Audit Procedures for Debt and Equity Frauds in Chapter 13

School: Bloomsburg University - Course: ACCT 442 - Subject: Accounting

Nathan Tice ACCT 442 Chapter 13 Homework 13.7:Fraud risks associated with debt include: - Not appropriately seeking authorization of debt obligations - Misclassifying long-term or short-term debt - Not properly recording prepayment penalties 13.8:Fraud risks associated with equity include: - Not appropriately seeking authorization of stock sales or issuances - Violating debt covenants through stock sales or issuances - Notrecording stock sales or issuances properly - Enabling the exercise of stock options that are not properly authorized or that are not in accordance with the terms of options granted 13.9:Given typical inherent and fraud risks related to material misstatement of debt, the auditor would expect the client to have implemented the following controls: - The board of directors approves all new debt - Debt and interest accounts are updated and reconciled to the general ledger on a monthly basis - Top management and the board of directors review draft financial statements prior to issuance for proper disclosure of debt obligations - A debt amortization schedule is prepared for each new debt obligation, updated as appropriate, and is reviewed by appropriate personnel 13.10:Given typical inherent and fraud risks related to material misstatement of equity, the auditor would expect the client to have implemented the following controls: - The board of directors approves all stock transactions (including options and warrants) - The CEO and CFO authorize all stock transactions (including options and warrants) approved by the board of directors - Stockholders' equity accounts are updated and reconciled to the general ledger on a timely basis - Top management and the board of directors review draft financial statements prior to issuance for proper disclosure of equity accounts - An outside party, such as an attorney, maintains details of shares issued, repurchased, and cancelled - The organization's accountant researches and analyzes proper accounting for stock option grants, and the organization's legal counsel and CFO review and approve the analysis 13.11:Typical planning analytical procedures related to debt include: - Perform a trend analysis of the balances in notes payable and accrued interest with prior periods, considering known client activities related to debt.

- Estimate overall interest expense based on average interest rates and average debt outstanding. - Calculate debt-to-equity ratios and perform a trend analysis with prior periods, considering known client activities related to debt and equity. - Calculate the times interest earned ratio and perform a trend analysis with prior periods. 13.12:The primary planning analytical procedure related to equity includes comparing current- year account balances with prior-year account balances. The auditor should have an expectation as to the nature and magnitude of any account balance changes so that the information can be more easily understood by the auditor. 13.13:While planning for debt, including interest transactions, the auditor typically uses only substantive procedures. This approach is often the most appropriate because the number of transactions is relatively small, and the dollar amounts involved are usually quite material. 13.14: While planning for equity, similar to debt, the auditor typically also uses a substantive approach. This approach is often the most appropriate because the number of equity transactions with outside parties is usually small. In fact, a substantive approach using only tests of details is most commonly used to audit equity accounts. 13.18: Completeness - Recorded debt obligations include all debt obligations: -Perform substantive analytical procedures -Confirm debt obligations -Vouch additions and deletions to debt obligations Completeness - All interest expense is recorded: -Perform substantive analytical procedures to analyze interest expense and recalculate accrued interest Presentation/ Disclosure - Debt obligations are properly classified in the balance sheet between current and noncurrent liabilities, and adequate disclosures are made in accordance with GAAP requirements: -Review debt agreements for the restrictive covenants and consider their effect on disclosures in the financial statements -Inquire of management -Examine balance sheet for proper disclosure of current and noncurrent portions, related parties, and restrictions resulting from debt -Read all disclosures for appropriateness, consistency, and clarity