Modern Auditing:
Assurance Services and the Integrity
of Financial Reporting, 8th Edition
William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University
Chapter 17 – Auditing the Investing and Financing Cycles
Chapter Overview
Nature of the Investing and
Financing Cycles
• Overview of the Cycles
– Investing Activities
– Financing Activities
• Understanding the Entity and
Environment
Understanding the Entity and
Environment
Investing Cycle – Audit
Objectives
Investing Cycle – Analytical
Procedures
Investing Cycle
• Inherent Risk
• Consideration of Internal Controls
• Preliminary Audit Strategies
Substantive Tests for Plant
Assets
• Initial Procedures
• Analytical Procedures
• Tests of Details of Transactions
– Vouch Plant Asset Additions
– Vouch Plant Asset Disposals
– Review Entries to Repairs and
Maintenance Expense
Substantive Tests for Plant
Assets
• Tests of Details of Balances
– Inspect Plant Assets
– Examine Title Documents and Contracts
• Tests of Details of Accounting
Estimates
– Review Provisions for Depreciation
– Impairment of Plant Assets
– Tests of Details of Presentation and
Disclosure
Study Break
1. This cycle involves activities such
as the purchase and sale of land,
buildings, and equipment not
generally held for resale.
A.
B.
C.
D.
Investing Cycle
Financing Cycle
Cash Disbursements Cycle
Cash Receipts Cycle
A. Investing Cycle
Study Break
2. All of the following are classes of
transactions associated with the
audit of plant assets, except:
A.
B.
C.
D.
Depreciation Expense
Disposal of Fixed Assets
Payroll Expense
Acquiring of Fixed Assets
C. Payroll Expense
Study Break
3. While auditing the investing cycle, this
test of details of balances allows the
auditor to obtain direct personal
knowledge of the existence of the plant
assets.
A.
B.
C.
D.
Inspect plant assets
Examine title documents and contracts
Impairment of plant assets
Review provisions for depreciation
A. Inspect plant assets
Financing Cycle
Financing Cycle – Audit
Objectives
Financing Cycle – Analytical
Procedures
Financing Cycle
• Inherent Risk
• Consideration of Internal Control
• Common Documents and Records
Financing Cycle – Functions and
Related Controls
• Authorizing bonds and capital stock
• Issuing bonds and capital stock
• Paying bond interest and cash dividends
• Redeeming and reacquiring bonds and
capital stock
• Recording financing transactions
Preliminary Audit Strategies for
Long-Term Debt
Substantive Tests of Long-Term
Debt
• Initial Procedures
• Analytical Procedures
• Tests of Details of Transactions
Substantive Tests of Long-Term
Debt
• Tests of Details of Balances
– Review Authorizations and Contracts
– Confirm Debt
– Recalculate Interest Expense
• Tests of Details of Presentation and
Disclosure
Study Break
4. This cycle involves activities such
as acquiring debt, issuing bonds,
and issuing common stock.
A.
B.
C.
D.
Investing Cycle
Financing Cycle
Cash Disbursements Cycle
Cash Receipts Cycle
B. Financing Cycle
Study Break
5. This financing function involves
making payments to the proper payees
in according with board of director or
management authorizations.
A.
B.
C.
D.
Authorizing bonds
Authorizing capital stock
Paying bond interest and cash dividends
Recording financing transactions
C. Paying bond interest and cash dividends
Study Break
6. All of the following are tests of
details of balances for the
financing cycle, except:
A.
B.
C.
D.
Confirmation of accounts payable
Confirmation of long-term debt
Review authorization and contracts
Recalculate interest expense
A. Confirmation of accounts payable
Preliminary Audit Strategies for
Shareholders’ Equity
Substantive Tests of
Stockholders’ Equity
• Initial Procedures
• Analytical Procedures
• Tests of Details of Transactions
– Vouch Entries to Paid-in Capital
Accounts
– Vouch Entries to Retained Earnings
Analytical Procedures
Substantive Tests of
Stockholders’ Equity
• Tests of Details of Balances
– Review Articles of Incorporation and Bylaws
– Review Authorization and Terms of Stock
Issues
– Confirm Shares Outstanding with Registrar
and Transfer Agent
– Inspect Stock Certificate Book
– Inspect Certificates of Shares Held in
Treasury
• Tests of Details of Presentation and
Disclosure