Question

Please identify and describe two tests of detail for both the long-term debt and stockholders’ equity areas. Please also discuss how to use planning analytical procedures to identify possible material misstatements associated with debt obligations and stockholders’ equity transactions.

Answer 1

substantive tests are those activities performed by the auditor to detect material misstatement or fraud related to transactions or account balance.there are two categories of substantive tests-analytical procedures and tests of details.

two tests of detail for long term debts are-

• review the board of directors meeting minutes-during your review, make sure that any new long agreements or bond issuance are authorized.this varies client by client ,but normally you look for a motion and vote to approve taking on new debt.
• examine cash transactions-the last place you should look when reviewing your client's long term debt is cash transactions .you should trace any large cash disbursement made by your client or cash receipts hitting its bank statements to the appropriate source document.the company may be trying artificially inflates sales by recording loan as sales revenue.the source document in this case would be the customer invoice .follow it through by checking the shipping document to make sure the order was indeed shipped to a customer.

planning analytical procedures for debt obligations-

trend analysis of ;

• balance in notes payable and accrued interest
• debt to equity ratio
• times interest earned ratio
• estimate overall interest expense based on
• average interest rates and average debt outstanding

test of details for stockholders equity area-

• reviewing a copy of client's articles of incorporation
• inspecting documentation related to client's record keeping of capital stock and contributed capital maintained by the client or held by a transfer agent

planning analytical procedure for stockholder's equity accounts

• compare current year account balances with prior year account balances