Chapter06 - answer.doc

8/14/2019 Chapter06 - answer.doc

1/6

6-1. Investing activities include an entitys activities to invest in debt or equitysecurities of other entities and investments in property, plant, and equipment.

These transactions are often recorded during the expenditure cycle but are so

significant that additional controls are applied to them.

6-2. Kickbacks, acquisitions of goods for personal use, appropriation of assets, andprocessing of fictitious transactions can occur in the acquisition of property, plant,

and equipment, just as they do in the acquisition of goods. elated!party

transactions to acquire investments or property, plant, and equipment may resultin improper valuation of the accounts. "ecurities may be stolen or diverted.

#istorically, business entities have manipulated the accounting values at $hich

assets $ere recorded by acquiring assets from a related party or selling assets to a

related party. %cquiring assets at inflated values may result in draining cash from

the acquiring entity. "elling assets at inflated values to related parties results in

increased revenue and assets to the selling entity, and these may never be reali&ed.

%ll transactions conducted $ith related parties must be examined carefully.

6-3. 'ritical controls include separating the responsibilities for authori&ingtransactions, keeping records, and having custody of the asset.

(enerally, the board, or sometimes an investment committee of the board, must

approve individual investments. %fter obtaining board approval, the treasurer or

vice president for finance has authority to execute the purchase or sale of an

investment transaction.

)ue to their large peso value and susceptibility to misappropriation, investmentcertificates *stocks or bonds+ are often left in the custody of a broker or bank.

hen the entity takes custody of investment certificates should be stored in a safe

deposit box.

Typically the general ledger clerk maintains investment records unless the entityhas a large volume of investment transactions.

CHAPTER

6

AUDIT OF THE FINANCING AND INVESTING

CYCLE: TESTS OF CONTROLS AND

SUBSTANTIVE TESTS OF TRANSACTIONS


2/6

6-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition

6-4. The substantive tests, grouped according to the assertions they test, are as follo$s-

Existence or occurrence: ecorded investments and investment income exist.

Inspect securities on hand and trace to listing.

'onfirm securities held by others.

Completeness: %ll investments and investment income are recorded.

%pply analytical procedures.

Rights and obligations: Investments and investment income are o$ned by the

entity.

or investments acquired during the period, examine supporting invoices andpaid checks. or dividends, interest, and disposals of investments, examine

remittance advices.

aluation or allocation: Investments are valued in accordance $ith (%%/ and

investments and investment income are mathematically accurate.

econcile the investment listing to the subsidiary ledger and general ledger

account.

ecalculate interest revenue and verify dividend income by reference to

published reports of dividends.

!resentation and disclosure: Investments and investment income are presented in

accordance $ith (%%/.

evie$ statement presentation for compliance $ith (%%/.

6-5. inancing activities consist of an entitys transactions to *0+ obtain long!term

*capital+ funds by issuing long!term debt or capital stock1 *2+ make payments

associated $ith long!term funds, such as payment of interest and dividends1 and*3+ retire long!term funds by paying off or reacquiring debt or equity obligations.

4ong!term debt includes notes, mortgages, and bonds. 'apital stock includes both

common and preferred stock. 5ften these transactions are recorded in the sales

and collections cycle, but they are so significant that additional controls are

applied to them.

6-6. The characteristics of the liability accounts that result in a different auditing

approach than follo$ed in the audit of accounts payable are-

0+ elatively fe$ transactions affect the account balances but each transaction

is often highly material in amount.

2+ The exclusion of a single transaction could often be material by itself.


3/6

Audit o" the #inancing and $n%esting Cycle: &ests o" Controls and Substanti%e &ests o" &ransactions 6-

33+ The relationship bet$een the client entity and the holder of the o$nership

document is legal in nature.

6+ The liabilities involve accrual and payment of interest as $ell as debt.

