Question

1. Provide a flowchart of the cycle for Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders' Equity, and Income Statement Accounts. Prepare an audit program. Describe the cycle and include any risks involved with this cycle.

Answer 1

Solution:-

Discription:-

Investing and Financing Cycle Activities:-

•Concerned with transactions related to the use of the organization's funds (investing) and sources of those funds (financing) other than operations.

•Accounts affected by investing and financial cycle transactions include investments in securities; property, plant and equipment; notes and bonds payable; and, stockholders' equity accounts.

Inherent Risks

•Lease Accounting – circumventing capital lease rules to remove debt from balance sheet.

•Loan covenants – intentional misstatement to avoid having banks call loans.

•Related party transactions – more risk because they are not at arms-length.

•Complex transactions – transactions are often structured to get around GAAP. Makes them difficult and hard to audit.

Impairments – taking a big bath in bad years for investments to create reserves to reduce expenses in the future.