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Chapter 10

Chapter 10. Finance and Investment Cycle. Internal Control. Long-term Debt separate functions: authorization, independent trustee, interest and principal payments documents and records: loan and bond contracts, subsidiary ledgers. 1. Internal Control (Continued). Stockholder’s Equity

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Chapter 10

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  1. Chapter 10 Finance and Investment Cycle Chapter 10

  2. Internal Control • Long-term Debt • separate functions: authorization, independent trustee, interest and principal payments • documents and records: loan and bond contracts, subsidiary ledgers Chapter 10

  3. 1. Internal Control (Continued) • Stockholder’s Equity • separate functions: authorization, independent trustee or stockholder’s records, dividends • documents and records: articles of incorporation, by laws, stock certificate book, stockholder’s subsidiary ledger, dividend bank account, treasury stock Chapter 10

  4. 1. Internal Control (continued) • Investments • separate functions: authorize purchasing and selling securities, receiving periodic income, recording transactions, safeguarding securities, recording market adjustments and reclassifications • documents and records: stock and bond certificates, broker’s advice, investment subsidiary ledger Chapter 10

  5. Substantive Tests • Long-term Debt • Agree beginning balance to prior audit • Confirmation • Vouch transactions • Determine business purpose of loan • Obtain and review loan agreements • Ensure debt covenants are met • Review authorizations • Reconcile interest expense • Review current portion of long-term debt • Recalculate discount or premium amortization • Recalculate gain/loss on retirement • Analytical procedures Chapter 10

  6. 2. Substantive Tests (continued) • Long-term Debt • Existence and Occurrence • confirmation, vouching, review authorizations, determine business purpose • Rights and Obligations • examine loan agreements, confirmation, vouching , determine business purpose • Completeness • reconciling interest expense, reading BOD meeting minutes, analytical procedures Chapter 10

  7. 2. Substantive Tests (continued) • Long-term Debt • Valuation • vouch transactions, confirmation, review current portion, recalculate discount/premium amortization • Presentation and Disclosure • compare statement presentation to GAAP • review terms, covenants, commitments, retirement provisions Chapter 10

  8. 2. Substantive Tests (continued) • Stockholder’s Equity • Agree beginning balance to prior audit • Confirmation with outside agents • Reconcile stock certificate book • Review articles of incorporation and bylaws • Review authorizations • Determine all transactions are recorded • Vouch transactions • Verify allocation between capital stock account and paid in capital • Inspect treasury stock certificates Chapter 10

  9. 2. Substantive Tests (continued) • Stockholder’s Equity • Existence and Occurrence • confirmation, reconciling stock records, vouching transactions, inspect treasury stock shares • Rights and Obligations • confirmation, reconciling stock records, vouching transactions • Completeness • confirming, inspecting stock certificate book Chapter 10

  10. 2. Substantive Tests (continued) • Stockholder’s Equity • Valuation • vouching transactions • Presentation and Disclosure • compare statement presentation to GAAP • review par or stated values, shares authorized, issued and outstanding, dividend and liquidation preferences, dividends in arrears, stock compensation plans, recompute EPS calculations Chapter 10

  11. 2. Substantive Tests (continued) • Investments • Agree beginning balance to prior audit • Inspect and count securities on hand • Confirm securities held by others • Vouch entries (examine broker’s advices, deposit slips, and paid checks) • Review authorizations • Recalculate investment revenue earned (review broker's monthly statements) • Review documentation concerning fair values • Analytical procedures Chapter 10

  12. 2. Substantive Tests (continued) • Investments • Existence and Occurrence • inspecting and counting, confirmation, vouching • Rights and Obligations • vouching (examine broker’s advices, deposit slips, and paid checks), confirmation • Completeness • analytical procedures, vouching, inspecting and counting, confirmation Chapter 10

  13. 2. Substantive Tests (continued) • Investments • Valuation • review documentation concerning fair values, recalculate investment earned, inspection and counting • Presentation and Disclosure • compare statement presentation to GAAP • numerous disclosures are required regarding fair values, and realized and unrealized gains and losses Chapter 10

  14. Review Questions for Discussion • Chapter 10 10.2 10.3 10.11 10.12 10.14 10.17 Chapter 1

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