SolutionARENSAuditing13eAEBSMCH221.docx

SolutionARENSAuditing13eAEBSMCH221.docx

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SolutionARENSAuditing13eAEBSMCH221

Chapter22

AuditoftheCapitalAcquisitionandRepaymentCycle

⏹ReviewQuestions

22-1Fourexamplesofinterestbearingliabilityaccountscommonlyfoundonbalancesheetsare:

1.Notespayable

2.Contractspayable

3.Mortgagespayable

4.Bondspayable

Theseliabilitieshavethefollowingcharacteristicsincommon:

1.Relativelyfewtransactionsaffecttheaccountbalance,buteachtransactionisoftenhighlymaterialinamount.

2.Theexclusionofasingletransactioncouldbematerialinitself.

3.Thereisalegalrelationshipbetweenthecliententityandtheholderofthestock,bond,orsimilarownershipdocument.

4.Thereisadirectrelationshipbetweeninterestanddividendaccountsanddebtandequity.

Theseliabilitiesdifferinwhattheyrepresentandthenatureoftheirrespectiveliabilities.

22-2Thecharacteristicsoftheliabilityaccountsinthecapitalacquisitionandrepaymentcyclethatresultinadifferentauditingapproachthantheapproachfollowedintheauditofaccountspayableare:

1.Relativelyfewtransactionsaffecttheaccountbalance,buteachtransactionisoftenhighlymaterialinamount.

2.Theexclusionofasingletransactioncouldbematerialinitself.

3.Thereisalegalrelationshipbetweenthecliententityandtheholderofthestock,bond,orsimilarownershipdocument.

4.Thereisadirectrelationshipbetweeninterestanddividendaccountsanddebtandequity.

22-3Itiscommontoauditthebalanceinnotespayableinconjunctionwiththeauditofinterestexpenseandinterestpayablebecauseitminimizestheverificationtimeandreducesthelikelihoodofoverlookingmisstatementsinthebalance.Oncetheauditorissatisfiedwiththebalanceinnotespayableandtherelatedinterestratesandduedatesforeachnote,itiseasytotesttheaccuracyofaccruedinterest.Iftheinterestexpensefortheyearisalsotestedatthesametime,thelikelihoodofomittinganotefromnotespayableforwhichinteresthasbeenpaidisminimized.Whentherearealargenumberofnotesoralargenumberoftransactionsduringtheyear,itisusuallytootimeconsumingtocompletelytieoutinterestexpenseasapartoftheauditofthenotespayableandrelatedaccruedinterest.Normally,however,thereareonlyafewnotesandfewtransactionsduringtheyear.

22-4Themostimportantcontrolstheauditorshouldbeconcernedaboutintheauditofnotespayableare:

1.Theproperauthorizationfortheissuanceofnewnotes（orrenewals）toinsurethatthecompanyisnotbeingcommittedtodebtarrangementsthatarenotauthorized.

2.Controlsovertherepaymentofprincipalandinteresttoinsurethattheproperamountsarepaid.

3.Properrecordsandprocedurestoinsurethatallamountsinalltransactionsareproperlyrecorded.

4.Periodicindependentverificationtoinsurethatallthecontrolsovernotespayableareworking.

22-5Themostimportantanalyticalproceduresusedtoverifynotespayableisatestofinterestexpense.Bytheuseofthistest,auditorscanuncovermisstatementsininterestcalculationsorpossibleunrecordednotespayable.

22-6Itismoreimportanttosearchforunrecordednotespayablethanunrecordednotesreceivablebecausetheomissionofanassetislesslikelytooccurthantheomissionofadebt.Severalauditprocedurestheauditorcanusetouncoverunrecordednotespayableare:

1.Examinethenotespaidafteryear-endtodeterminewhethertheywereliabilitiesatthebalancesheetdate.

2.Obtainastandardbankconfirmationthatincludesspecificreferencetotheexistenceofnotespayablefromallbankswithwhichtheclientdoesbusiness.

3.Reviewthebankreconciliationfornewnotescrediteddirectlytothebankaccountbythebank.

4.Obtainconfirmationfromcreditorswhohaveheldnotesfromtheclientinthepastandarenotcurrentlyincludedinthenotespayableschedule.

22-6（continued）

5.Analyzeinterestexpensetouncoverapaymenttoacreditorwhoisnotincludedonthenotespayableschedule.

6.Reviewtheminutesoftheboardofdirectorsforauthorizedbutunrecordednotes.

22-7Theprimarypurposeofanalyzinginterestexpenseistouncoverapaymenttoacreditorwhoisnotincludedonthenotespayableschedule.Theprimaryconsiderationstheauditorshouldkeepinmindwhendoingtheanalysisare:

1.Isthepayeefortheinterestpaymentlistedinthecashdisbursementsjournalalsoincludedinthenotespayablelist?

2.Hasaconfirmationfornotespayablebeenreceivedfromthepayee?

22-8Thetestsofcontrolsandsubstantivetestsoftransactionsforliabilityaccountsinthecapitalacquisitionandrepaymentcycleconsistsoftestsofthecontrolandsubstantivetestsoverthepaymentofprincipalandinterestandtheissuanceofnewnotesorotherliabilities,whereasthetestsofdetailsofba