AEB_SM_CH22_1 - 1Chapter 22 Audit of the Capital...

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1Chapter 22 Audit of the Capital Acquisition and Repayment Cycle Review Questions 22-1 Four examples of interest bearing liability accounts commonly found on balance sheets are: 1. Notes payable 2. Contracts payable 3. Mortgages payable 4. Bonds payable These liabilities have the following characteristics in common: 1. Relatively few transactions affect the account balance, but each transaction is often highly material in amount. 2. The exclusion of a single transaction could be material in itself. 3. There is a legal relationship between the client entity and the holder of the stock, bond, or similar ownership document. 4. There is a direct relationship between interest and dividend accounts and debt and equity. These liabilities differ in what they represent and the nature of their respective liabilities. 22-2 The characteristics of the liability accounts in the capital acquisition and repayment cycle that result in a different auditing approach than the approach followed in the audit of accounts payable are: 1. Relatively few transactions affect the account balance, but each transaction is often highly material in amount. 2. The exclusion of a single transaction could be material in itself. 3. There is a legal relationship between the client entity and the holder of the stock, bond, or similar ownership document. 4. There is a direct relationship between interest and dividend accounts and debt and equity. 22-1
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22-3 It is common to audit the balance in notes payable in conjunction with the audit of interest expense and interest payable because it minimizes the verification time and reduces the likelihood of overlooking misstatements in the balance. Once the auditor is satisfied with the balance in notes payable and the related interest rates and due dates for each note, it is easy to test the accuracy of accrued interest. If the interest expense for the year is also tested at the same time, the likelihood of omitting a note from notes payable for which interest has been paid is minimized. When there are a large number of notes or a large number of transactions during the year, it is usually too time consuming to completely tie out interest expense as a part of the audit of the notes payable and related accrued interest. Normally, however, there are only a few notes and few transactions during the year. 22-4 The most important controls the auditor should be concerned about in the audit of notes payable are: 1. The proper authorization for the issuance of new notes (or renewals) to insure that the company is not being committed to debt arrangements that are not authorized. 2. Controls over the repayment of principal and interest to insure that the proper amounts are paid.
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AEB_SM_CH22_1 - 1Chapter 22 Audit of the Capital...

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