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Brow Location: United States\PwC Material\Montgomery's Auditing, Twelfth Edition\Part 3: Auditing Specific Accounts |
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25
Auditing Debt and Equity
25.1 Audit Objectives |
25.2 Typical Transactions and Controls |
25.3 Determining the Audit Strategy |
(a) Risk Factors,
(b) Asssment of Control Risk, |
25.4 Substantive Tests |
(a) Analytical Procedures,
(b) Tests of Details,
(c) Extent of Tests,
(d) Other Procedures, |
(i) Minutes of Meetings,
(ii) Articles of Incorporation, |
(e) Tests of Specific Debt and Equity Accounts, 留学申请中介 bowel |
(i) Confirming Contingent Liabilities, Compensating Balances, Lines of Credit, and Other Arrangements,
(ii) Debt Covenant Violations,
(iii) Stockholders' Equity,
(iv) Dividends,
(v) Partnership Capital,
取代英语(vi) Initial Audits,
(vii) Permanent Files, |
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The traditional distinction between debt and equity is clear in most business. Equity aris from owners' invested funds plus earnings retained and reinvested; debt is the result of borrowing funds for specific periods, both short- and long-term, although the individual loans are often renewed indefinitely. The distinctions among debt, equity, and other financing arrangements are often blurred, however. It is more realistic to view various debt, equity, lea, and other contractual arrangements as an array of alternatives that financial managers u to enhance the entity's earnings record as well as its financial strength. Common stock is as much a financing instrument as bank loans, and convertible debt may have as many equity characteristics as preferred stock. Financial managers may adjust the legal characteristics of an instrument, whether formally designated as debt or equity, to achieve a desired (or required) balance between protecting principal and income and sharing the risks and rewards of ownership. Financial instruments may be designed to reconcile an entity's need for financial resources at minimal cost with investors' preferences for safety and rewards. The result is a virtually continuous spectrum of financing instruments, ranging from straight borrowing t
o borrowing with equity features, borrowing with variable income features, stock with preferences as to income and principal, common stock, and even promis of future stock. The Securities and Exchange Commission (SEC) and the Internal Revenue Service from time to time have addresd the distinctions among debt, equity, and other financing arrangements, and the subject continues to be of interest to tho agencies and to auditors and urs of financial statements.
The amount, type, and classification of financing appearing in an entity's balance sheet are of concern to investors, lenders, bond rating agencies, and others who influence the supply of financial resources. It is therefore important to financial management. Over the years, a great deal of ingenuity has gone into designing financing that looks like something el, like disguising what were actually ast acquisitions as off-balance-sheet operating lea transactions. The Financial Accounting Standards Board (FASB) and its Emerging Issues Task Force (EITF) have since addresd many of tho transactions, but auditors should constantly be alert to discern the substance of each transaction. If form is allowed to rule over substance, one or more audit objectives may not be achieved.
Transactions and accounts related to debt and equity include le accounting for capital leas, interest expen, debt discount and premium, early extinguishment of debt (including gain or loss thereon), debt defeasance, troubled debt restructuring, product financing arrangements, cash and stock dividends, stock splits, stock warrants, options and purcha plans, and treasury stock transactions. Many of the transactions and accounts involve special accounting measurement, prentation, and disclosure principles that require particular audit attention. Other matters with audit implications include short-term debt expected to be refinanced, debt covenants, compensating balance arrangements, debt conversion features, mandatory stock redemption requirements, and stock conversion features.
