Modern Auditing:

Assurance Services and the Integrity

of Financial Reporting, 8th 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 Overview
 Nature of the Investing and
Financing Cycles
Overview of the Cycles
Investing Activities

Financing Activities

Understanding the Entity and

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

Consideration of Internal Controls

Preliminary Audit Strategies

 Substantive Tests for Plant
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 Tests for Plant
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 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 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 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 Cycle
Financing Cycle Audit
Objectives
Financing Cycle Analytical
Procedures
 Financing Cycle
Inherent Risk

Consideration of Internal Control

Common Documents and Records

Financing Cycle Functions and
Related 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 Audit Strategies for
Long-Term Debt
 Substantive Tests of Long-Term
Debt
Initial Procedures

Analytical Procedures

Tests of Details of Transactions

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

Tests of Details of Presentation and

Disclosure
 Study 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 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 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 Audit Strategies for
Shareholders Equity
 Substantive Tests of
Stockholders Equity
Initial Procedures

Analytical Procedures

Tests of Details of Transactions

Vouch Entries to Paid-in Capital
Accounts
Vouch Entries to Retained Earnings
Analytical Procedures
 Substantive Tests of
Stockholders 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