ACCT_3444_L11_CH_20-23 - Accounting 3444 Lecture 11:...

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Unformatted text preview: Accounting 3444 Lecture 11: Chapter 20 and 21Capital Acquisition and Audit Completion Lecture 10 Recap: Chapters 18 and 19– Auditing Accounts Payable and Inventory Key concepts • Purchasing Cycle • Control Objectives, Procedures and tests of Controls • Substantive Tests • Search for Unrecorded Liabilities • Audit of Capital Assets • Inventory Processes, the Inventory Count and Inventory Pricing In Class Chapter 18 and 19 Wrap up Exercises: Chapter 18: Problem: 18-29 Chapter 19: Problem: 19-16 Chapter 20: Financing Capital Acquisition/Long term Debt/Owners’ Equity Capital acquisition – covered in the purchasing cycle (ch 18/19 notes) Financing capital acquisition accounts impacted: 1. Share capital- Common and Preferred 2. Dividends 3. Bonds/Notes/Mortgages payable 4. Interest expense 5. Income tax expense, FIT (asset/liability) 6. Financial instruments Key Characteristics of These transactions: 1. Relatively few transactions during the period 1 2. A Single transaction may be material 3. Usually involves a contract with a 3 rd party 4. Direct impact on Interest expense/ dividends As a result, usually a 100% substantive audit is most efficient. Control Risk Assessment Even though a substantive audit will likely be performed, the auditor still must give consideration to the controls over these cycles in terms of: Key Controls: • Transactions are appropriately Authorized • Custody • Record keeping • Periodic Reconciliation Control Considerations 1. Authorization- Long Term debt is initiated by authorized individuals i.e. Signed lending agreement and approval by audit committee/ B of D 2. Completeness- All borrowings and repayments of interest and principle are recorded- 3. Valuation- Transactions are recorded at the face value plus or minus any discount/ premium. Issuance fees are amortized over the term of the debt 4. Classification- Notes and Bonds are properly classified in terms of current and long- term portions Other • Should be aware of any debt covenants which may introduce a potential bias in the accounting records 2 • EIC 59 indicates if a debt covenant is violated and as a result the lender can call the debt – then the debt should be classified as current Control Objectives Substantive Audit Procedures: • Examine any new debt agreements and determine status of existing agreements • Examine the Board minutes for Approval • Trace large cash receipts/ disbursements to source documents and general ledger • Confirmation of long term liabilities (notes/bonds payable) i. Confirm amount, interest rates, due date, collateral, restrictive debt covenants etc • Analytical relationships with interest expense can be used to recalculate interest expense during the period – compare to client’s interest expense and accrual recorded and assess whether any issues exist • Examine debt agreements to ensure all note disclosure details are provided i.e. any restrictive covenants, due dates, interest rates, maturity dates, and redemption privileges...
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This note was uploaded on 07/13/2011 for the course ACCT 1110 taught by Professor Bleecker,d during the Spring '11 term at Kwantlen Polytechnic University.

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ACCT_3444_L11_CH_20-23 - Accounting 3444 Lecture 11:...

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