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MELISSA CATHLIN - 01220110072

CHAPTER 22
Characteristics of the Capital Acquisition and Repayment Cycle Few transactions affect the account balances, but each one is often highly material in amount. The exclusion of a single transaction could be material in itself. There is a legal relationship between the client entity and the holder of the stock, bond, or similar ownership document. There is a direct relationship between the interest and di idends accounts and debt and equity.

!ethodology for "esigning Tests of #alances $ %otes &ayable 'dentify client business risks affecting notes payable. (et tolerable misstatement and assess inherent risk for notes payable. Assess control risk for notes payable. "esign and perform tests of controls and substanti e tests of transactions. "esign and perform analytical procedures for notes payable balance. "esign tests of details of notes payable to satisfy balance)related audit ob*ecti es +Audit procedures, (ample si,e, 'tems to select, Timing-.

'nternal Controls &roper authori,ation for the issue of new notes Adequate controls o er the repayment of principal and interest &roper documents and records &eriodic independent erification

!a*or #alance)Related Audit .b*ecti es in %otes &ayable /xisting notes payable are included +completeness-. %otes payable in the schedule are accurately recorded +accuracy-. %otes payable are properly presented and disclosed +presentation and disclosure-.

MELISSA CATHLIN - 01220110072


Audit of Capital (tock and &aid)in Capital Capital stock is accurately recorded +accuracy-. Capital stock is properly presented and disclosed +presentation and disclosure-. /xisting capital stock transactions are recorded +completeness-. Recorded capital stock transactions exist and are accurately recorded +existence and accuracy-.

/)Commerce and Capital Acquisition Auditors may identify specific business risks associated with the method used by start)up companies to acquire capital. The complexity of the capital transactions may create unique financial reporting and disclosure issues.

Audit of Retained /arnings Transactions in ol ing retained earnings0 $ net earnings for the year $ di idends declared There may be corrections to0 $ prior)period earnings $ prior)period ad*ustments $ appropriations of retained earnings Accounts in the Cycle %otes &ayable Contracts &ayable !ortgages &ayable #onds &ayable 'nterest /xpense Accrued 'nterest Cash in the #ank

MELISSA CATHLIN - 01220110072


Capital (tock $ Common Capital (tock $ &referred &aid)in Capital in /xcess of &ar "onated Capital Retained /arnings Appropriations of Retained /arnings Treasury (tock "i idends "eclared "i idends &ayable &roprietorship $ Capital Account &artnership $ Capital Account

Tests of Controls and (ubstanti e Tests of Transactions 0 Tests of notes payable transactions in ol e the issue of notes and the repayment of principal and interest. Analytical &rocedures for %otes &ayable Analytical &rocedure Compare indi idual notes outstanding with those of the prior year Compare total balance in notes payable,interest expense, and accrued interest with prior year balances. &ossible !isstatement .mission or misstatement of notes payable !isstatement of interest expense and accrued interest or notes payable.

CHAPTER 23
Transaction Cycles

MELISSA CATHLIN - 01220110072


+!isstatements which may not be disco ered as a part of the audit of the bank reconciliation0 Failure to bill a customer An embe,,lement of cash by interception of cash receipts from customers before they are recorded, with the account charged off as a bad debt "uplicate payment of a endor1s in oice 'mproper payments of officers1 personal expenditures &ayment for raw materials that were not recei ed &ayment to an employee for more hours worked &ayment of interest to a related party for an amount in excess of the going rate

+!isstatements which are normally disco ered as a part of the tests of a bank reconciliation0 Failure to include a check that has not cleared the bank, e en though it has been recorded in the cash disbursements *ournal Cash recei ed by the client subsequent to the balance sheet date but recorded as cash receipts in the current year "eposits recorded as cash receipts near the end of the year, deposited in the bank in the same month, and included in the bank reconciliation as a deposit in transit &ayments on notes payable debited directly to the bank balance by the bank but not entered in the client1s records

2eneral cash account 'mprest accounts #ranch bank account 'mprest petty cash fund Cash equi alent

!ethodology for "esigning Tests of #alances for Cash in the #ank &3A(/ ' 'dentify client business risks affecting cash in bank

