Audit of The Capital Acquisition and Repayment Cycle

Chapter
Chapter22
22
Audit
Auditofofthe
the
Capital
CapitalAcquisition
Acquisition
and
andRepayment
Repayment
Cycle
Cycle
Copyright © 2014 Pearson Education

Identify the accounts and the unique
characteristics of the capital acquisition
and repayment cycle.
Design and perform audit tests of notes
payable and related accounts and
transactions.
Identify the primary concerns in the audit
of owners’ equity transactions.
22-2
Design and perform tests of controls,
substantive tests of transactions, and tests
of details of balances for capital stock and
retained earnings.
22-3
1
Identify the accounts and the unique characteristics
of the capital acquisition and repayment cycle.
22-4
1. Relatively few transactions affect the
account balances, but each one is
often highly material in amount.
2. The exclusion of a single transaction

could be material in itself.
22-5
3. A legal relationship exists between the
client entity and the holder of the stock,
bond, or similar ownership document.
4. A direct relationship exists between the

interest and dividends accounts and
debt and equity.
22-6
 Notes payable
 Contracts payable
 Mortgages payable
 Bonds payable
 Interest expense
 Accrued interest
 Appropriations of retained earnings
 Treasury stock
 Dividends declared
22-7
 Cash in the bank
 Capital stock – common
 Capital stock – preferred
 Paid-in capital in excess of par
 Donated capital
 Retained earnings
 Dividends payable
 Proprietorship – capital account
 Partnership – capital account
22-8
Identify client
business risks Phase I
affecting notes payable
Set performance materiality
and assess inherent Phase I
risk for notes payable
Assess control
risk for Phase I
notes payable
22-9
Design and perform
tests of controls and
substantive tests of
Phase II
transactions for
capital acquisition and
repayment cycle
22-10
Design and perform
analytical procedures Phase III
for notes payable
Design tests of Audit procedures

details of notes Sample size
payable to satisfy Phase III
balance-related Items to select
audit objectives Timing
22-11
2
Design and perform audit test of notes payable and
related accounts and transactions.
22-12
Secured or
Legal
unsecured
Obligation
by assets
22-13
Objectives of the audit of notes payable:
 Internal controls are adequate

 Transactions are properly authorized
and recorded
 The related liabilities and expenses are
properly stated
22-14
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.
22-15
22-16
Tests of notes payable transactions
involve the issue of notes and the
repayment of principal and interest.
22-17
Analytical procedure Possible misstatement
Recalculate approximate Misstatement of
interest expense on the interest expense and
basis of average interest accrued interest, or
rates and overall monthly omission of a
notes payable note payable
22-18
Analytical procedure Possible misstatement
Compare individual notes Omission or
outstanding with those misstatement of
of the prior year a note payable
Compare total balance in Misstatement of interest

notes payable, interest expense and accrued
expense, and accrued interest or notes
interest with prior-year payable
balances
22-19
The two most important balance-
related audit objectives in notes
payable are:
1. Completeness:
Existing notes payable are included.
2. Accuracy:
Notes payable in the schedule are
accurately recorded.
22-20
Cash in Bank Notes Payable
Payments of principal
Audited by
TOC and STOT
Ending
Issue of new notes balance
Audited by
TOC and STOT Audited by
Payments AP and TDB
of interest Interest Payable
Audited by
TOC, STOT,
and AP TOC + STOT + AP + TDB
= Sufficient appropriate evidence
22-21
22-22
22-23
3
Identify the primary concerns in the audit of
owners’ equity transactions.
22-24
Publicly Closely
held Versus held
corporation corporation
Many shareholders Simple, few transactions

Frequent transactions Few shareholders
Occasional transactions
22-25
22-26
Proper authorization of transactions
Proper record keeping and segregation of duties
Independent registrar and stock transfer agent
22-27
4
Design and perform tests of controls,
substantive tests of transactions, and tests of
details of balances for capital stock and
retained earnings.
22-28
Auditor concerns in auditing Capital
Stock and Paid-in-Capital accounts
Occurrence
Completeness and
Accuracy
Presentation
Accuracy and
disclosure
22-29
1. Occurrence:
Recorded dividends occurred.
2. Completeness:
Existing dividends are recorded.
3. Accuracy:
Dividends are accurately recorded.
22-30
4. Occurrence:
Dividends are paid to stockholders
that exist.
5. Completeness:
Dividends payable are recorded.
6. Accuracy:
Dividends payable are accurately
recorded.
22-31
Transactions involving retained earnings:
 Net earnings for the year
 Dividends declared
There may be corrections to:

 Prior-period earnings
 Prior-period adjustments
 Appropriations of retained earnings
22-32
22-33
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stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
22-34

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Chapter

Copyright © 2014 Pearson Education

2. The exclusion of a single transaction

4. A direct relationship exists between the

Design tests of Audit procedures

 Internal controls are adequate

2. Adequate controls over the repayment

3.Proper documents and records.

4.Periodic independent verification.

Compare total balance in Misstatement of interest

Many shareholders Simple, few transactions

Proper record keeping and segregation of duties

Independent registrar and stock transfer agent

There may be corrections to:

All rights reserved. No part of this publication may be reproduced,

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