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audit of the financing and investing cycle
Transcript of audit of the financing and investing cycle
Nature of Financing and Investing Cycle
Uses resources and information provided by the expenditure and disbursement cycle.
Provides resources and information to the revenue and receipt cycle.
Types of Transaction and Financial Statement Accounts Affected
Types of transactions which are typically associated with the financing and investing cycle:
The receipt of capital funds from investors and creditors
The use of capital funds for operations or temporary investments until needed for operations
The payment of dividends and interests to investors and creditors
Types of Document and Accounting Records
The Business Functions of the Financing and Investing Cycle
Investment and Internal Control
-Processes investments, directing resources into other private and public sector equity and debt instruments.
*Major functions and specific controls
~if maintained internally
~if maintained externally
Debt and Internal Control
Major Functions and Specific Controls Related to Debt-Related Financing Activity:
Equity and Internal Control
Major functions and specific controls related to equity-related financing activities are as follows:
The more common accounts affected by each type of transaction are:
Notes Payable and the Related Interest Accounts
Owner’s Equity and Dividend Accounts
- a debt security document representing a stated amount of corporate debt.
- a debt instrument issued by the Bureau of Treasury.
- a general category of commercial loan instruments , due and payable in accordance with terms described on the instruments.
- an equity security document representing ownership of a stated number of shares of capital stock.
*Acquisitions, sales and income
-Authorized by the investment committee
-Prices should be compared with published price quotations
-Recorded income, gains, and losses should be recalculated by employees not otherwise responsible for the securities
Recording and Interest
All debt instruments should be accounted for in bond or note registers
Maintained by an employee not responsible for the custody, incurrence, or redemption of long-term debt.
On regular basis, independent employee should reconcile the registers with the general ledger
Authorize employee should calculate interest expense in accordance with the terms of each instrument
Approval, Incurrence, and Retirement
All long-term debt should be authorized by the board of directors
Approval should be expressly documented in the board’s minutes
Treasurer of the corporation will prepare a report on any proposed financing
Board of directors should receive a report stating the net amount received and its disposition
In Small companies
Debt transactions are handled internally by an employee
Unissued debt instrument should be consecutively pre-numbered and controlled by an employee who neither maintains detailed debt records nor has access to general accounting records
On regular basis, independent employee should physically unissued debt instruments and account for the numerical sequence.
When retired, debt instruments should either be cancelled or be destroyed
-Internal control is strengthened by the fact that the trustee does not have access to the issuing company’s assets or accounting records.
-Trustee is charged
with the protection of the creditors' interests
with the monitoring of the issuing company’s compliance with the provisions of the indenture.
Internal Control Questionnaire – Notes Payable
RECORDING AND DIVIDEND
-A COMPANY'S DETAILED records may include a stockholders' ledger to account outstanding shares and owners, a transfer journal to record shares transferred and certificate control records to account for the numbers of issued and unissued shares.
-Cash dividends to individual shareholders should be computed from record date information in the shareholders‘ ledger and paid from a special bank account reserved for dividend payments
APPROVAL, ISSUANCE AND RETIREMENT
-All transaction relating to equity securities must be authorize by the Board of Directors
-In many small companies, equity transactions are usually handled internally by the secretary of the company
Board of directors should designate officers who are authorized to;
1.sign stock certificates
2. maintain records of stockholders
3. maintain custody of unissued certificates
4 sign dividend checks.
Many companies enhance control over equity by utilizing independent stock registrars and stock transfer agents to assure that securities are issued and transferred properly whereas:
a. Independent Stock registrars – It’s responsibility is to avoid any issuance of stock by obtaining copies of the documents authorizing the total shares to be issued and maintaining records of total shares issued and cancelled.
b. Independent Stock Transfer Agents - It‘s primary responsibility is to maintain detailed stockholders records and carrying out transfer ownership
Control Objectives and Fraud
Transaction Authorization and Execution
Access to Assets
Entity's internal control
Auditor's Review of the system
Control Risk Assessment