Professional Documents
Culture Documents
AcFn 3162 CH 7 Audit of Debt & Equity Capital
AcFn 3162 CH 7 Audit of Debt & Equity Capital
YA AAUSC 1
…Audit of Debt & Equity
YA AAUSC 2
…Audit of Debt & Equity
Accounts affected by transactions in the capital acquisition
& Repayment Cycle
YA AAUSC 3
…Audit of Debt & Equity
YA AAUSC 7
…. Audit of Debt Obligation
YA AAUSC 8
…. Audit of Debt Obligation
YA AAUSC 9
…. Audit of Debt Obligation
Bond Indenture
This is a contract between an issuer of bonds and the
bondholder stating:
Time period before repayment
Amount of interest paid
Bond being convertible (eg. If they are converted to
equity security and if so, at what price or what ratio)
Bond being callable (Callable bonds give the issuer the right to call
and retire the bonds prior to maturity).
Amount of money that is to be repaid
YA AAUSC 10
…. Audit of Debt Obligation
Debt Covenants
These are:
Restrictions in debt agreements aimed at protecing the
lender by restricting the activities of the borrower
Common Restrictions include:
Maintenance of a minimum level of retained earnings
before dividends can be paid
Maintenance of a minimum working-capital ratio
Specification of a maximum debt-equity ratio
Specific callable provisions identifying procedures for
calling and retiring debt at prespecified prices and dates
YA AAUSC 11
…. Audit of Debt Obligation
YA AAUSC 12
…. Audit of Debt Obligation
YA AAUSC 13
…. Audit of Debt Obligation
YA AAUSC 14
…. Audit of Debt Obligation
YA AAUSC 17
Substantive Tests for Debt Obligation Balances
YA AAUSC 18
…Substantive Tests for Debt Obligation
Transactions & Balances
Tolerable misstatement (low)
Auditors often set tolerable misstatement at a low level because it is
usually possible to audit 100% of the account balance and transactions
affecting the notes payable account balance.
Inherent risk (low)
They also set inherent risk at a low level because it is usually easy to
determine the correct value of the account
Focused balance related objective for debt (eg. notes payable account)
include:
Completeness,
Accuracy,
Presentation & disclosure objectives such as collateral and covenant
restrictions for notes payable.
YA AAUSC 19
…Substantive Tests for Debt Obligation
Balances
Substantive Tests of Details of Balances
The amount of testing of details of balance depends heavily on:
1. The materiality of the debt balance (eg notes payable) and
2. The effectiveness of internal controls.
YA AAUSC 21
FRAUD-RELATED SUBSTANTIVE PROCEDURES FOR
DEBT OBLIGATIONS
YA AAUSC 23
Audit of the Shareholders Equity
Accounts
Relevant Accounts in the audit of Shareholders
equity include:
Stock accounts (Common, Preferred, Treasury),
Additional Paid in capital,
Dividend accounts,
Retained earnings
YA AAUSC 24
...Audit of the Shareholders Equity
Accounts
Transactions affecting Shareholders equity
include:
Issuance of New stock
Purchase of treasury stock
Declaration and payment of dividends
Grants of stock options and warrants
Exercises and expirations of stock options and warrants
Transfer of net income to retained earnings
Recording of prior-period adjustments to retained
earnings
YA AAUSC 25
...Audit of the Shareholders Equity
Accounts
YA AAUSC 27
...Audit of the Shareholders Equity
Accounts
…Internal Controls over Common Stock and related account
YA AAUSC 28
...Audit of the Shareholders Equity
Accounts
…Internal Controls over Common Stock and related account
YA AAUSC 31
...Audit of the Shareholders Equity
Accounts
Risk Assessment Procedures
Inherent risks related to Shareholders equity account
Risks related to inaccurate valuation:
Stocks issued in exchange for non cash asset may not be
properly valued
Risks related to inaccurate presentation & disclosure of
Each class of stock outstanding and number of shares authorized,
issued, and outstanding and special rights associated with them
Stock options outstanding and convertible features
Existence of stock warrants
Any restrictions or appropriations of retained earnings
Prior-period adjustments and other comprehensive income adjustments
YA AAUSC 32
…. Audit of Debt Obligation
YA AAUSC 34
SUBSTANTIVE TESTS OF DETAILS -STOCKHOLDERS’
EQUITY TRANSACTIONS
YA AAUSC 35
….SUBSTANTIVE TESTS OF DETAILS -STOCKHOLDERS’
EQUITY TRANSACTIONS
YA AAUSC 36
….SUBSTANTIVE TESTS OF DETAILS -STOCKHOLDERS’
EQUITY TRANSACTIONS
YA AAUSC 37
FRAUD-RELATED SUBSTANTIVE PROCEDURES
FOR STOCKHOLDERS’ EQUITY ACCOUNTS
YA AAUSC 44
AUDIT OF SOLE PROPRIETERSHIPS &
PARTNERSHIPS
AUDIT OF PARTNERSHIPS
In the audit of partnership, the most important document
is the article of partnership (partnership contract.
The contract normally includes
Net income/loss sharing agreement
Maintaining specified level of partners capital,
Restrictions of drawings by partners to specified amount,
Auditors are required to ensure compliance with the
partnership contract.
For Partnerships operating without written agreement,
auditors suggest to have written agreement.
YA AAUSC 46
…DISCLOSURE OF CONTINGENCIES
YA AAUSC 47
..DISCLOSURE OF CONTINGENCIES
YA AAUSC 49
..DISCLOSURE OF CONTINGENCIES
YA AAUSC 50
..DISCLOSURE OF CONTINGENCIES
YA AAUSC 51
..DISCLOSURE OF CONTINGENCIES
YA AAUSC 54
..DISCLOSURE OF CONTINGENCIES
YA AAUSC 55