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Unformatted text preview: 1Chapter 21 Audit of the Capital Acquisition and Repayment Cycle Review Questions 21-3 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 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. 21-4 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. 3. Proper records and procedures to insure that all amounts in all transactions are properly recorded. 4. Periodic independent verification to insure that all the controls over notes payable are working. 21-7 The primary purpose of analyzing interest expense is to uncover a payment to a creditor who is not included on the notes payable schedule. The primary considerations the auditor should keep in mind when doing the analysis are: 1. Is the payee for the interest payment listed in the cash disbursements journal also included in the notes payable list? 2. Has a confirmation for notes payable been received from the payee? 21-8 The tests of controls and substantive tests of transactions for liability accounts in the capital acquisition and repayment cycle consists of tests of the control and substantive tests over the payment of principal and interest and the issuance of new notes or other liabilities, whereas the tests of details of balances concern the balance of the liabilities, interest payable, and interest expense. A unique aspect of the capital acquisition and repayment cycle is that auditors 21-1 normally verify the transactions and balances in the account at the same time, as described in the solution to Review Question 21-3....
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- Spring '11