2 INVESTING AND FINANCING CYCLE 10-2INVESTING AND FINANCING CYCLEConcerned with transactions related to the use of the organization's funds (investing) and sources of those funds (financing) other than operations.Accounts affected by investing and financial cycle transactions include investments in securities; notes and bonds payable; and, stockholders' equity accounts.
5 Investment and Finance Activities 10-5Investment and Finance ActivitiesFinancial PlanningRaise capitalOperate business (all other cycles)Mergers and acquisitionsInvest excess funds
6 Exhibit 10.2 Finance and Investment Cycle 10-6Exhibit 10.2 Finance and Investment Cycle
7 Control Considerations 10-7Control ConsiderationsTransactions authorized by BOARD OF DIRECTORSDocumentation:Investments in securities: BROKER'S ADVICEProperty, plant and equipment: VENDOR'S INVOICE (for purchased PPE) or INTERNAL COST RECORDS (for manufactured PPE)Bonds and notes payable: Documentation from DEBTHOLDERSStockholders' Equity: Documentation from REGISTRARCASH RECEIPTS/DISBURSEMENTS JOURNALS
8 Finance and Investment Cycle: Control Procedures 10-8Physical ControlsSecurities numbered and in the client's nameSecurities held by an independent custodian or in a secure locationAccess to safe-deposit box requires the presence of more than one employeePhysical items periodically compared to detail recordsCash receipts from Investing and Financing cycle transactions deposited intact and dailySeparation of DutiesTransactions AUTHORIZED by the Board of DirectorsGeneral Accounting RECORDS transactionsA separate function or external custodian has CUSTODYPerformance ReviewsCompare current investing and cycle transaction data against prior-year data or expected dataCompare revenue and expenses against organization standards or expectations.
9 CONTROL OVER ACCOUNTING ESTIMATES 10-9CONTROL OVER ACCOUNTING ESTIMATESCommunication of need for estimateAccumulate dataQualified personnelReview and approvalComparison to resultsCompare with plans
10 SUBSTANTIVE TESTS–INTEREST-BEARING LIABILITIES 10-10SUBSTANTIVE TESTS–INTEREST-BEARING LIABILITIESAgree to BEGINNING BALANCE and CONFIRM with holders or makers.LOAN PROCEEDSVOUCH to cash receiptsRecalculate Discount/PremiumConfirm IBL, examine noteLOAN PAYOFFRecalculate Interest ExpenseRecalculate Gain/Loss on RetirementVerify cash disbursements
11 INTEREST-BEARING LIABILITIES 10-11INTEREST-BEARING LIABILITIESINTEREST PAYMENTSRecalculate Interest ExpenseSearch for UNRECORDED liabilitiesInquiry of managementBank confirmationsUnusual amounts of interest expenseLarge receipts of cash during the yearEnsure DEBT COVENANTS are met.Inspect loan agreements.Consider GOING CONCERN implications if not met.Ensure proper presentation and disclosure.
13 AUDITING STOCKHOLDER'S EQUITY 10-13AUDITING STOCKHOLDER'S EQUITYOverview of audit approachEXTERNAL PARTIES involved in record keepingTransactions must be authorized by the BOARD OF DIRECTORSTransactions must be consistent with the client's ARTICLES OF INCORPORATION
14 AUDITING STOCKHOLDER'S EQUITY 10-14AUDITING STOCKHOLDER'S EQUITYPAID-IN CAPITALAgree balances to prior year documentationExamine issuances and repurchases of capital stockVerify distribution of proceeds between CAPITAL STOCK and ADDITIONAL PAID-IN CAPITALExamine CASH RECEIPTS and CASH DISBURSEMENTS recordsDetermine that all transactions are RECORDED (TRACE from BOD minutes)Verify that all transactions are PROPERLY AUTHORIZED
15 AUDITING STOCKHOLDER'S EQUITY 10-15AUDITING STOCKHOLDER'S EQUITYRETAINED EARNINGSAgree beginning balance with prior year documentationVerify the appropriateness of prior-period adjustment treatmentTrace net income/loss to INCOME STATEMENTEnsure that DIVIDENDS are properly authorized by BOARD OF DIRECTORS
16 Auditing Investments: Substantive Procedures 10-16Auditing Investments: Substantive ProceduresAgree balances to Prior Year DocumentationPurchases of investmentsVOUCH to BROKER'S ADVICE (Statement)Examine BOARD MINUTES for authorizationSales of investmentsVOUCH to BROKER'S ADVICE, CASH RECEIPTS RECORDS, and BOARD MINUTESRecalculate gain or loss on saleRead minutes for sales of Investments and trace to recording
17 Auditing Investments: Substantive Procedures (cont.) 10-17Auditing Investments: Substantive Procedures (cont.)Determine MARKET VALUE (SFAS 115)Obtain 12/31 market price from Wall Street Journal or other sourcesEvaluate for possible PERMANENT DECLINESPHYSICALLY INSPECT or CONFIRM securities Verify Certificate Numbers to ensure that there were no unrecorded sales and subsequent repurchasesMade in company nameCan inspect at interim, if safe-deposit boxVerify DIVIDEND REVENUEExamine CASH RECEIPTS recordsCompare to external sources (Moody's, Standard & Poor's)Evaluate presentation in BALANCE SHEET (short-term vs. long-term asset)
18 Trouble Spots in Audits of Investments 10-18Trouble Spots in Audits of InvestmentsValuation of investments at cost, market, or value impairment that is other than temporary.Propriety, effectiveness, and risk disclosure of derivative securities used as a hedgesDetermination of the fair value of derivatives and securities, including valuation models and the reasonableness of key assumptions.Determination of significant influence relationship for equity method investments.
19 10-19Derivative Investments, Hedging Activities, and Investments in Securities (SAS 92)Inquiries about the nature of investments and the reasons for holding them, especially hedging activities.The classification affects the accounting treatment of market values and the unrealized gains and losses on investments.Due to the complexity of SFAS 133 (Accounting for Derivative Securities and Hedging Activities), auditors may need special skills or knowledge to understand client hedging transactions, to ensure that effective controls are in place to monitor them, and to audit the transactions.
20 Auditing Fair Value Measurements (SAS 101) 10-20Auditing Fair Value Measurements (SAS 101)Management’s responsibility.Market-based values preferredIf not available—use assumptions market would have used.If not known—management can use their own assumptionsif no contrary data