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* Chapter 22

Audit of the Capital


Acquisition and
Repayment Cycle

Characteristics :
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. 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.

*Objectives of the audit


of notes payable:

1. The internal controls over notes payable


are adequate.
2. Transactions for principal and interest are
properly authorized and recorded.
3. The liability for notes payable and the
related interest expense and accrued
liability are properly stated

1. Proper authorization for the issue of


new notes.
Adequate controls over the repayment
of principal and interest

Proper documents and records

Periodic independent verification

Internal Controls

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.

*Analytical Procedures for

Notes Payable

Analytical procedure

Possible misstatement

Recalculate possible
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.

*Major Balance-related Audit


Objectives in Notes Payable
1. Completeness:
Existing notes payable are
included
2. Accuracy:
Notes payable in the schedule
` are accurately recorded.

*Owners Equity
Internal Controls :
Proper authorization of transactions
Proper record keeping and segregation of duties
Independent registrar and stock transfer agent

*Audit of Capital Stock and


Paid-in Capital

1.

Completeness:
Existing capital stock transactions
are recorded.

2.

Occurrence and accuracy:


Recorded capital stock transactions
exist and are accurately recorded.
Accuracy:
Capital stock is accurately recorded.

3.
4.

Presentation and disclosure:


Capital stock is properly presented and
disclosed.

*Audit of Dividends
1.

Occurrence:
Recorded dividends occurred.

2.

Completeness:
Existing dividends are recorded.

3.

Accuracy:
Dividends are accurately recorded.

4.

Occurrence:
Dividends are paid to stockholders
that exist.

5.

Completeness:
Dividends payable are recorded.

6.

Accuracy:
Dividends payable are accurately recorded.

* 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