Audit of the Financing and

Investing Cycle: Test of

Controls and Substantive
Tests of Transactions

Nature
Include the responsibilities of planning the
cash needs, raising capital, and investing
funds

These cycles embrace the major non-

operating activities of many companies

Every business must raise money to

finance the acquisition of productive

assets used to produce revenue

Financing Cycle Transactions

Borrowing from others excluding open
trade accounts with creditors.

Share capital and dividend

transactions share issuance and

reacquisition, shares returned and
dividend declarations are the principal
transactions involving shareholders
equity

Investing Cycle Transactions

Acquisitions and disposals

of financial assets.
Lending to others, excluding
open trade accounts with
customers.

Accounts typically affected by the

financing and investing cycles:
Notes payable non trade (short term
and long term)

Bonds payable
Mortgage payable
Long-term liability under capital lease
Share capital
Investment in securities (temporary
and long term)

Cash in bank
Interest expense
Accrued interest payable
Paid-in capital in excess of par
Donated capital
Retained earnings
Appropriation of retained earnings

Non-trade accounts receivable

Treasury shares

Property, plant and equipment

Dividends declared

Accumulated depreciation
Intangibles and other assets

Proprietorship capital account

Partnership capital account

Documents and Records

Share certificate an engraved form showing the
number of shares owned by a shareholder in a
corporation

Bond certificate an engraved form showing the

number of bonds owned by a bondholder

Bond indenture a contract stating the terms of the

bond issue between the bondholder and the issuing
entity

Brokers advice a statement from a broker specifying

the details of an investing transaction

Auditing the Financing Cycle

Possible errors related to financing activities include:

Failing to make interest accruals, or making them twice

Accruing interest in the wrong period
Making incorrect estimates of allowances for obligations
Failing to recognize that the entity violated a debt
agreement

Failing to record dividends that were declared

Internal Control Over Financing Cycle

Transactions
existence or occurrence/ rights and obligations
1. Issuance of long-term notes, bonds , and share capitals are made in
accordance with board of directors authorizations and legal requirements
and proceeds are promptly deposited intact

2. Payments of bond interest and cash dividends are made to proper payees
in accordance with the board of directors or management authorizations

3. Redemption and reacquisition of bonds and share capital transactions are

executed in accordance with board of directors authorizations

4. Cancellation of notes when they are paid to avoid double payment

5. Recorded balances are periodically verified with bondholders and
shareholders

Valuation / Completeness /
Classification

Transactions and events are

correctly recorded as to amount,

classification, and accounting
period

Transactions are promptly and

correctly posted to individual
accounts

Evaluation of Internal Control over

Financial Cycle Transactions
1. Current liabilities
. A system authorization on both as to original

transaction resulting in a liability and as to payment of

the liability should be well-defined and established

. Satisfactory system of record keeping with adequate

forms and documentation should be instituted

. There should be a plan of organization

Long-term liabilities
Should be properly authorized
There should be proper control over issued and
unissued obligations

Redeemed bonds should be cancelled, properly

mutilated and retained

Bond ledger should be used in which details of bonds

issued, cancelled and outstanding are shown

Proper control should be exercised over the payment of

interest on long-term liabilities

Share Capital
Internal control measures and proper accounting
Share certificates should be serially numbered and the
authority for signing and issuing the certificates be
designated by the board of directors

Corresponding records of certificates should be

prepared

Cancelled certificates should be mutilated and any

necessary documentary stamps should be attached

Entries for share issuances and transfers should be

made by a person who does not have authority to sign

and issue certificated

Auditing the Investing Cycle

Basic considerations:
Audit risk for investing cycle transactions
and balances can generally be kept at a
very low level in most enterprises since:

1. These transactions occur infrequently

2. Effectivity controls can be maintained at
relatively little cost

Internal Control Over Investing

Cycle Transactions
Three operating objectives of internal
control applicable to the investing
cycle are:

1.Executing of transactions
2.Recording of transactions
3.Custody of assets

Existence or Occurrence / Rights and

Obligations
Purchases of property and equipment, securities and

intangibles are made in accordance with managements

authorization

Sales of property and equipment, securities and intangibles

should be authorized

Dividend and interest checks from investments are promptly

deposited intact

Access to property and equipment, securities and intangibles

are restricted to authorized personnel

Recorded balances are composed with existing assets at

reasonable intervals

Valuation / Completeness /
Classification

Transactions and events are

correctly recorded as to amount,

classification and accounting
period

Transactions are promptly and

correctly posted to individual
investment accounts

Evaluation of Internal Control Over

Investing Cycle Transactions
1. Internal control over investments
. Purchases and sales should be made only on proper
authorization

. Access to securities should not be vested on one person

only

. Custodianship and accounting for securities should be

separated

. Securities must be physically controlled

. Revenues received from the investments periodically

should be reconciled with the amounts that should be

received

2. Internal control over fixed assets

Proper authorization
Clearly defined and sound policy for differentiation of

capital and revenue expenditures should be established

Fixed assets controlling account should be conducted

and supported by detailed plant records

Physical inspections of fixed assets

Periodic review of adequacy of insurance
Reasonable depreciation policy and must be
consistently applied

3. Internal control over intangible

assets
Proper authorization
Adequacy and consistency of accounting policies
governing intangible assets should be reviewed
periodically

General ledger account should be supported by

adequate detailed records and should be periodically

reconciled

Schedules of intangibles should be prepared periodically

and be reviewed by a responsible official

Test of Controls and Substantive Tests

of Transactions: Investing Cycle
1. Trace transactions for purchases and sales of property
and equipment, securities and intangibles through the
system

2. Review reports by internal auditors on their periodic

inspections to property and equipment, securities and
intangibles

3. Review monthly reports by officer of client company on

securities owned, purchased and sold, and revenue
earned

4. Review significant changes in the composition of

property and equipment and related liens and