The finance and investment cycle encompasses a broad range of accounts, including tangible assets (e.g., investment securities), intangible assets (e.g., goodwill, patents), long-term liabilities, deferred credits, stockholders’ equity, gains, losses, expenses, and income taxes. Key accounting areas include equity method accounting, consolidation, goodwill, income taxes, and derivatives. The focus is on auditing challenges, highlighting the cycle’s complex, high-value, and infrequent transactions.
Source Documents:
Implied records such as financial statements,
contracts, and
ledger entries.
Debt and equity transactions are rare but significant, involving large sums and overseen by top management, necessitating strong governance.
Ensures sufficient cash for operations through a CFO-prepared cash flow forecast, detailing business plans, cash inflows, and outflows. Integrated with a capital budget, approved by the board, it authorizes major investments and acquisitions, acting as a key control mechanism.
Source Documents:
Cash flow forecasts
Capital budgets
Board approval records
The board authorizes stock sales and debt financing, with directors signing public securities offerings. Routine transactions (e.g., note renewals) may be delegated to the CFO/treasurer. Auditors look for executive signatures (CEO, CFO, treasurer, board chair) on documents. Due to high-level involvement, external parties like transfer agents (tracking securities ownership for dividends/interest) and registrars (maintaining certificate records) are critical. Past off-balance-sheet transactions (e.g., leases, guarantees) require careful auditor scrutiny for disclosure, though new standards enhance transparency.
Source Documents:
Board minutes
Registration documents
Financing contracts
Transfer agent/registrar agreements
Executive signatures
Managed by the CFO/controller, records for notes and bonds payable mirror accounts payable processes: verifying payment notices, tracking due dates, preparing interest vouchers, and accruing interest. Small firms use general ledger accounts; larger ones (e.g., utilities) maintain control/subsidiary accounts, as shown in Consolidated Edison’s 2021 debenture records.
Source Documents:
Payment notices from lenders
Bond agreements
Interest vouchers
General ledger entries
Control/subsidiary accounts (for large firms)
Public firms reconcile stock ownership with registrar/transfer agent reports to prevent issues like counterfeit shares. Bonds are reconciled via trustee reports. Smaller firms use stock certificate books, inspected periodically by an independent party, with possible direct shareholder confirmations.
Source Documents:
Registrar/transfer agent reports
Bond trustee confirmations
Stock certificate books
Shareholder confirmations
Covers investments in marketable securities, intangible assets (patents, trademarks, goodwill), and other forms, focusing on manufacturing/service firms (noting complexity in financial institutions).
Investment policies require board or investment committee approval, with major transactions needing specific high-level authorization. Auditors verify the approval process.
Source Documents:
Board minutes
Investment committee approvals
Policy documents
Negotiable securities (stocks, bonds) are stored in brokerage accounts or safes/safe deposit boxes, accessible only by senior officers (CFO, CEO) under dual control (e.g., two signatures). Intangibles like patents are kept in company files, protected by legal documents.
Source Documents:
Brokerage account statements
Safe deposit access records
Legal contracts (e.g., patents, trademarks)
Board authorizations mitigate unauthorized transaction risks. Manual systems use vouchers and checks (approved by CFO/treasurer); electronic systems employ controls like multifactor authentication. Complex standards (e.g., for securities, goodwill) demand skilled accountants, increasing misstatement risks due to ongoing valuations.
Source Documents:
Board authorizations
Vouchers
Checks
Electronic transaction logs
Brokerage confirmations
Valuation accounting records
Prevents overstatement through broker confirmations or physical securities counts, recording details like company names, CUSIP numbers, and ownership. Counts resemble inventory checks, requiring regular execution and auditor oversight, with client presence mandatory.
Source Documents:
Broker confirmations
Securities count records
Certificate details (e.g., CUSIP numbers, ownership endorsements)
The finance and investment cycle involves strategic financial planning, raising capital via debt/equity, and investing in diverse assets, characterized by infrequent, high-value transactions. Managed by senior officials, it relies on external parties (e.g., transfer agents) and robust documentation. Typical source documents include:
Planning/Capital: Cash flow forecasts, capital budgets, board approvals
Financing: Board minutes, registration documents, financing contracts, transfer agent/registrar reports, executive signatures, payment notices, bond agreements, ledger entries, trustee confirmations, stock certificate books, shareholder confirmations
Investing: Investment policy approvals, brokerage statements, safe deposit records, legal contracts, vouchers, checks, electronic logs, broker confirmations, securities count records, certificate details
These documents ensure proper authorization, recording, custody, and reconciliation, critical for auditing this complex cycle.