Question

Identify controls and testing procedures for the finance and investment cycle

Answer 1

The ?nance and investment cycle contains a large number of accounts and records, rang-ing across tangible and intangible assets, liabilities, deferred credits, shareholders equity,gains and losses, expenses and related taxes such as income tax, goods and service tax(GST) and provincial sales tax (PST). The major accounts and records are listed
–
1. These include some of the more complicated topics in accounting equity methodaccounting for investments, consolidation accounting, goodwill, income taxes and ?nancial instruments, to name a few. It is not the purpose of this chapter to explain the account-ing for these balances and transactions. The chapter concentrates on a few importantaspects of auditing them.
–
1 shows a skeleton outline of the ?nance and invest-ment cycle. Its major functions are ?nancial planning and raising capital; interacting withthe acquisition and expenditure, production and payroll, and revenue and collection cycles;and entering into mergers, acquisitions and other investments.
Debt and Shareholder Equity Capital
Transactions in debt and shareholder equity capital are normally few in number but largein monetary amount. They are handled by the highest levels of management. The control-related duties and responsibilities re?ect this high-level attention.
Authorization

Financial planning starts with the chief ?nancial of?cers (CFOs) cash
?ow forecast. Thisforecast informs the board of directors and management of the business plans, the prospectsfor cash in?ows and the needs for cash out?ows. The cash?ow forecast usually is inte-grated with the capital budget, which contains the plans for asset purchases andbusinessacquisitions. A capital budget approved by the board of directors constitutes the authori-zation for major capital asset acquisitions (acquisition cycle) and investments.Sales of share capital and debt ?nancing transactions usually are authorized by the boardof directors. All the directors must sign registration documents for public securities offer-ings. However, authority normally is delegated to the CFO to complete such transactionsas periodic renewals of notes payable and other ordinary types of
?nancing transactionswithout speci?c board approval of each transaction. Auditors should expect to
?nd theauthorizing signatures of the chief executive of?cer (CEO), CFO, chair of the board of directors and perhaps other high-ranking of?cers on ?nancing documents.Many?nancing transactions are off the balance sheet.
”
Companies can enter into obli-gations and commitments that are not required to be recorded in the accounts. Examplesof such authorizations include leases, endorsements on discounted notes or on other com-panies
’
obligations, letters of credit, guarantees, repurchase or remarketing agreements,commitments to purchase at
?xed prices, commitments to sell at ?xed prices and certainkinds of stock options. These are among the business and ?nancing options available tocompanies. They cause problems in ?nancial reporting and disclosure.
Custody In large companies custody of share certi?cate books is not a signi?cant management prob-lem. Large companies employ banks and trust companies to serve as registrars and trans-fer agents. A registrar keeps the shareholder list and, from time to time, determines theshareholders eligible to receive dividends (shareholders of record on a dividend record