Modern

Modern Auditing:
Auditing:
Assurance
Assurance Services
Services and
and the
the Integrity
Integrity
of
of Financial Reporting, 8th Edition
Financial Reporting, 8 th
Edition

William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University

Chapter 17 – Auditing the Investing and Financing Cycles

Chapter
Chapter Overview
Overview
 Nature
Nature of
of the
the Investing
Investing and
and
Financing
Financing Cycles
Cycles
• Overview of the Cycles
– Investing Activities

– Financing Activities

• Understanding the Entity and

Environment
Understanding
Understanding the
the Entity
Entity and
and
Environment
Environment
Investing
Investing Cycle
Cycle –– Audit
Audit
Objectives
Objectives
Investing
Investing Cycle
Cycle –– Analytical
Analytical
Procedures
Procedures
 Investing
Investing Cycle
Cycle
• Inherent Risk

• Consideration of Internal Controls

• Preliminary Audit Strategies

 Substantive
Substantive Tests
Tests for
for Plant
Plant
Assets
Assets
• Initial Procedures

• Analytical Procedures

• Tests of Details of Transactions

– Vouch Plant Asset Additions
– Vouch Plant Asset Disposals
– Review Entries to Repairs and
Maintenance Expense
 Substantive
Substantive Tests
Tests for
for Plant
Plant
Assets
Assets
• Tests of Details of Balances
– Inspect Plant Assets
– Examine Title Documents and Contracts

• Tests of Details of Accounting

Estimates
– Review Provisions for Depreciation
– Impairment of Plant Assets
– Tests of Details of Presentation and
Disclosure
 Study
Study Break
Break
1. This cycle involves activities such
as the purchase and sale of land,
buildings, and equipment not
generally held for resale.
A. Investing Cycle
B. Financing Cycle
C. Cash Disbursements Cycle
D. Cash Receipts Cycle

A. Investing Cycle
 Study
Study Break
Break
2. All of the following are classes of
transactions associated with the
audit of plant assets, except:
A. Depreciation Expense
B. Disposal of Fixed Assets
C. Payroll Expense
D. Acquiring of Fixed Assets

C. Payroll Expense
 Study
Study Break
Break
3. While auditing the investing cycle, this
test of details of balances allows the
auditor to obtain direct personal
knowledge of the existence of the plant
assets.
A. Inspect plant assets
B. Examine title documents and contracts
C. Impairment of plant assets
D. Review provisions for depreciation

A. Inspect plant assets

Financing
Financing Cycle
Cycle
Financing
Financing Cycle
Cycle –– Audit
Audit
Objectives
Objectives
Financing
Financing Cycle
Cycle –– Analytical
Analytical
Procedures
Procedures
 Financing
Financing Cycle
Cycle
• Inherent Risk

• Consideration of Internal Control

• Common Documents and Records

Financing
Financing Cycle
Cycle –– Functions
Functions and
and
Related
Related Controls
Controls
• Authorizing bonds and capital stock

• Issuing bonds and capital stock

• Paying bond interest and cash dividends

• Redeeming and reacquiring bonds and

capital stock

• Recording financing transactions

Preliminary
Preliminary Audit
Audit Strategies
Strategies for
for
Long-Term
Long-Term Debt
Debt
 Substantive
Substantive Tests
Tests of
of Long-Term
Long-Term
Debt
Debt
• Initial Procedures

• Analytical Procedures

• Tests of Details of Transactions

 Substantive
Substantive Tests
Tests of
of Long-Term
Long-Term
Debt
Debt
• Tests of Details of Balances
– Review Authorizations and Contracts
– Confirm Debt
– Recalculate Interest Expense

• Tests of Details of Presentation and

Disclosure
 Study
Study Break
Break
4. This cycle involves activities such
as acquiring debt, issuing bonds,
and issuing common stock.
A. Investing Cycle
B. Financing Cycle
C. Cash Disbursements Cycle
D. Cash Receipts Cycle

B. Financing Cycle
 Study
Study Break
Break
5. This financing function involves
making payments to the proper payees
in according with board of director or
management authorizations.
A. Authorizing bonds
B. Authorizing capital stock
C. Paying bond interest and cash dividends
D. Recording financing transactions

C. Paying bond interest and cash dividends

 Study
Study Break
Break
6. All of the following are tests of
details of balances for the
financing cycle, except:

A. Confirmation of accounts payable

B. Confirmation of long-term debt
C. Review authorization and contracts
D. Recalculate interest expense

A. Confirmation of accounts payable

Preliminary
Preliminary Audit
Audit Strategies
Strategies for
for
Shareholders’
Shareholders’ Equity
Equity
 Substantive
Substantive Tests
Tests of
of
Stockholders’
Stockholders’ Equity
Equity
• Initial Procedures

• Analytical Procedures

• Tests of Details of Transactions

– Vouch Entries to Paid-in Capital
Accounts
– Vouch Entries to Retained Earnings
Analytical
Analytical Procedures
Procedures
 Substantive
Substantive Tests
Tests of
of
Stockholders’
Stockholders’ Equity
Equity
• Tests of Details of Balances
– Review Articles of Incorporation and Bylaws
– Review Authorization and Terms of Stock
Issues
– Confirm Shares Outstanding with Registrar
and Transfer Agent
– Inspect Stock Certificate Book
– Inspect Certificates of Shares Held in
Treasury

• Tests of Details of Presentation and

Disclosure