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AuditoftheCapitalAcquisitionandRepaymentCycleChapter21 CharacteristicsoftheCapitalAcquisitionandRepaymentCycleFewtransactionsaffecttheaccountbalances,buteachoneisoftenhighlymaterialinamount.Theexclusionofasingletransactioncouldbematerialinitself.12 CharacteristicsoftheCapitalAcquisitionandRepaymentCycleThereisalegalrelationshipbetweenthecliententityandtheholderofthestock,bond,orsimilarownershipdocument.Thereisadirectrelationshipbetweentheinterestanddividendsaccountsanddebtandequity.34 FinanceandInvestingAccountsInvestmentsGainsandlossesoninvestmentsIntangibles-goodwill,consolidationsLongtermdebtInterestincome/expenseDividendincomeStockAccounts AccountsintheCycleNotesPayableContractsPayableMortgagesPayableBondsPayableInterestExpenseAccruedInterestCashintheBankCapitalStock–CommonCapitalStock–Preferred AccountsintheCyclePaid-inCapitalinExcessofParDonatedCapitalRetainedEarningsAppropriationsofRetainedEarningsTreasuryStockDividendsDeclaredDividendsPayableProprietorship–CapitalAccountPartnership–CapitalAccount SegregationofDutiesAuthorization–BoardofDirectorsminutesCustodyRegistrarlistofstockholdersTransferagentissues/cancelssharesBrokerkeepsstock/bond-confirmOfficerkeepsstocks/bonds–countRecordkeeping–accountingReconciliationtobrokerreports,registrar ControlIssuesTransactionsprocessedbyhighlevelmanagementSeparationofduties-compensatingcontrols SpecialAuditConsiderationsUsuallynotsampledbecausetherearefewhighdollartransactionsTestsfordetails100%ofallitemsAssertionsExistenceandownershipofsecuritiesValuationofincomeandexpensesCompletenessofliabilities. MethodologyforDesigningTestsofBalances–NotesPayableIdentifyclientbusinessrisksaffectingnotespayable.Settolerablemisstatementandassessinherentriskfornotespayable.Assesscontrolriskfornotespayable. MethodologyforDesigningTestsofBalances–NotesPayableDesignandperformtestsofcontrolsandsubstantivetestsoftransactions.Designandperformanalyticalproceduresfornotespayablebalance. MethodologyforDesigningTestsofBalances–NotesPayableDesigntestsofdetailsofnotespayabletosatisfybalance-relatedauditobjectives.AuditproceduresSamplesizeItemstoselectTiming NotesPayableAnotepayableisalegalobligationtoacreditor.Itmaybeunsecuredorsecuredbyassets. NotesPayableandtheRelatedInterestAccountsNotesPayableInterestExpenseCashinBankInterestPayablePaymentsofprincipalBeginningbalanceIssueofnewnotesPaymentsofprincipalInterestexpensePaymentsofinterestBeginningbalanceIssueofnewnotesEndingbalancePaymentsofinterestInterestexpenseEndingbalance 1.Properauthorizationfortheissueofnewnotes2.Adequatecontrolsovertherepaymentofprincipalandinterest3.Properdocumentsandrecords4.PeriodicindependentverificationInternalControls Testsofnotespayabletransactionsinvolvetheissueofnotesandtherepaymentofprincipalandinterest.TestsofControlsandSubstantiveTestsofTransactions AnalyticalProceduresforNotesPayableAnalyticalProcedurePossibleMisstatementRecalculateapproximateMisstatementofinterestexpenseontheinterestexpenseandbasisofaverageinterestaccruedinterest,orratesandoverallmonthlyomissionofannotespayable.outstandingnotepayable AnalyticalProceduresforNotesPayableAnalyticalProcedurePossibleMisstatementCompareindividualnotesOmissionoroutstandingwiththoseofmisstatementofatheprioryear.notepayableComparetotalbalanceinMisstatementofnotespayable,interestinterestexpenseandexpense,andaccruedinterestaccruedinterestorwithprioryearbalances.notespayable MajorBalance-RelatedAuditObjectivesinNotesPayableExistingnotespayableareincluded(completeness).Notespayableinthescheduleareaccuratelyrecorded(accuracy).Notespayableareproperlypresentedanddisclosed(presentationanddisclosure).123 TypesofAuditTestsforNotesPayableCashinBankNotesPayablePaymentsofprincipalIssueofnewnotesPaymentsofinterestInterestPayableEndingbalanceTOC+STOT+AP+TDP=SufficientcompetentevidenceperGAASAuditedbyTOC,STOT,andAPAuditedbyAPandTDPAuditedbyTOCandSTOTAuditedbyTOCandSTOT TypesofAuditTestsforNotesPayableInterestPayableEndingbalanceAuditedbyAPandTDPAuditedbyTOC,STOT,andAPInterestExpenseInterestexpenseEndingbalanceAuditedbyAPTOC+STOT+AP+TDP=SufficientcompetentevidenceperGAAS PubliclyheldcorporationCloselyheldcorporationOwners’Equity Owners’EquityandDividendAccountsCashinBankCapitalStock–CommonPaid-inCapitalinExcessofPar–CommonRedemptionofstockRedemptionofstockBeginningbalanceIssueofstockEndingbalanceBeginningbalanceIssueofstockEndingbalance Owners’EquityandDividendAccountsCashinBankDividendsPayableRetainedEarningsPaymentofdividendsDividendsdeclaredBeginningbalanceDividendsdeclaredEndingbalanceBeginningbalanceNetearningsEndingbalance ProperauthorizationoftransactionsProperrecordkeepingandsegregationofdutiesIndependentregistrarandstocktransferagentInternalControls 1Existingcapitalstocktransactionsarerecorded(completeness).2Recordedcapitalstocktransactionsexistandareaccuratelyrecorded(existenceandaccuracy).AuditofCapitalStockandPaid-inCapital 3Capitalstockisaccuratelyrecorded(accuracy).4Capitalstockisproperlypresentedanddisclosed(presentationanddisclosure).AuditofCapitalStockandPaid-inCapital AuditofDividends1.Recordeddividendsexist(existence).2.Existingdividendsarerecorded(completeness).3.Dividendsareaccuratelyrecorded(accuracy).4.Dividendsaspaidtostockholdersexist(existence).5.Dividendspayablearerecorded(completeness).6.Dividendspayableareaccuratelyrecorded(accuracy). AuditofRetainedEarningsTransactionsinvolvingretainedearnings:–netearningsfortheyear–dividendsdeclaredTheremaybecorrectionsto:–prior-periodearnings–prior-periodadjustments–appropriationsofretainedearnings Auditorsmayidentifyspecificbusinessrisksassociatedwiththemethodusedbystart-upcompaniestoacquirecapital.Thecomplexityofthecapitaltransactionsmaycreateuniquefinancialreportinganddisclosureissues.E-CommerceandCapitalAcquisition EstimatesManagementcommunicatestheneedforproperaccountingestimatesReliabledataforestimatesPreparationofestimatesbyqualifiedpersonnelAdequatereviewandsupervisionComparisonofestimatestosubsequentresultsEstimatesconsistentwithcompanyplans EndofChapter21