Chapter 10
Finance and Investment Cycle
Accounting 408
Chapter 10
1
1. Internal Control

Investments
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
separate functions: authorize purchasing
and selling securities, receiving periodic
income, recording transactions,
safeguarding securities, recording market
adjustments and reclassifications
documents and records: stock and bond
certificates, broker’s advice, investment
subsidiary ledger
Accounting 408
Chapter 10
2
1. Substantive Tests

Investments





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Agree beginning balance to prior audit
Inspect and count securities on hand
Confirm securities held by others
Vouch entries (examine broker’s advices, deposit slips, and
paid checks)
Review authorizations
Recalculate investment revenue earned (review broker's
monthly statements)
Review documentation concerning fair values
Analytical procedures
Accounting 408
Chapter 10
3
1. Substantive Tests

Investments

Existence and Occurrence


Rights and Obligations


inspecting and counting, confirmation, vouching
vouching (examine broker’s advices, deposit slips,
and paid checks), confirmation
Completeness

Accounting 408
analytical procedures, vouching, inspecting and
counting, confirmation
Chapter 10
4
1. Substantive Tests

Investments

Valuation


review documentation concerning fair values,
recalculate investment earned, inspection and
counting
Presentation and Disclosure


Accounting 408
compare statement presentation to GAAP
numerous disclosures are required regarding fair
values, and realized and unrealized gains and losses
Chapter 10
5
2. Internal Control

Long-term Debt


separate functions: authorization,
independent trustee, interest and principal
payments
documents and records: loan and bond
contracts, subsidiary ledgers
Accounting 408
Chapter 10
6
2. Substantive Tests

Long-term Debt
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Agree beginning balance to prior audit
Confirmation
Vouch transactions
Determine business purpose of loan
Obtain and review loan agreements
Ensure debt covenants are met
Review authorizations
Reconcile interest expense
Review current portion of long-term debt
Recalculate discount or premium amortization
Recalculate gain/loss on retirement
Analytical procedures
Accounting 408
Chapter 10
7
2. Substantive Tests

Long-term Debt

Existence and Occurrence


Rights and Obligations


confirmation, vouching, review authorizations, determine business
purpose
examine loan agreements, confirmation, vouching , determine
business purpose
Completeness

Accounting 408
reconciling interest expense, reading BOD meeting minutes,
analytical procedures
Chapter 10
8
2. Substantive Tests

Long-term Debt

Valuation


vouch transactions, confirmation, review current
portion, recalculate discount/premium amortization
Presentation and Disclosure


Accounting 408
compare statement presentation to GAAP
review terms, covenants, commitments, retirement
provisions
Chapter 10
9
3. Internal Control

Stockholder’s Equity


separate functions: authorization,
independent trustee or stockholder’s
records, dividends
documents and records: articles of
incorporation, by laws, stock certificate
book, stockholder’s subsidiary ledger,
dividend bank account, treasury stock
Accounting 408
Chapter 10
10
3. Substantive Tests

Stockholder’s Equity
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Agree beginning balance to prior audit
Confirmation with outside agents
Reconcile stock certificate book
Determine that correct number of shares is used in EPS calculation
Review articles of incorporation and bylaws
Review authorizations
Determine all transactions are recorded
Vouch transactions
Verify allocation between capital stock account and paid in capital
Inspect treasury stock certificates
Accounting 408
Chapter 10
11
3. Substantive Tests

Stockholder’s Equity

Existence and Occurrence


Rights and Obligations


confirmation, reconciling stock records, vouching
transactions, inspect treasury stock shares
confirmation, reconciling stock records, vouching
transactions
Completeness

Accounting 408
confirming, inspecting stock certificate book
Chapter 10
12
3. Substantive Tests

Stockholder’s Equity

Valuation


vouching transactions
Presentation and Disclosure


Accounting 408
compare statement presentation to GAAP
review par or stated values, shares authorized,
issued and outstanding, dividend and liquidation
preferences, dividends in arrears, stock
compensation plans, recompute EPS calculations
Chapter 10
13
Review Questions for Discussion

Chapter 10
10.1
10.3
10.6
10.11
10.16
10.17
ACCT-4080
Chapter 1
14
Timeline for Major Activities in Audit
Beginning
of year
Year-End Date
(date of the financial
statements)
Audit planning
Interim testing (tests
of controls and
substantive
procedures)
Date of the auditors’ report
(audit completion date)
• Completing substantive
procedures
• Attorney’s letters
• Management representation
letter
• Going-concern assessment
• Adjusting journal entries
• Audit documentation review
• Subsequent events
Subsequently
discovered facts
Audit report
release date
• Subsequently
discovered facts
• Omitted audit
procedures
• Management letter
• Communications
with those charged
with governance
11-