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1、Chapter 22Audit of the Capital Acquisition and Repayment Cyclen Review Questions22-1Four examples of interest bearing liability accounts commonly found on balance sheets are:1.Notes payable2.Contracts payable3.Mortgages payable4.Bonds payableThese liabilities have the following characteristics in co
2、mmon:1.Relatively few transactions affect the account balance, but each transaction is often highly material in amount.2.The exclusion of a single transaction could be material in itself.3.There is a legal relationship between the client entity and the holder of the stock, bond, or similar ownership
3、 document.4.There is a direct relationship between interest and dividend accounts and debt and equity.These liabilities differ in what they represent and the nature of their respective liabilities.22-2The characteristics of the liability accounts in the capital acquisition and repayment cycle that r
4、esult in a different auditing approach than the approach followed in the audit of accounts payable are:1.Relatively few transactions affect the account balance, but each transaction is often highly material in amount.2.The exclusion of a single transaction could be material in itself.3.There is a le
5、gal relationship between the client entity and the holder of the stock, bond, or similar ownership document.4.There is a direct relationship between interest and dividend accounts and debt and equity.22-3It is common to audit the balance in notes payable in conjunction with the audit of interest exp
6、ense and interest payable because it minimizes the verification time and reduces the likelihood of overlooking misstatements in the balance. Once the auditor is satisfied with the balance in notes payable and the related interest rates and due dates for each note, it is easy to test the accuracy of
7、accrued interest. If the interest expense for the year is also tested at the same time, the likelihood of omitting a note from notes payable for which interest has been paid is minimized. When there are a large number of notes or a large number of transactions during the year, it is usually too time
8、 consuming to completely tie out interest expense as a part of the audit of the notes payable and related accrued interest. Normally, however, there are only a few notes and few transactions during the year.22-4The most important controls the auditor should be concerned about in the audit of notes p
9、ayable are:1.The proper authorization for the issuance of new notes (or renewals) to insure that the company is not being committed to debt arrangements that are not authorized.2.Controls over the repayment of principal and interest to insure that the proper amounts are paid.3.Proper records and pro
10、cedures to insure that all amounts in all transactions are properly recorded.4.Periodic independent verification to insure that all the controls over notes payable are working.22-5The most important analytical procedures used to verify notes payable is a test of interest expense. By the use of this
11、test, auditors can uncover misstatements in interest calculations or possible unrecorded notes payable.22-6It is more important to search for unrecorded notes payable than unrecorded notes receivable because the omission of an asset is less likely to occur than the omission of a debt. Several audit
12、procedures the auditor can use to uncover unrecorded notes payable are:1.Examine the notes paid after year-end to determine whether they were liabilities at the balance sheet date.2.Obtain a standard bank confirmation that includes specific reference to the existence of notes payable from all banks
13、with which the client does business.3.Review the bank reconciliation for new notes credited directly to the bank account by the bank.4.Obtain confirmation from creditors who have held notes from the client in the past and are not currently included in the notes payable schedule.5.Analyze interest ex
14、pense to uncover a payment to a creditor who is not included on the notes payable schedule.6.Review the minutes of the board of directors for authorized but unrecorded notes.22-7The primary purpose of analyzing interest expense is to uncover a payment to a creditor who is not included on the notes p
15、ayable schedule. The primary considerations the auditor should keep in mind when doing the analysis are:1.Is the payee for the interest payment listed in the cash disbursements journal also included in the notes payable list?2.Has a confirmation for notes payable been received from the payee?22-8The
16、 tests of controls and substantive tests of transactions for liability accounts in the capital acquisition and repayment cycle consists of tests of the control and substantive tests over the payment of principal and interest and the issuance of new notes or other liabilities, whereas the tests of de
17、tails of balances concern the balance of the liabilities, interest payable, and interest expense. A unique aspect of the capital acquisition and repayment cycle is that auditors normally verify the transactions and balances in the account at the same time, as described in the solution to Review Ques
18、tion 22-3.22-9Four types of restrictions long-term creditors often put on companies in granting them a loan are:1.Financial ratio restrictions2.Payment of dividends restrictions3.Operations restrictions4.Issue of additional debt restrictionsThe auditor can find out about these restrictions by examin
19、ing the loan agreement and related correspondence associated with the loan, and by confirmation. The auditor must perform calculations and observe activities to determine whether the client has observed the restrictions.22-10The primary objectives in the audit of owners equity accounts are to determ
20、ine whether:1.The internal controls over capital stock and related dividends are adequate.2.Owners equity transactions are recorded properly, as defined by the following six transaction-related audit objectives:n Occurrencen Completenessn Accuracyn Posting and summarizationn Classificationn Timing22
21、-10(continued)3. Owners equity balances in the financial statements satisfy the following balance-related audit objectives:n Detail tie-inn Existencen Completenessn Accuracyn Classificationn Cutoff4. Owners equity balances are properly presented and disclosed to satisfy the following presentation an
22、d disclosure-related audit objectives:n Occurrence and Rights and Obligationsn Completenessn Accuracy and Valuationn Classification and Understandability22-11Although the corporate charter and bylaws are legal documents, their legal nature is not being judged by the auditor. They are being used only
23、 to reference transactions being tested by the auditor and provide insight into some of the key control features of the company. The auditor should consult an attorney if the information the auditor needs from the documents is not clear or if a legal interpretation is needed.22-12The major internal
24、controls over owners equity are:1.Proper authorization of transactions2.Proper record keeping3.Adequate segregation of duties between maintaining owners equity records and handling cash and stock certificates4.The use of an independent registrar and stock transfer agent22-13The audit of owners equit
