This document provides an overview of the finance cycle and related audit procedures. It defines the finance cycle as transactions related to obtaining loans and repaying obligations. Key accounts include loans, share capital, debentures, and provisions. The auditor tests for proper occurrence, valuation, completeness, and classification. Procedures include inspecting agreements and minutes, confirming terms, and tracing transactions. The document also discusses auditing estimates for provisions and contingent liabilities by evaluating management's process and assumptions.

1. 1
UNIT 1- Internal controls: Business Cycles
Part 2: Finance and Invesment cycle

2. Learning Outcomes
• Explain the nature and purpose of the
cycle.
• Identify and describe the major general
ledger accounts affected by the cycle.
• Formulate the substantive procedures per
assertion or per the whole section as
required
• REFER TO COURSE OUTLINE FOR
DETAILED LEARNING OUTCOMES:

3. WHAT IS THE
FINANCE
CYCLE?
• Financing transactions
• The receipt of loan funding and the subsequent
repayment thereof.
• The handling of and accounting for the obligations that
arise from financing, including:
• Finance charges paid and accrued.

4. What is
covered in
this cycle?
• 1. Loans
• 2. Share capital
• 3. Debentures
• .4. Provision and Contingent liabilities
• 5. Leases

5. Characteristic of this
cycle
Infrequent and smaller transaction
cycle
Transactions could individually be
material
Non-routine due to infrequent nature
lead to lack of internal control
Consideration of the legal and
regulatory environment
Non-standard documentation is used

6. Fraudulent financial
reporting
Failing to recognise all financing liabilities at the reporting date
Omitting long-term liabilities
Undervalue long-term liabilities
Accounting for complex financial instrument liabilities incorrectly
Incorrect classifying of debt and equity in terms of the requirement
of IFRS
Fair values of liabilities incorrectly accounted for at the reporting
date
Failing to account for accruals in relation o financing expenses, such
as interest expenses and dividends declared
Understating or omitting provisions
Inadequate disclosure of contingent liabilities

7. Memorandum of
incorporation
Minutes of board
meeting
Loan agreement
Bank statement
Supporting
documents
Used in this
cycle.

8. 1. Long term loans
• Borrowing long term loans is a common form
of financing.

9. Flowchart of
how the Finance
cycle takes
place?
Raising of funds
Acquisition of debt
Repayment of
dent
Handling and
Accounting for
related investment
and Finance
Activities

10. Approval to take
considerations of
A need that have arisen such
as:
• A decision to invest in a
new plant may require
funds to be sourced.
Board of directors meet
to approve transaction
In line with
MoI of Incorporation.
Step 1

11. What assertion
will the auditor
be testing?
Occurrence
Evidence of authority
can be determined
by tracing, minutes of
meetings.

12. Loan agreement is signed.
Terms
Conditions
Interest
Lenders approached
and terms of
borrowing are
confirmed and agreed
on.
Step 2

13. What assertion
will the auditor
be testing?
Valuation
Obtain information
about terms and
conditions of to check if
no violation has taken
place such as missed
payments..

14. Receipt is received
and recorded into
cash book, posted
to general ledger.
Lender deposits
funds in company
bank account
1. Filed
Step 3

15. What assertion
will the auditor
be testing?
Completeness
Auditor can review the
bank statements to
check if there are no
lump sump deposit that
may be loan obtained

16. Monthly debit
order for payment
of instalment to
lender.
Monthly
statement
received from
lender
Step 4

17. Missed loan
payment lead
to higher
interest,
penalties or
repossessions.

18. How to account for
long term loans:
• Reflect at amortised cost using the effective
interest rate
• Audit procedures similar to those of
debentures

19. What substantive
audit procedures
will the auditor do
to test for
Completeness
assertion.
• Obtain specific representations from management
• Review financial records, minutes and
correspondence
• Obtain 3rd party confirmation
• Enquire and confirm the source of funding for any
major acquisitions
• Match interest payments to loans
• Perform analytical review

