Bus 426 - Chapter 20

3 Pages
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Department
Business Administration
Course Code
BUS 426
Professor
Michael Favere- Marchesi

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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 material  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  Objectives 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 interest 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 recorded 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 (P
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