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

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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
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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
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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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