TAILIEUCHUNG - Lecture Auditing and assurance services (Second international edition) - Chapter 15: Auditing the financing/investing process

Chapter 15 - Auditing the financing/investing process: Long term liabilities, stockholders’ equity and income statement accounts. In this chapter, the learning objectives are: Understand the types and features of long-term debt, be familiar with assessing control risk for long-term debt, be familiar with key control activities for long-term debt, know how to conduct substantive audit procedures for long-term debt. | Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity and Income Statement Accounts Chapter Fifteen Auditing Long-Term Debt The auditor must be assured that the amounts shown on the balance sheet for the various types of long-term debt are not materially misstated. This assurance extends to the recognition of interest expense. For the vast majority of entities, it is more efficient to follow a strategy of conducting substantive testing. Inherent Risk Assessment – Long-Term Debt The inherent risk for notes and bonds would normally be assessed as low to moderate because the volume of transactions are low, the accounting is not complex, and the client often receives third-party statements or amortization tables. However, the amounts are usually large and the financial markets have developed sophisticated instruments that have characteristics of both debt and equity. The inherent risk associated with these instruments is normally high. Control Risk Assessment – Long-Term Debt When a substantive strategy is followed, the auditor still needs a sufficient understanding of the entity’s internal control system over debt. Assertions and Related Control Activities Occurrence and Authorization Adequate documentation must verify that a note or bond was properly authorized. Any significant debt commitments should be approved by the board of directors or by executives who have been delegated by this authority. When the entity has proper controls for issuing debt transactions, it is generally easy for the auditor to test those transactions for validity and authorization at the end of the period. Assertions and Related Control Activities Completeness The client should maintain a subsidiary ledger that contains information about all the long-term debt owed by the entity. The debt amount recorded in the subsidiary ledger should be reconciled to the general ledger control account regularly. Assertions and Related Control Activities Valuation Notes

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