Boynton SM CH 17
Boynton SM CH 17
Boynton SM CH 17
AUDIT
FINANCING
CYCLE
Learning
Check
17-1.
17-2. When auditing the investing and financing cycles auditors typically
address the following issues:
What assets are necessary to support the operations of the entity, and
what are managements long-range plans for growing the entitys
asset base?
17-1
These cycles are often audited together due to the strong connection
between asset acquisition and the financing of those assets.
17-3. Investing activities are critical to a company in the hotel industry as
facilities are the primary productive asset. The location and quality of
hotel facilities are directly related to revenues and represent a substantial
proportion of the asset side of the balance sheet. Due to the long-term
nature of these assets they are usually financed with long-term
mortgages.
Alternatively, buildings are only necessary to house the process of
computer assembly and often these facilities may be leased rather than
purchased. A computer assembler may even consider an operating lease
rather than a capital lease.
a.
17-2
and repair and maintenance transactions (VA3) are accurately valued using
GAAP and correctly journalized, summarized and posted.
Transactions for depreciation expense are properly valued (VA5).
Cutoff. All acquisitions of plant assets (EO1 and C1), and disposals of plant
assets (EO2 and C2), and repair and maintenance transactions (EO3 and C3)
have been recorded in the correct accounting period.
Classification. All acquisitions of plant assets (PD1), and disposals of plant
assets (PD2), and repair and maintenance transactions (PD3) have been
recorded in the proper accounts.
Balance Objectives
Existence. Recorded plant assets represent productive assets that are in
use at the balance sheet date (EO4).
Completeness. Plant assets balances include the effects of all applicable
transactions during the period (C4).
Rights and Obligations. The entity owns or has rights to all recorded plant
assets at the balance sheet date (RO1).
Valuation and Allocation. Plant assets balances are stated at cost (VA4),
less accumulated depreciation (VA5), and are written down for material
impairments (VA6).
Disclosure Objectives
Occurrence and Rights and Obligations.
events and transactions have occurred and pertain to the entity (PD4).
Completeness. All PP&E disclosures that should have been included in the
financial statements have been included (PD5).
Understandability. All PP&E information is appropriately presented and
information in disclosures is understandable to users (PD6).
Accuracy and Valuation. PP&E information is disclosed accurately and at
appropriate amounts (PD7).
b.
The natural
With
17-3
17-5.
a.
Asset
Audit Significance
An unexpected increase in fixed asset turnover may
Turnover
assets.
An unexpected increase in total asset turnover may
indicate the failure to record or capitalize depreciable
assets.
An unexpected increase or decrease in the depreciation
Depreciation
Expense
as
Percent of Property,
Plant
and
Equipment
Repair Expenses to
Net Sales
b.
Inherent risk may be low for the existence assertion for plant assets
as they are not vulnerable to theft and they are easy to observe.
However, inherent risk may be moderate to high for issues of
completeness associated with the recording of capital leases, the
existence
of
various
capitalized
expenditures,
or
with
the
The same system of internal control that governs normal day to day
expenditures also applies to the acquisition of plant assets.
Additional controls that might not apply to routine expenditures
include the fact that due to the size and long-term implications of
acquisitions of plant assets, they are normally subject to a capital
budgeting process and review by the board of directors (or
committee of the board).
17-4
17-6.
a.
b.
17-7.
a.
b.
c.
17-5
17-8. The procedures that may be useful to the auditor in determining whether
all plant asset retirements have been recorded are:
17-9
17-6
b.
evaluate
impairment
is
based
on
an
estimate
of
the
Based on the
b.
17-11.
are
accurately
valued
using
GAAP
and
correctly
journalized,
17-7
17-12. a.
b.
17-8
Ratio
Audit Significance
Interest
Bearing
debt
Shareholders
Equity
to
Assets
Comparing
Total
that
equity
that
may
may
be
be
compared
with
compared
with
prior
prior
years
years
Return
Incremental Cost of
Debt
Current Portion of
liquidity problems.
Operations
Times
Interest
Earned
Interest Expense to
financing costs.
A reasonableness test of recorded interest expense that
Interest
Bearing
Debt
17-13.
Control
capital.
risk
as
also
low
as
financing
transactions
receive
17-9
17-15.
17-10
17-16.
VA
X
X
X
X
X
trustees
Recalculate interest expense
17-17. a.
test
is
from
recorded
entries
to
supporting
c.
