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Chapter 20

BUS 426 Chapter Notes - Chapter 20: Promissory Note, Retained Earnings, Accrual

Business Administration
Course Code
BUS 426
Michael Favere- Marchesi

of 3
Chapter 20 - Audit of the Capital Acquisition and Repayment Cycle
Nature of the Capital Acquisition and Repayment Cycle
The transaction cycle involving the acquisition of capital resources,
in the form of interest-bearing debt and owners’ equity, and the
repayment of the capital
o Major Accounts:
o Notes Payable: A legal obligation to a creditor, which may be
unsecured or secured by assets
o Contracts Payable
o Mortgage Payable
o Capital Stock Preferred
o Capital Stock - Common
o Retained Earnings
o Bonds Payable
o Interest Expense and Accruals
o Dividends Declared
o Dividends Payable
Four Important Characteristics
Few transactions affect the account balances, but highly
Exclusion of a single transaction could be material itself
There is a legal relationship between the client and the holder
of the stock
There is a direct relationship between the interest and
dividend accounts and debt and equity
Notes Payable
o Internal controls over notes are adequate
o Transactions for principal and interest are properly
authorized and recorded
o Liability for notes and related interest expenses and
liabilities are properly stated
Internal Controls
o Proper authorization for the issue of new notes
o Adequate controls over the repayment of principal and
o Proper documents and records
o Periodic, independent verification
Test of Controls
Analytical Procedures
Tests of Details of Balances
o Completeness: Existing notes payable are included
o Accuracy: Notes payable in the schedule are accurately
Chapter 20 - Audit of the Capital Acquisition and Repayment Cycle
o Presentation and Disclosure: Notes payable are
properly presented and disclosed
Owners’ Equity
Closely Held Company (Private Company): A corporation whose
stock is not publicly traded; typically, there are only a few
shareholders and few capital stock transactions over the year
Publicly Held Corporation: A corporation whose stock is publicly
traded; typically, there are many shareholders and frequent
changesi n the ownership of the stock
The internal controls over capital stocks and related dividends
are adequate
Owners’ equity transactions are recorded properly
Owners’ equity balances are properly presented and disclosed
Internal Controls
Proper authorization of transactions
o Issuance of capital stock
o Repurchase or redemption of capital stock
o Declaration of dividends
Proper record keeping and segregation of duties
o Capital Stock Certificate Book: A record of the
issuance and repurchase of capital stock for the life of
the corporation
Independent registrar and stock transfer agent
o Independent Registrar: An outside person or
organization engaged by a corporation to ensure that its
stock is issued in accordance with capital stock
provisions in the corporate charter and authorizations
by the board of directors
Audit of Capital Stock
Completeness: Existing capital stock transactions are
Occurrence and Accuracy: Recorded capital stock
transactions exist and are accurately recorded
Accuracy: Capital stock is accurately recorded
Presentation and Disclosure: Capital stock is properly
presented and disclosed
Audit of Dividends
Occurrence: Recorded dividends occurred
Completeness: Existing dividends are recorded
Accuracy: Dividends are accurately recorded
Existence: Dividends that exist are paid to shareholders
Completeness: Dividends payable are recorded
Chapter 20 - Audit of the Capital Acquisition and Repayment Cycle
Accuracy: Dividends payable are accurately recorded