Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8th Edition William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University Chapter 17 – Auditing the Investing and Financing Cycles

Chapter Overview

Nature of the Investing and Financing Cycles Overview of the Cycles Investing Activities Financing Activities Understanding the Entity and Environment

Understanding the Entity and Environment

Investing Cycle – Audit Objectives

Investing Cycle – Analytical Procedures

Investing Cycle Inherent Risk Consideration of Internal Controls Preliminary Audit Strategies

Substantive Tests for Plant Assets Initial Procedures Analytical Procedures Tests of Details of Transactions Vouch Plant Asset Additions Vouch Plant Asset Disposals Review Entries to Repairs and Maintenance Expense

Substantive Tests for Plant Assets Tests of Details of Balances Inspect Plant Assets Examine Title Documents and Contracts Tests of Details of Accounting Estimates Review Provisions for Depreciation Impairment of Plant Assets Tests of Details of Presentation and Disclosure

Study Break This cycle involves activities such as the purchase and sale of land, buildings, and equipment not generally held for resale. Investing Cycle Financing Cycle Cash Disbursements Cycle Cash Receipts Cycle A. Investing Cycle

Study Break All of the following are classes of transactions associated with the audit of plant assets, except: Depreciation Expense Disposal of Fixed Assets Payroll Expense Acquiring of Fixed Assets C. Payroll Expense

Study Break While auditing the investing cycle, this test of details of balances allows the auditor to obtain direct personal knowledge of the existence of the plant assets. Inspect plant assets Examine title documents and contracts Impairment of plant assets Review provisions for depreciation A. Inspect plant assets

Financing Cycle

Financing Cycle – Audit Objectives

Financing Cycle – Analytical Procedures

Financing Cycle Inherent Risk Consideration of Internal Control Common Documents and Records

Financing Cycle – Functions and Related Controls Authorizing bonds and capital stock Issuing bonds and capital stock Paying bond interest and cash dividends Redeeming and reacquiring bonds and capital stock Recording financing transactions

Preliminary Audit Strategies for Long-Term Debt

Substantive Tests of Long-Term Debt Initial Procedures Analytical Procedures Tests of Details of Transactions

Substantive Tests of Long-Term Debt Tests of Details of Balances Review Authorizations and Contracts Confirm Debt Recalculate Interest Expense Tests of Details of Presentation and Disclosure

Study Break 4. This cycle involves activities such as acquiring debt, issuing bonds, and issuing common stock. Investing Cycle Financing Cycle Cash Disbursements Cycle Cash Receipts Cycle B. Financing Cycle

Study Break This financing function involves making payments to the proper payees in according with board of director or management authorizations. Authorizing bonds Authorizing capital stock Paying bond interest and cash dividends Recording financing transactions C. Paying bond interest and cash dividends

Study Break All of the following are tests of details of balances for the financing cycle, except: Confirmation of accounts payable Confirmation of long-term debt Review authorization and contracts Recalculate interest expense A. Confirmation of accounts payable

Preliminary Audit Strategies for Shareholders’ Equity

Substantive Tests of Stockholders’ Equity Initial Procedures Analytical Procedures Tests of Details of Transactions Vouch Entries to Paid-in Capital Accounts Vouch Entries to Retained Earnings

Analytical Procedures

Substantive Tests of Stockholders’ Equity Tests of Details of Balances Review Articles of Incorporation and Bylaws Review Authorization and Terms of Stock Issues Confirm Shares Outstanding with Registrar and Transfer Agent Inspect Stock Certificate Book Inspect Certificates of Shares Held in Treasury Tests of Details of Presentation and Disclosure