Audit of the Capital Acquisition and Repayment Cycle
We have only rarely covered the material in this chapter. Our students have had enough of the detail testing at this point. When we do cover it, it does not get much time. The following are the major things to discuss:
Chapter opening vignette
Nature of and accounts in the capital acquisition and repayment cycle
Audit of notes payable
Audit of owners' equity
Chapter Opening Vignette - “A Dishonest Client Will Get the Best of the Auditor Almost Every Time "
This vignette represents an example of how much auditors must rely on client representations, and where those representations can't be corroborated, the auditor is essentially at the client's mercy. This leads to a discussion of several concepts: What is the nature of representations, how can they be corroborated, what does the auditor do when they can't be corroborated, the importance of new client investigation, and the importance of being skeptical.
Nature of and Accounts in the Capital Acquisition and Repayment Cycle (page
We start by identifying the four characteristics affecting the audit of the capital acquisition and repayment cycle that are discussed in the chapter:
Relatively few, but highly material, transactions
Exclusion of a singe transaction could be material in itself
Direct relationship of interest to debt and dividends to equity
We then identify the accounts (listed on pages 728-729) that will be discussed.
Audit of Notes Payable (page 730)
First we refer students to Figure 22-1 (page 729) and discuss the methodology for designing joint tests for notes payable. This is a good time to discuss why tests of controls and substantive tests of transactions are rarely relevant for the capital acquisition and repayment cycle.
(See Figure 22-1)
Next we refer students to Figure 22-2 (page 730) to identify the account balances being audited.
(See Figure 22-2)
The following questions are then asked:
Review Question 22-3 - audit of notes, interest expense and accrued interest simultaneously
Review Question 22-4 - internal controls over notes payable
Review Question 22-6 - search for unrecorded notes
Why is it common to confirm all notes payable in a typical audit?
Review Question 22-9 - restrictions on loans
Figure 22-3 (pages 732-733) illustrates a 100% audit of notes payable and related accounts. Identify circumstances where this would be done.
To the extent there is time, we also cover one or two of the following:
Problem 22-23 - procedures and purposes of the procedures for bonds payable
Problem 22-24 or 22-25 - audit program for notes payable
To summarize the coverage of notes payable, we suggest using Figure 22-4 (page 735).
(See Figure 22-4)
Audit of Owners' Equity (page 735)
As for all other areas, we start by reviewing the account balances in the owners' equity and related accounts. These are shown in Figure 22-5 (page 736).
(See Figure 22-5)
We find in the audit of owners' equity it is useful to distinguish between several circumstances as dramatically affecting the evidence needed.
Closely held company - continuing audit
Closely held company - first year audit
Publicly held company - continuing audit - no independent stock registrar
Publicly held company - continuing audit - independent stock registrar
Publicly held company - first year audit
For capital stock and paid-in capital, we use the objectives stated in the text, and discuss how the audit is affected by each of the five circumstances listed above.
We do the same thing for dividends and retained earnings.
Problem 22-29 provides an overview of various procedures performed related to owners' equity. Figure 22-6 (page 740) provides a good summary of the material for owners' equity.
(See Figure 22-6)
CROSS-REFERENCE OF LEARNING OBJECTIVES AND PROBLEM MATERIAL
Identify the accounts and the unique characteristics of the capital acquisition and repayment cycle.
Design and perform audit tests of notes payable and related accounts and transactions.
Identify the p rimary concerns in audit of owners ' equi
22-10, 22-11, y 22-12, 22-13,
22-28, 22-29, 22-30
Design and perform tests of controls, substantive tests of transactions, and tests of details of balances for capital stock and retained earnings
22-28, 22-29, 22-30, 22-31