The details of the audit of long-term debt and equity accounts were discussed in this chapter. The chapter includes a description of the controls for these types of accounts, and the audit procedures that the auditors use to substantiate long-term debt and equity accounts. To summarize:

• The financing cycle involves the activities of the company that are designed to obtain capital funds. It typically involves the issuance and repayment of debt and equity, as well as payment of interest and dividends. A primary concern for both of these types of transactions is proper authorization by the appropriate official in the company or by the board of directors.

• Control over the issuance of bonds by a company is enhanced when an independent trustee represents the interest of the bondholders. The responsibilities of the trustee include monitoring the company's compliance with the requirements of the bond agreement and processing the payments of interest and principal to individual bondholders.

• Capital stock transactions are best controlled by employing a registrar/transfer agent who monitors the issuance of the company's stock and handles transfers of shares between investors. In smaller companies capital stock is controlled through the maintenance of a stock certificate book and a stockholders ledger.

• After the auditors obtain an understanding of the client's internal control over the financing cycle, they will often perform only limited tests of controls because of the limited number of transactions typically involved. It is usually more efficient to assess control risk at a high level and perform detailed substantive tests of transactions.

• In the audit of interest-bearing debt, the auditors' primary substantive procedures will include vouching selected transactions occurring during the period, examining debt agreements, confirming balances and terms, and evaluating compliance with restrictive covenants.

• The auditors' primary substantive procedures for equity transactions will typically include vouching the major equity transactions occurring during the period, confirming the number of shares outstanding with the registrar, and evaluating the company's compliance with stock option plan requirements and other restricting agreements.

Describe the nature of interest-bearing debt.

Describe the auditors' objectives in auditing debt.

Assess the risks of material misstatement (inherent and control risks) of debt.

Identify and explain the fundamental controls over the financing cycle.

Design typical substantive tests used by auditors for the financial statement assertions related to debt.

Describe the nature of equity accounts.

Describe the auditors' objectives for the audit of equity accounts.

Describe the fundamental controls over capital stock and other types of equity accounts.

List the procedures for the audit of equity accounts.