25.1 Audit Objectives
Figure 25.1 describes specific audit objectives applicable to debt and equity transactions and accounts. The application of the objectives to specific accounts varies depending on the nature of the debt and equity instruments and the related accounts. Most of the au
dit objectives included in the figure are lf-explanatory; however, three issues related to prentation and disclosure merit further comment.飓风马修
Figure 25.1 Audit Objectives for Debt and Equity
伦敦奥运火炬Completeness | All obligations for notes payable, long-term debt, and capitalized leas and all equity accounts have been identified and are included in the financial statements. |
for free | All off-balance-sheet obligations (e.g., operating leas, product financing arrangements, take-or-pay contracts, and throughput contracts) have been identified and considered for inclusion or disclosure in the financial statements. |
Accuracy | Interest, discounts, premiums, dividends, and other debt-related and equity-related transactions and accounts have been accurately calculated. |
Existence/Occurrence | All debt and equity accounts, transactions, and other changes in tho accounts have been properly authorized. |
Cutoff | All debt and equity transactions were recorded in the proper period. |
Valuation/Allocation apartheid | All obligations for notes payable, long-term debt, and capitalized leas and all equity accounts are properly valued. | 四级准考证打印入口官网
Rights and Obligations | All debt and equity accounts reprent obligations of the entity or ownership rights in the entity. |
| All terms, requirements, instructions, commitments, and other debt-related and equity-related matters have been identified and complied with. |
Prentation and Disclosure | All obligations for notes payable, long-term debt, and capitalized leas and all equity accounts are properly classified, described, and disclod. |
| Interest, discounts, premiums, dividends, and other debt-related and equity-related transactions and accounts are properly classified, described, and disclod.高中英语必修一 |
| All terms, requirements, instructions, commitments, and other debt-related and equity-related matters are disclod, as appropriate. |
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The question of whether particular asts and liabilities may be offt or "netted" usually aris when an ast is held for the purpo of ttling a specific liability or when a debt is incurred to finance a specific ast. As a general rule, asts and liabilities should not be offt unless they are exclusively related to each other. Asts can be ud for other purpos, and debts are a lien on all asts as well as tho specifically pledged. Furthermore, paragraph 7 of Accounting Principles Board (APB) Opinion No. 10 states that "it is a general principle of accounting that the offtting of asts and liabilities in the balance sheet is improper except where a right of toff exists." FASB Interpretation No. 39, Offtting of Amounts Related to Certain Contracts, defines the term "right of toff" as a debtor's legal right, by contract or otherwi, to discharge all or a portion of the debt owed to another party by applying against the debt an amount that the other party owes to the debtor. A right of toff exists only when all of the following conditions are met:
∙ Each of two parties owes the other determinable amounts
∙ The reporting party has the right to t off the amount owed with the amount the other party owes
∙ The reporting party intends to t off the debt
∙ 翻跟斗亲亲The right of toff is legally enforceable
The interpretation address the applicability of the general principle to various types of contracts in various circumstances.
Various commitments customarily are given and received in negotiating long-term financing and are included in formal debt covenants. Typical debt covenants include agreements to maintain a minimum level of working capital or net asts; to maintain adequate insurance; to maintain property, sometimes through specified additions to maintenance funds; to restrict dividends; not to pledge or mortgage certain property or to
restrict the u of proceeds from its sale; to restrict leasing, borrowing, mergers, and the issuance or repurcha of other types of curities; to restrict the u of the proceeds from issuing the debt; to accumulate funds for repayment through a sinking fund; and to render reports and financial statements on specified dates. Such covenants are intended to protect the interests of curityholders, and failure to comply may be an event of default, which may give the curityholders the right to demand immediate repayment and perhaps other rights as well. Such covenants also may be important factors in encouraging or inhibiting changes in financial structure, lecting accounting principles, and adopting new accounting principles.
Statement of Financial Accounting Standards No. 129, Disclosure of Information About Capital Structure (Accounting Standards Section C24), contains disclosure requirements about the capital structure of entities (both public and nonpublic) that have issued curities. Tho disclosures should include a brief discussion of rights and privileges for curities outstanding, including dividend and liquidation preferences, participation rights, call prices and dates, conversion or exerci prices or rates and pertinent dates, sinking-f
und requirements, unusual voting rights, and significant terms of contracts to issue additional shares. The number of shares issued on conversion, exerci, or satisfaction of required conditions during at least the most recent annual fiscal period and any subquent interim period prented also should be disclod. In addition, companies that issue stock with liquidation preferences or redeemable stock should disclo all pertinent characteristics of tho curities. The u of disclosure checklists to assist the auditor in achieving the prentation and disclosure audit objective generally is discusd in Chapter 26.
