Ch 14: auditing investing and financing activities Flashcards
property, plant and equipment is typically ___________ risk
not super high
in PPE there is typically a _______ volume of transactions but maybe ___________ dollar value for the transaction
lower; higher
what are some activities that occur in PPE
acquisition, depreciation, maintenance and repairs
what is the activity that is the “total cost” of asset recorded in asset account
acquisition
maintenance and repairs on PPE can be _______________ or ______________
expenses; capitalized
a short term lease is for ______ or less
12 months
finance leasing option acronym
OWNSA
what does the OWNSA acronym for finance lease option stand for
O- ownership transfer
W- written bargain purchase option
N- 90%
S- 75%
A- alternative use
what are the five audit procedures for auditing PPE
- initial procedures
- substantive analytical procedures
- test of details- vouching/ tracing
- test of balances
- test of details of presentation and disclosure
is vouching forwards or backwards
backwards
what is the relevant assertion for vouching
existence
is tracing backwards or forwards
forwards
what is the relevant assertion for tracing
completeness
what three things are tested in the tests of balances for PPE
- inspection of assets
- valuation/ allocation
- rights/ obligations
in valuation/ allocation of PPE the auditors ____________
recalculate depreciation (the method and the estimate)
what do auditors do to gain comfortability surrounding impairment (PPE)
inquire of management, inspect management’s documentation, and recalculate impairment loss
when testing the rights/ obligations for the tests of balances for PPE what do auditors do?
- inspect vendor invoices
- inspect lease agreements
- inspect property deeds/ titles
in the test of details of presentation and disclosure for PPE what do auditors inspect?
client-prepared note
what are the two audit procedures for auditing long-term debt
- initial procedures
- substantive analytical procedures
what do auditors do under the test of details when auditing long-term debt
- vouch sample of entries
- confirmations as needed
- inspect authorizations and contracts for long term debt
does vouching have to be done every year for long-term debt?
no only really needs to be done for new debts
confirmations for long-term debt are done with
banks/ financial institutions
when inspecting authorizations for long-term debt who are the authorizations usually by?
board of directors
in the presentation and disclosure audit procedure for auditing long- term debt what do auditors do
inspect client- prepared note
what are the four audit procedures for auditing stockholder’s equity?
- initial procedures
- substantive analytical procedures
- test of details
- presentation and disclosure
in the test of details procedure for auditing SE what does the auditor do
inspect, confirmations as needed, recalc as needed
what is the auditor inspecting in the test of details procedure when auditing SE
board of directors minutes for authorization and details of transactions
who are the auditors confirming with in the test of details procedure for the auditing of SE
transfer agent to verify outstanding shares/ transactions
what does the auditor do in the presentation and disclosure procedure when auditing SE
inspect client prepare notes (ex: stock based compensation, EPS and how did they calculate basis/ dilute, dilutive securities, pensions)
what are investing activities
the purchase and sale of land, buildings, equipment, and other long-term assets not generally held for resale; in addition, investing activities include the purchase and sale of financial instruments that are not intended for trading purposes
assume that while performing analytical procedures that an auditor notices a material increase in repair and maintenance expense as a percent of net sales. what assertions may be misstates?
might indicate that assets that should have been capitalized were expensed. the assertion that may be misstated is classification
what are the three main testing streams related to PPE
- acquisition of PPE
- depreciation of PPE
- disposals of PPE
When auditing PPE, if the control are ______ and analytical procedures appear __________, the auditor may perform limited testing on the 3 transaction streams
strong; normal
if a private company or not-for-profit organization is undergoing significant capital expansion, and internal controls are weak, the auditor will likely _____________ sampling and audit a more ___________ portion of fixed asset additons
increase; significant
what should an auditor consider when developing an expectation for changes in long-term financing and changed in equity
-auditor needs to develop a good understanding of the audit client and its business environment to develop expectations regarding the client’s financial statements
there is often a direct connection between a client’s investment in PPE and ___________
the entity’s financing activities
auditor should understand how a company plans to fund ________ of LT assets
acquisition
what does the sustainable growth rate calculation do?
provides an estimate of the rate of sales growth that can be obtained without changing the entity’s profitability or financing structure
when should the auditor expect changes in the financing structure?
when sales grow significantly faster than the entity’s sustainable growth rate
an auditor needs to be alert to equity instruments like preferred stock with mandatory redemption dates that behave like _______
debt
auditor needs to ensure that equity instruments are properly ______ and ______-
classified; disclosed
a key control when entering into a new loan agreement/ issuing new common stock is that transactions are handled by a __________ or ____________
bond trustee; transfer agent
the payment of dividends and repurchase of stock should be authorized by _________
BOD
accounting should regularly reconcile ________ to general ledger
subsidiary records
it is important for __________ to authorize new financing transactions based on the entity’s strategic plans and need for funding of investment activities
BOD
the three most common equity transactions that may occur on a regular basis are
- issuing shares when stock options are exercised
- repurchasing common stock and
- paying dividends
auditor will normally confirm equity transactions with company’s _____________-
registar/ transfer agent
auditor expected to confirm _________ and _________ of LT debt by direct communication with lenders and bond trustees
existence; terms
all confirmation responses should be compared with ________ and any differences should be investigated
records
what are the assertions related to additions of PPE
- Occurrence (additions which are recorded during the period are PPE acquired during the period
- Completeness (additions that occurred during the period have been included or recorded)
- Accuracy (additions are correctly journalized or posted)
- Cut-off (additions are recorded in the correct period)
- Classification (additions are recorded at the correct PPE account)
what are the assertions relating to disposals to PPE
- Occurrence (disposals which are recorded during the period are for PPE disposed during the period
- Completeness (disposals during the period have been included or recorded)
- Accuracy (disposals are correctly journalized or posted)
- Cut-off (disposals are recorded in the correct period)
- classification (disposals are recorded in the correct PPE account)
when can an asset under construction be depreciated?
can begin being depreciated when it is ready for use
if a gain is material it may indicate what?
can indicate the client is potentially being too aggressive with the depreciate rate chosen
