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    Audit of The Capital Acquisition and Repayment Cycle

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    Annisa Mukti
    Verify the accuracy and completeness of retained earnings.

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    © All Rights Reserved
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    Audit of The Capital Acquisition and Repayment Cycle

    Uploaded by

    Annisa Mukti
    157 views30 pages
    Verify the accuracy and completeness of retained earnings.

    Original Description:

    Original Title

    10. Audit of the Capital Acquisition and Repayment Cycle

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    Verify the accuracy and completeness of retained earnings.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    157 views30 pages

    Audit of The Capital Acquisition and Repayment Cycle

    Uploaded by

    Annisa Mukti
    Verify the accuracy and completeness of retained earnings.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 30
    At a glance
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    The key takeaways from the document are the various accounts involved in the capital acquisition and repayment cycle, the characteristics of notes payable, and the primary concerns in auditing owners' equity transactions.

    The main accounts involved in the capital acquisition and repayment cycle are notes payable, interest expense, accrued interest, capital stock, paid-in capital in excess of par, retained earnings, dividends payable, cash in bank, among others.

    Notes payable typically represent a legal obligation of the company that can be secured or unsecured by company assets. The main objectives in auditing notes payable are to ensure internal controls are adequate, transactions are properly authorized and recorded, and the related liabilities and expenses are properly stated.

    1

    AUDITING 2 (EAI374)

    Ch 22 - Audit of the Capital Acquisition


    and Repayment Cycle

    RIA FRANSISCA IFA EVENDY S.Ak., M.M.


    PROGRAM STUDI S-1 AKUNTANSI
    FAKULTAS EKONOMI DAN BISNIS
    UNIVERSITAS TELKOM
    2
    Characteristics of the Capital
    Acquisition and Repayment Cycle

    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.
    3
    Characteristics of the Capital
    Acquisition and Repayment Cycle

    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.
    4

    Learning Objective 1

    Identify the accounts and the unique


    characteristics of the capital
    acquisition and repayment cycle.
    5

    Accounts in the Cycle


     Notes payable
     Contracts payable
     Mortgages payable
     Bonds payable
     Interest expense
     Accrued interest
     Appropriations of retained earnings
     Treasury stock
     Dividends declared
    6

    Accounts in the Cycle


     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
    7
    Methodology for Designing Tests
    of Balances for Notes Payable

    Identify client
    business risks Phase I
    affecting notes payable
    Set tolerable misstatement
    and assess inherent Phase I
    risk for notes payable
    Assess control
    risk for Phase I
    notes payable
    8
    Methodology for Designing Tests
    of Balances for Notes Payable

    Design and perform


    tests of controls and
    substantive tests of
    Phase II
    transactions for
    capital acquisition and
    repayment cycle
    9
    Methodology for Designing Tests
    of Balances for Notes Payable

    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
    10

    Learning Objective 2
    Design and perform audit test of notes
    payable and related accounts and
    transactions.
    11

    Notes Payable

    Secured or
    Legal
    unsecured
    Obligation
    by assets
    12

    Notes Payable
    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
    13

    Internal Controls
    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.


    14

    Notes Payable and the Related Interest Accounts


    Notes Payable Interest Expense
    Payments Beginning balance Interest
    of expense
    principal Issue of new notes
    Ending balance Interest Payable
    Payments Beginning
    of balance
    Cash in Bank interest
    Interest
    Issue of Payments of expense
    new notesprincipal
    Ending
    Payments of balance
    interest
    15
    Tests of Controls and Substantive
    Tests of Transactions

    Tests of notes payable transactions


    involve the issue of notes and the
    repayment of principal and interest.
    16
    Analytical Procedures for
    Notes Payable

    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
    17
    Analytical Procedures for
    Notes Payable

    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
    18

    Major Balance-related Audit Objectives in Notes Payable

    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.
    19
    Types of Audit Tests for Capital Acquisition and Repayment
    Cycle

    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
    AP and TDB
    Payments
    of interest Interest Payable
    Audited by
    TOC, STOT,
    and AP TOC + STOT + AP + TDB
    = Sufficient appropriate evidence
    20
    Types of Audit Tests for
    Notes Payable

    Interest Payable Interest Expense


    Interest expense

    Ending Audited by Ending


    balance TOC, STOT, balance
    and AP
    Audited by Audited
    AP and TDB by AP

    TOC + STOT + AP + TDB


    = Sufficient appropriate evidence
    21

    Learning Objective 3

    Identify the primary concerns in the


    audit of owners’ equity transactions.
    22

    Owners’ Equity

    Publicly Closely
    held Versus held
    corporation corporation

    Many shareholders Simple, few transactions


    Frequent transactions Few shareholders
    Occasional transactions
    23

    Owners’ Equity and Dividend Accounts


    Cash in Bank

    Capital Stock – Paid-in Capital in Excess


    Common of Par – Common
    Redemption Beginning Redemption Beginning
    of stock balance of stock balance

    Issue of Issue of
    stock stock

    Ending Ending
    balance balance
    24

    Internal Controls

     Proper authorization of transactions

    Proper record keeping and segregation of duties

    Independent registrar and stock transfer agent


    25

    Learning Objective 4
    Design and perform tests of controls,
    substantive tests of transactions, and
    tests of details of balances for capital
    stock and
    retained earnings.
    26
    Audit of Capital Stock and
    Paid-in Capital

    Auditor concerns in auditing Capital


    Stock and Paid-in-Capital accounts

    Occurrence
    Completeness and
    Accuracy

    Presentation
    Accuracy and
    disclosure
    27

    Audit of Dividends
    1. Occurrence:
    Recorded dividends occurred.

    2. Completeness:
    Existing dividends are recorded.

    3. Accuracy:
    Dividends are accurately recorded.
    28

    Audit of Dividends
    4. Occurrence:
    Dividends are paid to stockholders
    that exist.
    5. Completeness:
    Dividends payable are recorded.

    6. Accuracy:
    Dividends payable are accurately
    recorded.
    29

    Audit of Retained Earnings


    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
    30

    End of Chapter 22

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