6-7. It is common to audit the balance in notes payable in conjunction $ith the audit ofinterest expense and interest payable because it minimi&es the verification time

and reduces the likelihood of overlooking errors in the balance. 5nce the auditor

is satisfied $ith 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 $hich interest has been paid is minimi&ed.

hen 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 asa part of the audit of the notes payable and related accrued interest. 7ormally,

ho$ever, there are only a fe$ notes and fe$ transactions during the year.

6-8. The most important controls the auditor should be concerned about in the audit of

notes payable are-

0+ The proper authori&ation for the issuance of ne$ notes *or rene$als+ to ensurethat the company is not being committed to debt arrangements that are not

authori&ed.

2+ 'ontrols over the repayment of principal and interest to ensure that no more is

paid on the note than is required.

3+ /roper records and procedures to ensure that all amounts in all transactions

are properly recorded.

6+ /eriodic independent verification to ensure that all the controls over notes

payable are $orking.

6-9. our types of restrictions long!term creditors often put on companies in grantingthem a loan are-

0+ inancial ratio restrictions

2+ /ayment of dividends restrictions

3+ 5perations restrictions

6+ Issue of additional debt restrictions

The auditor can find out about these restrictions by examining the loan agreement

and related correspondence associated $ith the loan, and by confirmation. The

auditor must perform calculations and observe activities to determine $hether the

client has observed the restrictions.

6-1. The major internal control over o$ners equity are-

0+ /roper authori&ation of transactions

2+ /roper record keeping


4/6


3+ %dequate segregation of duties bet$een maintaining o$ners equity records

and handling cash and stock certificates6+ The use of an independent registrar and stock transfer agent

6-11. "ince it is important to verify that properly authori&ed dividends have been paid too$ners of stock as of the dividend record date, a comparison of a random sample

of canceled dividend checks to a dividend list prepared by management $ould be

inadequate. "uch an audit step is useless unless the dividend list has first been

verified to include all stockholders of record at the dividend record date. % better

test is to determine the total number of shares outstanding at the dividend date

from the stock registrar and recompute the total dividends that should have been

paid for comparison $ith the total amount actually paid. % random sample of

canceled checks should then be compared to the independent registrars records toverify that the payments $ere actually made to valid shareholders.

6-12. 0+ c 3+ c 8+ c

2+ d 6+ d

6-13. 0+ d 3+ c 8+ a

2+ a 6+ d 9+ a

6-14. 0+ d 2+ a 3+ b

6-15. 0+ a 2+ a 3+ a 6+ c

6-16. 0+ b 2+ a 3+ c

6-17.

!. ". #.

$%&'()* (+

C(,&(

$(*,/! F/,!,#/!

S!*0*, E&&(&

A%/ $&(#*%&* (

D**&0/,* E/)*,#*

(+ !*&/! E&&(&

0. To assure that all noteliabilities are

authori&ed by proper

management.

4oss of assets throughpayment of excess

interest rates or the

diversion of cash to

unauthori&ed persons.

'heck note request formsfor proper authori&ation.

2. To assure that note

transactions are

recorded in full and in

detail.

Improper disclosure or

errors in note payable

through duplication.

)etermine if master file is

maintained, and reconcile

detailed contents to

control.

3. To prevent misuse of :isstatement of )etermine if duties are


5/6


6/6


comparison to previous years.

8. %ssign tools to individual

foreman and periodically count

the tools.

Take a physical count of the tools.

9. #ave recording of property

acquisitions internally verified.

evie$ supporting documentation on

property acquisitions and compare to

recorded value.

=. The deposit of all cash directly

into the bank account.

*0+ 'onfirmation of bank accounts and

other tests for unrecorded loans.

*2+ /hysical examination of plantassets.

6-2.

L/!"// ! #(%

"* U,#(*&*

A%/ $&(#*%&* (

U,#(*& L/!"//

a. 4a$suit evie$ minutes of the >oard of

)irectors meetings.

b. >uilding used as collateral for a

loan

Chapter06 - answer.doc

Documents

Transcript of Chapter06 - answer.doc