Post on 01-Mar-2018
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* Chapter 22
Audit of the CapitalAcquisition and
Repayment Cycle
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Characteristics :
1. Relatively few transactions affect the
account balances, but each one is
often highly material in amount.
2. The exclusion of a single transactioncould be material in itself.
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3. A legal relationship exists between the
client entity and the holder of the stoc,bond, or similar ownership document.
!. A direct relationship exists between theinterest and dividends accounts and
debt and e"uity.
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*Objectives of the audit
of notes payable:1. The internal controls over notes payable
are ade"uate.
2. Transactions for principal and interest are
properly authori#ed and recorded.
3. The liability for notes payable and the
related interest expense and accrued
liability are properly stated
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Internal Controls
1. $roper authori#ation for the issue of
new notes.
Ade"uate controls over the repayment
of principal and interest
$roper documents and records
$eriodic independent verification
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Tests of notes payable transactionsinvolve the issue of notes and therepayment of principal and interest.
Tests of Controls and Substantive
Tests of Transactions
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*Analytical rocedures for
!otes ayable
Analytical procedure Possible misstatement
Recalculate possibleinterest expense on thebasis of average interest
rates and overall monthlynotes payable.
%isstatement of interestexpense and accruedinterest, or omission
of an outstandingnote payable.
&ompare individual notesoutstanding with thoseof the prior year.
'mission ormisstatement ofa note payable.
&ompare total balance innotes payable, interestexpense, and accruedinterest with prior(yearbalances.
%isstatement of interestexpense and accruedinterest or notespayable.
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*"ajor #alance$related Audit
Objectives in !otes ayable
%& Completeness:
)xisting notes payable areincluded
2& Accuracy:
*otes payable in the schedule+ are accurately recorded.
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$roper authori#ation of transactions
$roper record eeping and segregation of duties
ndependent registrar and stoc transfer agent
nternal &ontrols -
*O'ners( )quity
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*Audit of Capital Stoc* and
aid$in Capital1. &ompleteness-
)xisting capital stoc transactionsare recorded.
2. 'ccurrence and accuracy-Recorded capital stoc transactionsexist and are accurately recorded.
3. Accuracy-
&apital stoc is accurately recorded.!. $resentation and disclosure-
&apital stoc is properly presented anddisclosed.
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*Audit of +ividends
1. 'ccurrence-Recorded dividends occurred.
2. &ompleteness-)xisting dividends are recorded.
3. Accuracy-ividends are accurately recorded.
!. 'ccurrence-ividends are paid to stocholdersthat exist.
/. &ompleteness-ividends payable are recorded.
0. Accuracy-ividends payable are accurately recorded.
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*Audit of Retained )arnin,s
Transactions involving retained earnings- *et earnings for the year ividends declared
There may be corrections to- $rior(period earnings $rior(period adustments
Appropriations of retained earnings