17-18.
17-11
EO
X
X
X
X
X
and X
transfer agent
Inspect stock certificate book
Inspect certificates of shares held in treasury
17-20.
X
X
C
X
X
X
X
Audit Significance
Return on common
stockholders equity
Equity
to
total
equity
Dividend
payout
rate
that
may
be
compared
with
prior
years
long-term assets.
Earnings per share is useful for comparisons with price
17-12
Ratio
Audit Significance
per share.
Sustainable growth
rate
17-21.
Comprehensive
Questions
(Estimated time - 25 minutes)
17-13
17-22.
retirements,
and
depreciation,
and
the
ledger
is
periodically reconciled.
17-14
Property
and
equipment
is
insured
in
accordance
with
management's authorization.
17-15
17-23. a.
Category
Substantive Test
Specific
Initial
Audit
Objectives
Procedure
determine:
All
the entity.
b) Key economic drivers that influence the entitys acquisition of
plant assets.
c)
VA4
EO1, EO4
VA4
VA4
ii)
Analytical
Procedure
s
All
ii)
17-16
Category
Substantive Test
Specific
Audit
Objectives
c)
EO1,
Details of
VA4
Transactio
EO2,
ns
VA4
Tests
of
underlying contracts.
EO3,
VA1,
PD1,
EO4,
VA2,
PD2,
EO4,
VA3,
PD3,
EO4,
VA4
EO1, C1, VA1, PD1
Tests
of
Details of
EO4
Balances
of
RO1
expense
by
Details of
Accountin
salvage values.
VA6
Estimates
Tests
of
Details of
Presentati
on
statements.
and
Disclosure
VA5
PD4, PD7
PD4, PD7
PD5
PD6
disclosures
and
independently
evaluate
their
understandability.
b.
Is
Adjustment
Item
or
17-17
No.
Reclassification
Required?
1.
Yes or No
Yes
2.
No
& Equipment.
No adjustment is required because clearing costs are
costs that are directly attributable to conditioning the
property for use and should be included in land costs
3.
Yes
4.
Yes
income.
All costs relating to the purchase of machinery and
equipment should be capitalized. For purchased items
such costs would include invoice price, freight costs,
and unloading charges. Royalty payments, however,
should not be included in the cost of the machinery.
Such payments should be charged to expenses as
they accrue. The machinery costs, other than royalty
payments, should be included in Property, Plant &
Equipment.
17-18
17-24.
17-19
Vouch
entries
2.
of
Financial
Assertion
to Existence
retained earnings
board
b.
or
Statement c.
Type
of
Evidence
occurrence, Documentary
minutes.
Vouch entries in long- All
except
presentation Documentary
of
minutes
Vouch
director
to
cash Existence
or
occurrence, Mathematical
interest
Vouch
5.
brokers advice
valuation or allocation
Inspect entries in cash Existence or occurrence, Documentary
entries
to Existence
disbursements journal
6.
Vouch
to
board
or
occurrence, Documentary
valuation or allocation
of Existence
or
occurrence, Documentary,
confirmation
consider
confirming
with
transfer agent.
Solutions Manual to Modern Auditing: Copyright
17-20
a. Substantive Test
b.
Financial
7.
Recalculate
Assertion
Valuation or allocation
8.
interest expense
Inspect
cash All
except
Statement c.
consider
confirmation
and
confirming
9.
10.
directors minutes
Vouch to board
of Existence
or
or
and
Evidence
Mathematical
supporting
documentation
review
Documentary
occurrence, Documentary
allocation,
terms
of
issues
17-26.
a.
of
presentation Documentary,
Type
Verify payments made during the year and transactions after the
year end.
17-21
Read
(notes
to)
the
financial
statements
and
the
loan
b.
17-27.
The substantive tests that Jones should apply in examining the common
stock and treasury stock accounts are as follows:
Review the corporate charter to verify details of the common stock such
as authorized shares, par value, etc.
Foot the total shares outstanding in the stockholders' ledger and stock
certificate book.
Verify
treasury
stock
transactions
by
examining
supporting
17-22
Compare the total in the stockholders' ledger and the stock certificate
book to the balance sheet presentation.
17-28.
The proposal for the limitation of procedure is not justified by the stated
facts. Although the transfer agent and the registrar know the number of
shares issued, they do not necessarily know the number of shares outstanding.