20. Example of how
Enron would hide
its debts?
Image Source :
Investopedia.

21. 2. Share Capital
• Occurrence
• Inspect the memorandum of incorporation for
• Conditions and authority
• Sales of shares to directors inspect minutes for authorisation as
required
• Inspect minutes of directors' meetings to confirm is resolution for
the shares was approved
• Inspect the register of shareholders
• Inspect notification confirming the issue was lodged
• Trace receipt of cash to the bank
• Completeness
• Confirm with directors that no other share issues have taken place
during the current year

22. 2. Share Capital
• Accuracy, cut-off and classification
• Re-perform calculations to ensure the receipts
agree to the issue price
• Confirm by inspecting dates that the issue was
recorded in the correct period
• Cast the capital account
• Disclosure
• Inspect disclosure of AFS
• No of shares issues, rights of shares, details of shares
to directors
• Consistent with evidence gathered during the audit
• Amounts facts and dates are accurate
• Classification is appropriate, clear and understandable

23. 3.
Debentures.
• IFRS requirements are critical and complex

24. Debentures.
Cont’d
• IFRS requirements are critical and complex

25. Provisions,
Contingent
Liabilities and
Contingent Assets
• Consider the accounting requirements in IFRS
first
• Provision – liability with uncertain timing
• Liability – present obligation
• Probability of outflow of resources
• Reliable estimate
• Contingent liability – Possible obligation
• Provisions include:
• Environmental damage
• Bad debt or obsolete inventory
• Refund to customers
• Court case
• Contingent liabilities is when there is an
expectation of a liability but the conditions
are not certain

26. What is valuation
of a provision?
• The value at which the provision is recognised is the
reliable estimate of the amount of the obligation.
• Thus auditor must identify and assess the risk of material
misstatement of accounting estimates
• How management identifies transaction, events and
conditions which may give rise to the need of accounting
estimates
• How management determines the estimate;
• Models
• Use of an expert
• Assumptions
Effect of estimation uncertainty

27. Auditing provisions,
Contingent Liabilities
and Contingent
Assets for Accuracy,
Valuation and
Allocation assertion
• Review and test the process used by management to
develop the estimates
• Evaluate the data on which the estimate is based
• Evaluate the reasonableness and consistency of any
assumption
• Re-perform the calculations
• Compare the amount of the estimates to similar
estimates
• Compare the amount of the estimate to prior periods

28. Auditing provisions,
Contingent Liabilities and
Contingent Assets for
existence assertion
Evaluate the
company’s procedure
for identifying
provisions and
contingent liabilities.

29. Auditing provisions,
Contingent Liabilities and
Contingent Assets for
existence assertion Evaluate the
probability of an
outflow of
resources.

30. Auditing provisions,
Contingent Liabilities and
Contingent Assets for
existence assertion
Inspect the supporting
documentation and evaluate:
the present obligation,
probability of an outflow to settle
the obligation, basis on which the
amount is determined and if it is
reasonable.

31. Auditing provisions,
Contingent Liabilities and
Contingent Assets for
existence assertion
Inspect documentation which
management supplies to
support contingent liabilities
and consider if the obligation’s
existence will only be
confirmed by a future event

32. Auditing provisions,
Contingent Liabilities and
Contingent Assets for
Obligation assertion Obtain legal
advise if the
obligation is not
certain

33. Auditing provisions,
Contingent Liabilities and
Contingent Assets for
Disclosure assertion
Inspect disclosure for
compliance to IFRS, consistent
with evidence, amounts facts
are accurate, classification is
appropriate and disclosure is
clear and understandable

34. Auditing provisions,
Contingent
Liabilities and
Contingent Assets
for completeness
assertion
Evaluate the process for identifying provisions
Compare the schedule of provisions to the schedule of provisions for
the prior year
Compare current disclosed contingent liabilities to that of the prior
year
Enquire from the company’s legal advisors about the disputes the
company is currently involved in
Inspect the minutes for the need for provisions on warrantees, claims,
environmental damage, refunds, closure of a section
Inspect correspondence returns from SARS
Inspect cash payments subsequent to year-end for unusual payments
Obtain bank confirmation on loans, discounted bills
Discuss completeness of the provision with management