AUDIT OF THE CAPITAL ACQUISITION AND REPAYMENT 21 CYCLE A Dishonest Client Will get The best Of The auditor almost Every Time @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. 21 AUDIT OF THE CAPITAL ACQUISITION AND REPAYMENT CYCLE A Dishonest Client Will Get The Best Of The Auditor Almost Every Time
Characteristics of the Capital Acquisition and Repayment Cycle Few transactions affect the account balances but each transaction is often highly material in amount 2. The exclusion of a single transaction could be material in itself. 3. There is legal relationship between the client entity and the holder of the stock, bond. or similar ownership document 4. There is a direct relationship between the interest and dividends accounts and debt and equity Arens, Loebbecke: Aua @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. 4 Characteristics of the Capital Acquisition and Repayment Cycle 1. Few transactions affect the account balances, but each transaction is often highly material in amount. 2. The exclusion of a single transaction could be material in itself. 3. There is legal relationship between the client entity and the holder of the stock, bond, or similar ownership document 4. There is a direct relationship between the interest and dividends accounts and debt and equity
Accounts in the cycle ° Notes payable Paid-in capital in excess of par Contracts payable Donated capital Mortgages payable · Retained earnings B onds payable appropriations of retained earnings · Interest expense Treasury stock · Accrued interest · Dividends declared Cash in the bank Dividends payable proprietorship capital stock--common capital account capital stock-preferred. Partnership--capital account @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. Accounts in the Cycle • Notes payable • Contracts payable • Mortgages payable • Bonds payable • Interest expense • Accrued interest • Cash in the bank • capital stock -- common • capital stock -- preferred • Paid-in capital in excess of par • Donated capital • Retained earnings • appropriations of retained earnings • Treasury stock • Dividends declared • Dividends payable Proprietorship --capital account • Partnership -- capital account
FIGURE 21 Set tolerable misstatement and Phase I or notes pay able Assess control risk for notes payable Phase ethodology for Designing tests of details of Balances for Notes payable Design and perform of controls and substantive tests of Phase ll transactions Design and perform analytical procedures for note PhaseⅢ payable balance Design tests of details Audit procedures of notes payable Sample size balance to satisfy PhaseⅢl bala Items to select audit objectives Timing @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. FIGURE 21 - 1 Methodology for Designing Tests of Details of Balances for Notes Payable
FIGURE 21-2 Notes Payable and related Interest Accounts Notes payable Interest Payments Beginning expense balance Interest principalIssue of expense new notes Ending balance Interest Cash payable in bank Beginning Issue of Payments of new Principa notes Payments of Payments/ Interest expense Interest terest ng balance @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. FIGURE 21 - 2 Notes Payable and Related Interest Accounts