is often highly material in amount. 2. The exclusion of a single transaction could be material in itself. 3. There is 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
Accounts in the cycle ° Notes payable Paid-in capital in excess of par Contracts payable Donated capital Mortgages payable · Retained earnings B onds payable appropriations of retained earnings · Interest expense Treasury stock · Accrued interest · Dividends declared Cash in the bank Dividends payable proprietorship capital stock--common capital account capital stock-preferred. Partnership--capital account @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. 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 • 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
FIGURE 21 Set tolerable misstatement and Phase I or notes pay able Assess control risk for notes payable Phase ethodology for Designing tests of details of Balances for Notes payable Design and perform of controls and substantive tests of Phase ll transactions Design and perform analytical procedures for note PhaseⅢ payable balance Design tests of details Audit procedures of notes payable Sample size balance to satisfy PhaseⅢl bala Items to select audit objectives Timing @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. FIGURE 21 - 1 Methodology for Designing Tests of Details of Balances for Notes Payable
FIGURE 21-2 Notes Payable and related Interest Accounts Notes payable Interest Payments Beginning expense balance Interest principalIssue of expense new notes Ending balance Interest Cash payable in bank Beginning Issue of Payments of new Principa notes Payments of Payments/ Interest expense Interest terest ng balance @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. FIGURE 21 - 2 Notes Payable and Related Interest Accounts
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 @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. 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
Notes payable FIGURE 21-4 Cash in bank of principal Audited by TOC and stot Issue of new notes dited by TOC and sTOt Interest expense Audited by AP and TD Types of Audit Tests Interest payable for the Capital Payments of interest→-- nterest Expense→ Acquisition and Audited by Audited OC SToT, and AP TOC STOT, and AP Repayment cycle Ending balance Audited by AP Notes Payable Audited by AP and TDB Tests of Analytical Tests of = competent Arens, Loebbecke; Auditing, 8/E to obtain an understanding transactions procedures+ details of eider of internal control)(ToC) (STOT) (TDB) per GAAS @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. FIGURE 21 -4 Types of Audit Tests for the Capital Acquisition and Repayment Cycle Notes Payable
Capital stock-common Beginning FIGURE 21 (1) Redemption balance of stock ssue of stock平 Cash Owners'Equity Ending bank and balance Dividend accounts Paid-in capital In excess Dividends Retained of par-common payable earnIngs Beginning Beginning Beginning (1) Redemption balance Payment balance alance of stock Issue o Dividends stock dividends declared Dividends declared earnIngs Ending Endin Ending alance alance balance @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. FIGURE 21 -4 Owners’ Equity and Dividend Accounts
Audit of Dividend 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). @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. 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)
FIGURE 21-6 Types of Audit Tests for the Capital Acquisition and Repayment Cycle-Owners' Equity(See Figure 21-5 on p. 686 for accounts) Capital stock and paid-in capital in excess of par Cash in bank Dividends payable Retained earnings Issue of stock <f Payment of dividends<Dividends declared--Net Audited by Audited by Audited by TOC and STot TOC and stot TOC and STOt TOC, STOT, AP and TDB Redemption of stock Audited by TOC and stot Ending balance Ending balance Ending balance Audited by Audited by Audited by TDB TDB Tests of controls Substantive Tests of 〔 including procedures com to obtain an understandingtransactions tests of+ procedures/ details of of internal control)(Toc) (STOT (TDB) per GAAS Arens, Loebbecke; Auditing, 8/E @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc
