ASSIGNMENT LAB 7 :

AUDIT OF CAPITAL ACQUISITION AND REPAYMENT CYCLE

Please answer the following questions

1. What are the main characteristics of this audit cycle?
2. Briefly explain the main concerns in auditing capital stocks
3. Briefly explain the internal controls over notes payable
4. Please list procedures needed for notes payable TODB for each balance related
audit objectives
Cases
1. Currently you are auditing a company called Albino Hare. Your client prepared the
following schedule for long-term debt for the audit of financial statements for the year
ended December 31, 2018:
Notes Interest Due 1/1/18 Additions Payments 12/31/18
Payable Rate Date Beginning Ending
Description Balance Balance
Mortgage 6.25% 2024 $ 1,345,000 - $ 300,000 $ 1,045,000
Payable
Unsecured 6% 2026 6,750,000 - 365,000 6,385,000
Notes
payable
Secured 5.75% 2022 2,600,000 1,250,000 325,000 3,525,000
Bonds
Convertible 5.25% 2029 - 10,000,000 - 10,000,000
debentures
Total 10,695,000 11,250,000 990,000 20,955,000

a. What type of evidence would you examine to support the beginning balances in the
accounts?
b. What types of evidence would you use to support the additions to each account?
c. What types of evidence would you examine to support payments?
d. What procedures would you perform related to the ending balances in the accounts?
e. What evidence would you use to verify interest rates and due dates?
f. How might you use the information presented above to audit interest expense and
interest payable accounts?

2. below are procedures usually done by auditors in order to verify owner’s equity:
 1. Review the articles of incorporation and bylaws for provisions about owners’
equity.
2. Analyze all owners’ equity accounts for the year and document the nature of
any recorded
change in each account.
3. Account for all certificate numbers in the capital stock book for all shares
outstanding.
4. Examine the stock certificate book for any stock that was cancelled.
5. Review the minutes of the board of directors’ meetings for the year for
approvals related
to owners’ equity.
6. Recompute earnings per share.
7. Review debt provisions and senior securities with respect to liquidation
preferences,
dividends in arrears, and restrictions on the payment of dividends or the issue of
stock.
a. State the purpose of each of these seven audit procedures.
b. List the type of misstatements the auditors can uncover by the use of each audit
procedure.