Audit of the Financing and Investing Cycle

Group 10

Financing and Investing Cycle

The following activities should be undertaken:

Identify the activities and types of transaction Relate internal accounting objectives to financing and investing activities Determine essential features of internal control Perform compliance tests of controls Perform substantive audit procedures Design tests of details of account balances and analytical procedure.

Nature

Financing and investing cycles include the responsibility of:

Planning

the cash needs Raising capital Investing funds

Financing Cycle Transactions

1. Borrowing from others excluding open trade accounts with creditors.

2. Principal transactions involving shareholders equity.

Investing Cycle Transactions

1. Acquisition and disposal of financial assets

2. Lending to others, excluding open trade accounts with customers.

Documents and Records

Share Certificate Bond Certificate Bond Indenture Brokers Advice

Auditing the Financing Cycle

I. Basic Consideration

Possible errors relating to Financing activities Failing to make interest accruals Accruing interest in the wrong period Making incorrect estimates of allowances for obligations Failing to recognize that the entity violated a debt agreement Failing to record dividends that were declared

II. Internal Control Over Financing Cycle Transactions

Existence or Occurrence/ Rights and Obligations Valuation/ Completeness/ Classification

III. Study and Evaluation of Internal Control Over Financing Cycle Transactions

1. Current Liabilities (other than those arising from

trade credit and operating expenses)

a. A system of authorization on both as to original transaction resulting in a liability and as to payment should be well-defined and established. b. A satisfactory system of record keeping with adequate forms and documentation should be instituted. c. There should be a plan of organization with appropriate division of duties.

2. Long-term Liabilities a. Long-term obligations should be properly authorized. b. There should be proper control over issued and unissued obligations as in bonds. c. Redeemed bonds should be canceled, properly mutilated and retained in order to prevent unauthorized issuance. d. Bond ledger should be used in which details of bonds issued, canceled and outstanding are shown. e. Proper control should be exercised over the payment of interest on long-term liabilities.

3. Share Capital a. Internal control measures regarding the issuance of share certificates and registration of shares should be established. b. Share certificates should be serially prenumbered by the printer. c. As individual certificates are issued, corresponding records of the certificates should be prepared containing the name and address of the shareholders.

d. Canceled certificate should be mutilated and any necessary documentary stamps should be attached to the canceled certificates. e. Entries for share issuances and transfers should be made by a person who does not have authority to sign and issue certificates