Audit o the assurance service capital _ppt_22.pptx

Auditing and Assurance Services
Seventeenth Edition
Chapter 22
Audit of the Capital Acquisition
and Repayment Cycle
Copyright © 2020, 2017, 2014 by Pearson Education, Inc. All Rights Reserved

Learning Objectives
22.1 Identify the accounts and the unique characteristics of
the capital acquisition and repayment cycle
22.2 Design and perform audit tests of notes payable and
related accounts and transactions
22.3 Identify the primary concerns in the audit of owners’
equity transactions
22.4 Design and perform tests of controls, substantive tests
of transactions, and tests of details of balances for
capital stock and retained earnings

Learning Objective 22.1
Identify the accounts and the unique characteristics of the
capital acquisition and repayment cycle

Accounts in the Cycle (1 of 3)
• Four characteristics of the capital acquisition and
repayment cycle influence the audit of these accounts
(1 of 2)
– Relatively few transactions affect the account
balances, but each transaction is often highly material
– The exclusion or misstatement of a single transaction
can be material

• Four characteristics of the capital acquisition and
repayment cycle influence the audit of these accounts
(2 of 2)
– A legal relationship exists between the client entity
and the holder of the stock, bond, or similar ownership
document
– A direct relationship exists between the interest and
dividends accounts and debt and equity

• The accounts in a company’s capital acquisition and
repayment cycle depend on the type of business the
company operates and how its operations are financed
• The methodology for designing tests of details of
balances for accounts in the capital acquisition and
repayment cycle is the same as that followed for other
accounts
– The only difference is the name of the account being
audited

Let’s Discuss (1 of 6)
• List four examples of interest-bearing liability accounts
commonly found in balance sheets.
– What characteristics do these liabilities have in
common?
– How do they differ?

Design and perform audit tests of notes payable and related
accounts and transactions

Figure 22.1 Notes Payable and the
Related Interest Accounts

Notes Payable (1 of 4)
• A note payable is a legal obligation to a creditor, which
may be unsecured or secured by assets, and bears
interest
• The objectives of the audit of notes payable are to
determine whether (1 of 2):
– Internal controls over notes payable are adequate
– Transactions for principal and interest involving notes
payable are properly authorized and recorded

• The objectives of the audit of notes payable are to
determine whether (2 of 2):
– The liability for notes payable and the related interest
expense and accrued liability are properly stated
– Notes payable and the related interest expense are
properly aggregated and presented and related
disclosures are adequate and understandable

• There are four important controls over notes payable:
– Proper authorization for the issue of new notes
– Adequate controls over the repayment of principal and
interest
– Proper documents and records
– Periodic independent verification
• Tests of controls for notes payable and related interest
should emphasize testing the above controls

• Substantive analytical procedures are essential for notes
payable
• The normal starting point for the audit of notes payable is
a schedule of notes payable and accrued interest
• The three most important balance-related audit
objectives in notes payable are:
– Completeness, accuracy, and presentation

Table 22.1 Substantive Analytical
Procedures for Notes Payable
Substantive Analytical Procedure Possible Misstatement
Recalculate approximate interest
expense on the basis of average
interest rates and overall monthly
notes payable.
Misstatement of interest
expense and accrued interest
or omission of an outstanding
note payable
Compare individual notes
outstanding with those of the prior
year.
Omission or misstatement of a
note payable
Compare total balance in notes
payable, interest expense, and
accrued interest with prior-year
balances.
Misstatement of interest
expense and accrued interest
or notes payable

• Why are liability accounts included in the capital
acquisition and repayment cycle audited differently from
accounts payable?
• Which internal controls should the auditor be most
concerned about in the audit of notes payable?
– Explain the importance of each.

• Why is it more important to search for unrecorded notes
payable than for unrecorded notes receivable?
– Suggest audit procedures that the auditor can use to
uncover unrecorded notes payable.
• Distinguish between (a) tests of controls and substantive
tests of transactions and (b) tests of details of balances
for liability accounts in the capital acquisition and
repayment cycle.

Identify the primary concerns in the audit of owners’ equity
transactions

Figure 22.3 Owners’ Equity and
Dividend Accounts

Owners’ Equity (1 of 3)
• The verification of owners’ equity is more complex for
publicly held corporation than closely held corporation
• The major owners’ equity accounts in a publicly held
corporation include:
– Capital and common stock
– Paid-in capital in excess of par
– Retained earnings and related dividends

• The objectives of the audit of owners’ equity accounts
are to determine whether:
– Internal controls over capital stock and related
dividends are adequate
– Owners’ equity transactions are correctly recorded
– Owners’ equity balances are properly recorded and
presented

• Several internal controls are important for owners’
equity activities:
– Proper authorization of transactions
– Proper record keeping and segregation of duties
– Independent registrar and stock transfer agent

• What are the major internal controls over owners’ equity?
• How does the audit of owners’ equity for a closely held
corporation differ from that for a publicly held corporation?
– In what respects are there no significant differences?

Design and perform tests of controls, substantive tests of
transactions, and tests of details of balances for capital
stock and retained earnings

Audit of Capital Stock and Paid-In
Capital (1 of 4)
• Auditors have four main concerns in auditing capital
stock and paid-in capital in excess of par (1 of 2):
– Existing capital stock transactions are recorded
(completeness transaction-related objective)
– Recorded capital stock transactions occurred and are
accurately recorded (occurrence and accuracy
transaction-related objectives)

Capital (2 of 4)
• Auditors have four main concerns in auditing capital
stock and paid-in capital in excess of par (2 of 2):
– Capital stock is accurately recorded (accuracy
balance-related objective)
– Capital stock is properly presented and disclosed
(presentation balance-related objective)

Capital (3 of 4)
• The emphasis in the audit of dividends is on dividend
transactions rather than on the ending balance
– The exception is when there are dividends payable
• The most important objectives, including those
concerning dividends payable, are:
– Occurrence, completeness, accuracy, and
presentation

Capital (4 of 4)
• Accounting standards require proper presentation of
retained earnings and disclosure of information related to
retained earnings
• The auditor’s primary concern in determining whether the
presentation objective for retained earnings is satisfied
primarily relates to disclosure of any restrictions on the
payment of dividends

• What are the primary objectives in the audit of owners’
equity accounts?
• Describe the duties of a stock registrar and a transfer
agent. How does the use of their services affect the
client’s internal controls?

• What should be the major emphasis in auditing the
retained earnings account?
– Explain your answer.
• Explain the relationship between the audit of owners’
equity and the calculations of earnings per share.
– What are the main auditing considerations in verifying
the earnings per share figure?

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