Furthermore,
the
audit
of
capital
stock
includes
more
than
17-23
Examine
minutes
of
stockholders'
and
directors'
meetings
to
Trace the consideration received for capital stock into the records to
determine what consideration has been received and how it has been
recorded.
Examine and schedule treasury stock and review entries for treasury
stock to determine the existence of treasury stock, as authorized, and
to determine that a proper record has been made.
Case
Solutions Manual to Modern Auditing: Copyright
17-24
s
17-29.
a.
Assertion
All assertions
determine:
a) The significance of plant assets, and changes in plant
assets, to the entity.
b) Key
economic
drivers
that
influence
the
entitys
earnings.
Vouch the acquisition of the patent to supporting documentation
Existence
occurrence,
and
and
rights
obligations,
valuation
or
allocation
Valuation
or
allocation
Presentation
disclosure
and
17-25
c.
The
security has a fixed rate of return stated as a percentage of the par value
of the security and it has a fixed redemption date. Corporate holders of
the redeemable preferred stock will enjoy a dividend received deduction
for tax purposes.
Assertion
All assertions
determine:
a) The significance of sources of financing to the entity.
b) Key economic drivers that influence the entitys need for
financing and choice of financing.
c) Industry
standards
regarding
the
type
of
financing
Existence
occurrence,
and obligations
All assertions
preferred stock.
Recalculate interest expense
Valuation
and
allocation
Presentation
and
a) Determine
that
long-term
debt
balances
are
properly
and
right
disclosure
17-26
Procedure
conformity to GAAP by reference to disclosure checklist.
d) Read
disclosures
and
independently
evaluate
Assertion
their
understandability.
Professional Simulation
Audit
Procedure
s
FARS
Situatio
Audit Report
Research
n
The following table explains the auditing procedures that should be performed
associated with the legend identified as a) through h).
Legend
a)
b)
c)
Audit Procedure
Foot
Crossfoot
Traced beginning balance to prior years working papers and the
d)
general ledger.
Vouched additions
e)
f)
cash receipts
Vouched reclassification to supporting documents, title reports and
g)
h)
to
supporting
documentation,
e.g.,
vendors
17-27
Research
Audit
Audit Report
Situatio
Procedure
The following quotes are from Statement of Financial Accounting Standards No.
13, Accounting for Leases.
in paragraph 7.
ii.
7.
The criteria for classifying leases set forth in this paragraph and in
paragraph 8 derive from the concept set forth in paragraph 60. If at its
inception (as defined in paragraph 5(b)) a lease meets one or more of the
following four criteria, the lease shall be classified as a capital lease by
the lessee. Otherwise, it shall be classified as an operating lease. (See
Appendix C for an illustration of the application of these criteria.)
a.
b.
c.
17-28
A lessor
17-29
the primary beneficiary of the variable interest entity. The primary beneficiary
of a variable interest entity is the party that absorbs a majority of the entity's
expected losses, receives a majority of its expected residual returns, or both, as
a result of holding variable interests, which are the ownership, contractual, or
other pecuniary interests in an entity. The ability to make decisions is not a
variable interest, but it is an indication that the decision maker should carefully
consider whether it holds sufficient variable interests to be the primary
beneficiary. An enterprise with a variable interest in a variable interest entity
must consider variable interests of related parties and de facto agents as its
own in determining whether it is the primary beneficiary of the entity. ANU is it
primary beneficiary that absorbs the majority of any losses to the bank or
Shailer Enterprises and received the expected returns if the value of the
property increases. The appropriate paragraphs of FIN 46 follow.
Shailer enterprises meets the following conditions of a variable interest entity
based on paragraph 2 to the summary of FIN 46.
2.
b.
c.
17-30
variable interests in that same entity held by its related parties as its own
interests.
includes those parties identified in FASB Statement No. 57, Related Party
Disclosures, and certain other parties that are acting as de facto agents
of the variable interest holder.
b.
c.
d.
17-31
If one
17-32
Audit Report
Audit
FARS
Situatio
Procedure
Research
had been consolidated, property would be increased by $10 Million, long-term debt by
$9 Million, and Shareholders equity would be increased by $1 million.
In our opinion, except for the effects of not consolidating the financial statements of
Shailer Enterprises as discussed in the preceding paragraph, the financial statements
referred to above present fairly, in all material respects, the financial position of Alpha
17-33
Net Universal as of December 31, 20x7 and 20x6 and the results of their operations
and their cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
Signature
Date
17-34