RMK 4

 

 AUDITING THE FINANCING CYCLES FINANCING CYCLES

Summary of Modern Auditing Chapter 17 

By: 

BONY FERYANTO MARYONO (A311 10 279) 

Accounting Department  Faculty of Economics and Business  Hasanuddin University  2012

 

AUDITING THE FINANCING CYCLES

Significant investing transactions are usually accompanied by significant financing transactions. The financing cycle includes includes 2 major transaction transaction classes as follows: 1.  Long-term debt transactions include borrowings from bonds, mortgages, notes, and loans, and the related principal and interest payments. 2.  Stockholders’ equity transactions include the

issuance

preferred and common stock, treasury stock transactions,

and

redemption and

of 

dividend

payments.

The financing cycle interfaces with the expenditure cycle when cash is disbursed for bond interest, the redemption of bonds, b onds, cash dividends, and the purchase of treasury stock. The accounts used in recording financial cycle transactions include: LONG-TERM DEBT TRANSACTIONS Bonds, Mortgages, Notes, and Loans Payable Bond Premium (Discount) Interest Payable Interest Expense Gain (Loss) on Retirement of Bonds

STOCKHOLDERS’ EQUITY TRANSACTIONS   Preferred Stock Common Stock Treasury Stock Paid-in Capital Retained Earnings Dividends Dividends Payable

Materiality 

Financing liabilities are normally normally a material aspect of the fi financial nancial statements. statements. The primary consideration in evaluating the allocation of materiality is the determination of the magnitude of misstatement that will influence the decisions of a reasonable financial statement user. user. The auditor also needs to consider consider the significance significance of omissions of debt or obligations. Inherent Risk 

 –  

Long-term debt is not usually vulnerable to theft

 

 –   Complexity of determining capital lease  –   Consolidation of variable of variable interest entities and “off balance sheet” financing financing    –   Calculation and reporting of interest expense

Functions and Related Controls

The following financing functions and related control activities are associated with the financing cycle: 1.  Authorizing bonds and capital stock. The board of directors

usually

authorizes

financing transactions based on its strategic plans and investing activities. 2.  Issuing bonds and capital stock. Issues Issues are made in accordance directors authorizations and legal

requirements,

and

with

proceeds

are

board

of 

promptly

deposited intact; unissued bond and stock certificates are physically safeguarded. 3.  Paying bond interest and and cash dividends. Payments are made tto o proper payees in accordance with board of directors or management authorizations. 4.  Redeeming financing financing transactions. transactions. Transactions are executed executed in accordance accordance with board of directors authorizations; treasury stock certificates are physically safeguarded. 5.  Recording financing transactions. Transactions are correctly recorded as to amount, classification, and accounting period based on supporting authorizations and documentation; the duties of executing and recording financing transactions are segregated; periodic independent checks are made of agreement of

subsidiary

ledgers and control accounts, including confirmation with the bond trustee or transfer agent, if applicable. Ratio or Other Financial Information

Formula

Audit Significance

Free Cash Flow

Cash Flow from Operations  —  Capital Expenditures

Negative free cash flows indicate the need for, and approximate amount of, expected financing to prevent drawing down on cash or investments.

Interest-Bearing Debt to Total Assets

Interest-Bearing Debt ÷ Total Assets

Provides a reasonableness of the entity’s  proportion of debt that may be compared with prior years’ experience or industry   data.

Sha reholders’   Equity to Total Assets

Shareholders’ Equity ÷ Total Assets  

Provides a reasonableness of the entity’s  proportion of equity that may be compared with prior years’ experience or   industry data.