AUDITING CHAPTER 11 Accounts Receivable & Cash Balances By David N. Ricchiute.
AUDITING CHAPTER 16 Investment, Debt, & Equity By David N. Ricchiute.
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Transcript of AUDITING CHAPTER 16 Investment, Debt, & Equity By David N. Ricchiute.
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AUDITINGCHAPTER 16
Investment, Debt, & EquityByDavid N. Ricchiute
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GBW 8th ed., Ch. 162
TOPICS
Nature of financing cycleControls over long term debt, equity securitiesAuditor’s consideration of internal controlSubstantive tests of investments, long-term debt, equity balancesAuditor judgment for discretionary itemsAssurance, consulting opportunities
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GBW 8th ed., Ch. 163
FINANCING CYCLE
Capital funds received from Investors Creditors
Capital funds used for Operations Temporary investment
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GBW 8th ed., Ch. 164
DOCUMENTATION
Separate custody & recording for internal controlBond certificateCommercial paperStock certificateTreasury bill
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GBW 8th ed., Ch. 165
CUSTODY & RECORDING
Custody Held by internal officials, independent
custodians Minimize likelihood unauthorized sales
Recording By person independent of custody Provides detailed records of
transactions
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GBW 8th ed., Ch. 166
CONTROLS & DEBT SECURITIES
Long term debt Authorized by Board Maximum limits
Unissued instruments Prenumbered consecutively Custody separate from recording
Recording separate from custody, incurrence, redemption
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GBW 8th ed., Ch. 167
CONTROLS & EQUITY SECURITIES
Issuance, retirement, dividends Authorized by Board
Stock certificates Prenumbered consecutively Canceled when retired Physically safeguarded
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GBW 8th ed., Ch. 168
AUTHORIZATION: Investments Objective, Error, ProcedureObjective Error ProcedureInvestment in accord with authorization
Policy violation; higher risk
Selection policies; list approved investments
Sources of funds in accord with criteria
Funds with unfavorable terms
Policies
Adjustments in accord with criteria
Misstated accounts; covenant violations
Policies, prenumbering, authorization
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GBW 8th ed., Ch. 169
RECORDING: Investments Objective, Error, Procedure
Objective ErrorProcedure
Recorded at correct amounts, proper period, properly classified
Detailed records inaccurate, misstated financial statements
Processing, recording procedures; review Board minutes for directives; schedules due dates
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GBW 8th ed., Ch. 1610
ACCESS: Investments Objectives, Errors, ProceduresObjective Error ProcedureAccess restricted
Securities lost, stolen, destroyed, diverted
Physical barriers, insurance, files authorized signatures, segregation
Access to forms, records restricted
Records lost, stolen; forms used to divert
Physical barriers; prenumber; insurance; periodic accounting
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GBW 8th ed., Ch. 1611
INTERNAL CONTROL DOCUMENTATION
Test controls over investments only if sufficient transactionsIf not sufficient transactions, obtain understanding of controls Internal control questionnaire Memorandum
Plan substantive tests
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GBW 8th ed., Ch. 1612
SUBSTANTIVE TESTS: Existence, Occurrence
Investments Debt Stock
Confirm externally held securitiesInspect internally held securitiesTest cutoff
Confirm debtsExamine bonds
Inspect unissued instruments
Verify balancesExamine supporting documentation, authorization
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GBW 8th ed., Ch. 1613
SUBSTANTIVE TESTS: Completeness
Investments Debt Stock
Test cutoffAnalytical procedures
Analytical proceduresInspect, account for unissued instruments
Analytical proceduresVerify balances
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GBW 8th ed., Ch. 1614
SUBSTANTIVE TESTS: Rights & Obligations
Investments Debt StockConfirm externally held securitiesInspect internally held securities
Confirm debtsExamine bondsConfirm bonds & interest payments
Verify balances
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GBW 8th ed., Ch. 1615
SUBSTANTIVE TESTS: Valuation
Investments Debt Stock
Verify transactionsConfirm externally held securitiesCheck prices
Verify transactionsConfirm loansRecalculate interest, amortizations
Verify balances
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GBW 8th ed., Ch. 1616
SUBSTANTIVE TESTS: Presentation, Disclosure
Investments Debt Stock
Compare presentation, disclosure to GAAP
Compare presentation, disclosure to GAAP
Compare presentation, disclosure to GAAP
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GBW 8th ed., Ch. 1617
SUBSTANTIVE TESTS: Valuation of Marketable
Securities Valuation Obtain schedule investments Verify math accuracy by footing, cross
footing, reconciling to GL
For sampled transactions Examine for authorization,
documentation Compare price to published prices Test calculations for dividends, interest
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GBW 8th ed., Ch. 1618
SUBSTANTIVE TESTS: Marketable Securities & Other Assertions
Existence, Valuation, Rights Confirm or physically count
Existence, Completeness Test cutoff for acquisitions, sales, income
Completeness Perform analytical procedures
Presentation & Disclosure Review for classification, adequate
disclosure
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GBW 8th ed., Ch. 1619
SUBSTANTIVE TESTS: Long-term Debt 1
Existence, occurrence, Valuation, Completeness, Obligations Obtain schedule long-term debt Verify math accuracy by footing,
cross footing, reconciling to GL Examine documentation Review entries, physically inspect
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GBW 8th ed., Ch. 1620
SUBSTANTIVE TESTS: Long-term Debt 2
Existence, Obligations, Valuation Confirm bonds, notes, interest
payments
Existence, Occurrence, Obligations Obtain indebtedness agreements
Examine documentation, authorizations Determine compliance with recording
procedures
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GBW 8th ed., Ch. 1621
SUBSTANTIVE TESTS: Long-term Debt 3
Valuation Recalculate interest, amortization
premiums, discounts
Existence, Occurrence, Completeness Perform analytical procedures
Presentation & Disclosure Review for classification, adequate
disclosures
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GBW 8th ed., Ch. 1622
SUBSTANTIVE TESTS: Capital Stock, Retained Earnings, EPS 1
Existence, Occurrence, Valuation, Completeness, Obligations Verify recorded balance
Obtain schedule changes Foot, cross foot, reconcile with GL Examine sample of entries; foot, cross
foot, reconcile Confirm externally maintained
certificates, treasury shares
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GBW 8th ed., Ch. 1623
SUBSTANTIVE TESTS: Capital Stock, Retained Earnings, EPS 2
Occurrence, valuation Review issuances, stock & cash
dividends, stock splits, treasury stock for Documentation,authorization, recording,
Review treasury stock for Disbursements, sales, appropriate basis of
accounting
Valuation Recalculate EPS
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GBW 8th ed., Ch. 1624
SUBSTANTIVE TESTS: Capital Stock, Retained Earnings, EPS 3
Completeness Perform analytical procedures
Presentation & Disclosure Review for classification, adequate
disclosure
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GBW 8th ed., Ch. 1625
CLASSIFICATION ISSUES
Accounting for investments in debt, equity securities Classification as “held-to-maturity” or
“available-for-sale” Gains, losses recognized only on actual
sales Classification as “trading securities”
Unrealized gains, losses recognized in current earnings
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GBW 8th ed., Ch. 1626
MANAGEMENT DISCRETION & CLASSIFICATION
Unrealized gains, losses provide opportunities to manage earningsAuditors have incentives to assure that management complies with requirements of SFAS No. 115 Monitor management’s intent
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GBW 8th ed., Ch. 1627
ASSURANCE & CONSULTING
Before 2000 Investment advising was previously a
profitable advisory service
After 2000 SEC does not approve of investment
advising for audit clients