Kế toán, kiểm toán - Chapter 10: Finance and investment cycle

Auditing & Assurance Services, 6eChapter 10 Finance and Investment Cycle“Credit has done a thousand times more to enrich mankind than all the goldmines in the world. It has exalted labor, stimulated manufacture and pushed commerce over every sea.”--Daniel Webster 10-*Learning Objectives1. Describe the finance and investment cycle, including typical source documents and controls.Give examples of tests of controls over debt and stockholders’ equity transactions and investment transactions.Describe substantive procedures for finance and investment accounts.4. Describe common errors and frauds in the accounting for capital transactions and investments, and design audit and investigation procedures for detecting them. 10-*Inherent RisksLease AccountingLoan covenantsRelated-party transactionsComplex transactionsImpairments10-*Investment and Finance ActivitiesFinancial PlanCapital budgetRaise capitalOperate business (all other cycles)Mergers and acquisitionsInvestment of excess funds10-*Control ConsiderationsTransactions authorized by BOARD OF DIRECTORSDocumentation:Investments in securitiesBroker advice for all transactionsProperty, plant and equipmentVendor’s invoice for purchased PPEInternal cost records for company-built PPEBonds and notes payableDocumentation from debtholdersStockholders' Equity: Documentation from registarShow me the money!!trace transactions to cash receipts and disbursements journals10-*Finance and Investment Cycle:Control ProceduresPhysical ControlsSecurities CUSIP numbers recordedSecurities recorded in the client's nameSecurities held by an independent custodian i.e. by the brokeror in a secure location e.g. safe deposit boxAccess to safe-deposit box requires more than one employee (dual control)Physical items periodically compared to detail recordsCash receipts from transactions deposited intact and daily (electronic transfer preferred)10-*Finance and Investment Cycle:Control Procedures (cont.)Separation of DutiesTransactions AUTHORIZED by the Board of DirectorsGeneral Accounting RECORDS transactions A separate function or external custodian has CUSTODY of stock and bond certificatesPerformance ReviewsCompare current finance and investing transaction data against prior-year data or expected dataCompare revenue and expenses against organization standards or expectations.Compare transactions on monthly statement to cash receipts/disbursements10-*CONTROL OVER ACCOUNTING ESTIMATESCommunication of need for estimateWere estimates made by qualified personnel?Were estimates reviewed and approved?Have past estimates been inline with actual results?How are estimates in comparison to budgets and forecasts?10-*SUBSTANTIVE TESTSINTEREST-BEARING LIABILITIES (IBL)Agree to BEGINNING BALANCE and CONFIRM with holders or makers.LOAN PROCEEDSVOUCH to cash receipts to cash journal and bank statementRecalculate Discount/PremiumConfirm IBL, examine noteLOAN PAYOFFRecalculate Interest ExpenseRecalculate Gain/Loss on RetirementVouch to cash disbursements journal and bank statementConfirm with debt holder if necessary10-*INTEREST-BEARING LIABILITIESINTEREST PAYMENTSRecalculate Interest ExpenseSearch for UNRECORDED liabilitiesInquiry of managementBank confirmationsUnusual amounts of interest expenseLarge receipts of cash during the yearPayments made after year endEnsure DEBT COVENANTS are met.Inspect loan agreements.Consider GOING CONCERN implications if not met.Ensure proper presentation and disclosure.10-*AUDITING STOCKHOLDER'S EQUITYOverview of audit approach Large corporations recordkeeping of stock ownership usually done by a registrarSmall and closely held corporations may have a stock certificate book Review certificate book for stock issued during the year.Review record of outstanding stock certificates for stock purchased or retired.Transactions must be authorized by the board of directors or its equivalent e.g. an executive committee for an LLCTransactions must be consistent with the client's articles of incorporation.10-*AUDITING STOCKHOLDER'S EQUITYPAID-IN CAPITALAgree balances to prior year documentationExamine issuances and repurchases of capital stockVerify distribution of proceeds between CAPITAL STOCK and ADDITIONAL PAID-IN CAPITALTrace proceeds to CASH RECEIPTS Journal and bank statementIf stock is used to acquire assets (e.g. a purchase for stock) trace to PPE.Trace payments to CASH DISBURSEMENTS journal and bank statementDetermine that all transactions are RECORDED (TRACE from BOD minutes to the stock accounts and cash journals)Verify that all transactions are PROPERLY AUTHORIZED10-*AUDITING STOCKHOLDER'S EQUITYRETAINED EARNINGSAgree beginning balance with prior year documentationVerify the appropriateness of prior-period adjustment treatmentTrace net income/loss to INCOME STATEMENTEnsure that DIVIDENDS are properly authorized by BOARD OF DIRECTORS10-*Auditing Investments:Substantive ProceduresAgree beginning balances to Prior Year documentationReview client’s policies and proceduresIdentify individuals authorized to execute trades with brokersIdentify individuals who reconcile brokerage accounts with company recordsEnsure they are independent.Purchases of investmentsVouch to broker’s advice and broker Statement Examine board minutes for authorization10-*Auditing Investments:Substantive Procedures (Cont.)Sales of investmentsTrace to broker’s advise, cash receipts journal and bank statement.Vouch to authorization from the BODRead minutes for proper execution of transactionsRecalculate gain or loss on sale 10-*Auditing Investments:Substantive Procedures (cont.)Determine MARKET VALUEObtain 12/31 market price from Wall Street Journal, website or other sourcesEvaluate for possible permanent declines in valuePhysically inspect securities held by the clientConfirm securities held by a brokerVerify CUSIP Numbers to ensure that there were no unrecorded sales and subsequent repurchases Recorded in company name 10-*Auditing Investments:Substantive Procedures (cont.)Verify DIVIDEND REVENUEReview stocks held by client for dividend payments (e.g. Moody's, Standard & Poor's, quote.com).If securities held by broker review monthly statements for dividends.Trace dividend received to cash receipts journalEvaluate presentation on balance sheet (short-term vs. long-term asset) 10-*Trouble Spots in Audits of Investments Valuation of investments at cost if market value is not evidentvalue impairment that is other than temporary.Propriety, effectiveness, and risk disclosure of derivative securities used as a hedgesDetermination of the fair value of derivatives and securities, including valuation models and the reasonableness of key assumptions.Determination of significant influence relationship for equity method investments.10-*Derivative Investments, Hedging Activities, and Investments in Securities (SAS 92) Inquiries about the nature of investments and the reasons for holding them, especially hedging activities. Classification affects the accounting treatment of market values and the unrealized gains and losses on investments. Due to the complexity of Accounting for Derivative Securities and Hedging Activities, auditors may need special skills or knowledge to: understand client hedging transactions ensure that effective controls are in placeto audit the transactions. 10-*Auditing Fair ValueManagement’s responsibility to value assets and liabilities.Market-based values preferredThree level hierarchy in establishing FMV when market price is unavailable.Quoted market price for identical assets or liabilitiesQuoted market price for similar assets or liabilitiesEstimate using valuation techniques10-*