25、y for a closely held corporation differs from that for a publicly held corporation in that the amount of time spent in verifying owners equity in a closely held corporation is usually minimal because of the relatively few transactions for capital stock accounts that occur during the year. For public
26、ly held corporations, the audit of owners equity is more complex due to the existence of a larger number of shareholders and frequent changes in the individuals holding stock.The audits are not significantly different in regard to whether the transactions in the equity accounts are properly authoriz
27、ed and recorded and whether the amounts in the accounts are properly classified, described, and stated in accordance with generally accepted accounting principles. 22-14The duties of a stock registrar are to make sure that stock is issued by a corporation in accordance with the capital authorization
28、 of the board of directors, to sign all newly issued stock certificates, and to make sure old certificates are received and cancelled before a replacement certificate is issued when there is a change in the ownership of the stock.The duties of a transfer agent are to maintain the stockholder records
29、, and in some cases, disburse cash dividends to shareholders.The use of the services of a stock registrar improves the effectiveness of the clients internal controls by preventing the improper issuance of stock certificates. Along similar lines, the use of the services of an independent transfer age
30、nt improves the control over the stock records by putting them in the hands of an independent organization.22-15The number of shares outstanding, the correct valuation of capital stock transactions, and par value can all be confirmed with a transfer agent. The balance can then be easily recalculated
31、 from this information.22-16Since it is important to verify that properly authorized dividends have been paid to owners of stock as of the dividend record date, a comparison of a random sample of cancelled dividend checks to a dividend list prepared by management would be inadequate. Such an audit s
32、tep is useless unless the dividend list has first been verified to include all stockholders of record at the dividend record date. A better test is to determine the total number of shares outstanding at the dividend date from the stock registrar and recompute the total dividends that should have bee
33、n paid for comparison with the total amount actually paid. A random sample of cancelled checks should then be compared to the independent registrars records to verify that the payments were actually made to valid shareholders.22-17If a transfer agent disburses dividends for a client, the total divid
34、ends declared can be verified by tracing the amount to a cash disbursement entry to the agent and also confirming the amount. There should ordinarily be no need to test individual dividend disbursement transactions if a stock transfer agent is used. 22-18The major emphasis in auditing the retained e
35、arnings account should be on the recorded changes that have taken place during the year, such as net earnings for the year, dividends declared, prior period adjustments, extraordinary items charged or credited directly to retained earnings, or setting up or elimination of appropriations. Except for
36、dividends declared, the other items should be verified during other parts of the engagement. This is especially true of the net earnings for the year. Therefore, the audit of retained earnings primarily consists of an analysis of the changes in retained earnings and the verification of the authoriza
37、tion and accuracy of the underlying transactions. 22-19For auditing owners equity and calculating earnings per share, it is crucial to verify that the number of shares used in each is accurate. Earnings are verified as an integral part of the entire audit and should require no additional verificatio
38、n as a part of owners equity. The most important auditing considerations in verifying the earnings per share figure are the accounting principles prescribed by APB 15 and the descriptions of the various classes of stock in the corporate charter and minutes of the board of directors.Multiple Choice Q
39、uestions From CPA Examinations22-20a.(2)b.(2)c.(2)22-21a.(4)b.(3)c.(1)n Discussion Questions and Problems22-22a.PURPOSE OF CONTROLb.POTENTIAL FINANCIAL STATEMENT MISSTATEMENTc.AUDIT PROCEDURE TO DETERMINE EXISTENCE OF MATERIAL MISSTATEMENT 1.To insure that all note liabilities are actual liabilities
40、 of the company.Loss of assets through payment of excess interest rates or the diversion of cash to unauthorized persons.Examine note request forms for proper authorization and discuss terms of note with appropriate management personnel.2.To insure that note transactions are recorded in full and in
41、detail.Improper disclosure or misstatements in notes payable through duplication.Reconcile detailed contents of master file or other records to control account.3.To insure that all note-related transactions agree with account balances.Misstatement of notes payable.Reconcile master file with outstand
42、ing notes payable.4.To prevent misuse of notes and funds earmarked for notes.Misstatement of liabilities and cash.Perform all substantive procedures on extended basis. Trace from paid notes file to cash receipts to determine that the appropriate amount of cash was received when the note was issued.5
43、.To insure that notes are not paid more than once.Loss of cash.Examine outstanding notes and paid notes for similarities and the potential for reusing the notes.6.To insure that only the proper interest amount is paid and recorded.Misstatement of interest expense and related accrual.Recompute intere
44、st on a test basis.22-23 a.AUDIT PROCEDUREPURPOSE1To determine the nature of restrictions on client as a means of verifying whether the restrictions have been met and to insure they are adequately disclosed.2To insure that the bonds are not subject to unnecessary early retirement by bondholders and
45、that proper disclosures are made. 3To determine if the account balances are reasonable as related to each other and to examine for unreasonable changes in the account balances. 4To determine if the calculations are correct and accounts are accurate.5To obtain independent confirmation of bond indebte
46、dness and collateral.b.The auditor should be alert for the following provisions in the bond indenture agreement:1.Restrictions on payment of dividends2.Convertibility provisions3.Provisions for repayment4.Restrictions on additional borrowing5.Required maintenance of specified financial ratiosc.The a
47、uditor can determine whether the above provisions have been met by the following procedures:22-23 a. (continued) 1.Audit of payments of dividends2.Determine if the appropriate stock authorizations are adequate3.Determine if sinking fund is adequate4.Search for other liabilities5.Calculate ratios and
48、 compare to agreementd.The auditor should verify the unamortized bond discount or premium on a bond that was in force at the beginning of the year by recalculation. This is done by dividing the premium or discount by the number of total months the bonds will be outstanding and multiplying by the number of months remainin