MELISSA CATHLIN - 01220110072


(et tolerable misstatement and assess inherent risk for cash in bank Assess control risk for se eral cycles &3A(/ '' "esign and perform tests of controls and substanti e tests of transactions for se eral cycle &3A(/ ''' "esign and perform analytical procedures for cash in bank "esign tests of details of cash in bank to satisfy balance)related audit ob*ecti es Fraud .riented &rocedures 0 The auditor must extend the procedures in the audit of year)end cash to determine the possibility of a material fraud /xtended Tests of the #ank Reconciliation0 4hen the auditor belie es that the year)end bank reconciliation may be intentionally misstated, it is appropriate to perform extended tests of the year)end bank reconciliation. &roof of Cash All recorded cash receipts were deposited All deposits in the bank were recorded in the accounting records All recorded cash disbursements were paid by the bank All amounts that were paid by the bank were recorded

&roof of cash 'ncludes the following reconciliation tasks0 The balance on the bank statement with the general ledger balance at the beginning of the proof)of)cash period Cash receipts deposited per the bank with the cash receipts *ournal for a gi en period Cancelled checks clearing the bank with those recorded in the cash disbursements *ournal for a gi en period The balance on the bank statement with the general ledger balance at the end of the proof)of)cash period

&etty Cash 0

MELISSA CATHLIN - 01220110072


&etty cash is a unique account because it is often immaterial in amount, yet it is erified on many audits. The account is erified primarily because of the potential for embe,,lement and the client1s expectation of an audit re iew e en when the amount is immaterial.

CHAPTER 24
Classification and understandability0 Financial information is appropriately presented and described and disclosures are clearly expressed. Accuracy and aluation0 Financial and other information are disclosed fairly and at appropriate amounts. .ccurrence and rights and obligations0 "isclosed e ents and transactions ha e occurred and pertain to the entity. Completeness0 All disclosures that should ha e been included in the financial statements ha e been included. Contingent 5iabilities 0 A contingent liability is a potential future obligation to an outside party for an unknown amount resulting from acti ities that ha e already taken place.

MELISSA CATHLIN - 01220110072


Auditor1s Concerns &ending litigation for patent infringement, product liability, or other actions 'ncome tax disputes &roduct warranties %otes recei able discounted 2uarantees of obligations of others 6nused balances of outstanding letters of credit

Audit &rocedures for Finding Contingencies 'nquire of management about the possibility of unrecorded contingencies. Re iew current and pre ious years1 internal re enue reports for income tax settlements. Re iew the minutes of directors1 and stockholders1 meetings for indications of lawsuits or other contingencies. Analy,e legal expenses and re iew in oices and statements from legal counsel. .btain a letter from each ma*or attorney of the client as to the status of pending litigation. Re iew audit documentation for any information that may indicate a potential contingency. /xamine letters of credit in force

'nquiry of Client1s Attorneys A list including0 +7- pending threatened litigation , and +8- asserted or unasserted claims or assessments with which the attorney has had in ol ement. A request that the attorney furnish information or comment about the progress of each item listed. A request of the law firm to identify any unlisted pending or threatened legal actions or a statement that the client1s list is complete. A statement informing the attorney of the attorney1s responsibility to inform management of legal matters requiring disclosure in the financial statements and to respond directly to the auditor.

MELISSA CATHLIN - 01220110072


Types of (ubsequent / ents Those that ha e a direct effect on the financial statements and require ad*ustment Those that ha e do not ha e a direct effect on the financial statements but for which disclosure is required

Requiring Ad*ustment "eclaration of bankruptcy by a customer with an accounts recei able balance (ettlement of a litigation at an amount different from the amount recorded on the books "isposal of equipment not being used in operations at a price below the current book alue (ale of in estments at a price below recorded cost

Ad isability of "isclosure "ecline in the market alue of securities held for temporary in estment or resale 'ssuance of bonds or equity securities "ecline in the market alue of in entory as a consequence of go ernment action barring further sale of a product 6ninsured loss of in entories as a result of fire A merger or an acquisition

Final / idence Accumulation &erform final analytical procedures. / aluate the going)concern assumption. .btain a management representation letter. Consider information accompanying the basic financial statements. Read other information in the annual report.

/ aluate Results (ufficient appropriate e idence

MELISSA CATHLIN - 01220110072


/ idence supports auditor1s opinion Financial statement disclosures Audit documentation re iew 'ndependent re iew (ummary of e idence e aluation

Communicate with the Audit Committee and !anagement Communicate fraud and illegal acts Communicate internal control deficiencies .ther communication with audit committee !anagement letters