financing & investing

8/13/2019 financing & investing

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I. NATUREFinancing activities - cash is obtained from or repaid to creditors (debt financing) or owners (equity financing)

1) Long-term debt transactions - borrowings from bonds, mortgages, notes, and loans, and the related principaland interest payments.

2) Stockholders equity transactions - issuance and redemption of preferred and common stock, treasury stocktransactions, and dividend payments.

Investing activities - the purchase and sale of land, buildings, equipment, and other assets not generally held for resale- include the purchase and sale of financial instruments not intended for trading purposes

Important Fixed Asset Transactions and Issues Acquisition of plant and equipment, including capital leases Disposal of plant and equipment Repair and maintenance transactions Depreciation (matching) Capital / operating lease disclosures

DOCUMENTS Share Certificate an engraved form showing the number of shares owned by a shareholder in a corporation.Bond Certificate An engraved form showing the number of bonds owned by a bondholder.Bond Indenture A contract stating the terms of the bond issue between the bondholder and the issuing entity.Brokers Advice A statement from a broker specifying the details of an investing transaction.


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II. INHERENT RISKS

Financing Cycle Complexity of determining capital lease Consolidation of variable interest entities and off balance sheet financing Calculation and reporting of interest expense

Investing Cycle

Complexity of determining capital lease Valuation challenges with constructed assets Accounting estimate involved in depreciation

Impairment test for old assets still on the books Classification issues with repair and maintenance

III. CONTROL PROCEDURESFinancing Cycle1. Authorizing bonds and capital stock - The board of directors usually authorizes financing transactions based on itsstrategic plans and investing activities.2. Issuing bonds and capital stock made in accordance with the board of directors authorizations and legalrequirements, and proceeds are promptly deposited intact; unissued bond and stock certificates are physicallysafeguarded.3. Paying bond interest and cash dividends - made to proper payees in accordance with BOD or managementauthorizations.4. Redeeming financing transactions - executed in accordance with BOD authorizations; treasury stock certificates arephysically safeguarded.5. Recording financing transactions - correctly recorded as to amount, classification, and accounting period based onsupporting authorizations and documentation; the duties of executing and recording financing transactions aresegregated; periodic independent checks are made of agreement of subsidiary ledgers and control accounts, includingconfirmation with the bond trustee or transfer agent, if applicable.

Finance and Investment Cycle Physical Controls

Securities numbered and in the client's name Securities held by an independent custodian or in a secure location Access to safe-deposit box requires the presence of more than one employee Physical items periodically compared to detail records Cash receipts from Investing and Financing cycle transactions deposited intact and daily

Separation of Duties Transactions AUTHORIZED by the Board of Directors General Accounting RECORDS transactions A separate function or external custodian has CUSTODY

Performance Reviews Compare current investing and cycle transaction data against prior-year data or expected data Compare revenue and expenses against organization standards or expectations.

IV. CONTROL RISK ASSESSMENT- The involvement of senior officials in a relatively small number of high-dollar transactions makes

control risk assessment a process tailored specifically to the companys situation. - Real segregation of duties can be found in middle management and lower ranks, but it is hard to create and

enforce in upper-level management.- Compensating control: a control feature used when a company does not specify standard control procedures. (1)

Periodic report to BOD (2) Oversight by the Investment Committee of the Board

INTERNAL CONTROL DOCUMENTATIONTest controls over investments only if sufficient transactions


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If not sufficient transactions, obtain understanding of controls Internal control questionnaire Memorandum

Plan substantive tests

AUDIT OBJECTIVES Financing Cycle

1) Completeness

All debts (including pension fund obligations) are included on the balance sheet. Shareholders equity includes all capital paid into the company and all retained earnings.

2) Existence and Occurrence Recorded debt exists at balance sheet date. All cash flows occurred during the period. Get final signed copies of agreements.

3) Rights and Obligations All debt is the obligation of the entity. Guarantees!!!

4) Valuation and Allocation Debt and equity obligations are reported on the balance sheet in accordance with GAAP. Debt and equity are properly summarized in the balance sheet. Pension plan obligations are reported on the balance sheet in accordance with GAAP.

5) Presentation and disclosure Debt is properly classified (current or LT) Terms, covenants, commitments, and retirement provisions are adequately disclosed. Pension disclosures Equity disclosures, including stock options


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