The finance and investment cycle’s high-value, infrequent transactions necessitate robust internal controls to mitigate material misstatement risks. Controls focus on authorization, custody, record keeping, and periodic reconciliation, with emphasis on senior management involvement due to their override potential. Given the materiality of individual transactions, auditors often rely on substantive procedures, but effective controls are critical for assertions like existence, completeness, valuation, and presentation/disclosure.
The document highlights controls across the cycle’s financing and investing activities, addressing relevant assertions for significant accounts: Investments, Long-Term Debt, Capital Stock, and Retained Earnings.
Financial Planning
Control Activity: The CFO prepares a cash flow forecast integrated with a board-approved capital budget, authorizing major investments and acquisitions.
Assertions Mitigated:
Completeness: Ensures all planned financing needs are identified and recorded.
Presentation and Disclosure: Supports proper disclosure of financing strategies.
Purpose: Prevents unauthorized or unrecorded financing activities by requiring board oversight.
Raising Capital
Control Activity: Board authorization for stock sales and debt financing, with directors’ signatures on public offerings. Delegation to CFO/treasurer for routine transactions, supported by external transfer agents/registrars to track securities ownership.
Assertions Mitigated:
Existence/Occurrence: Verifies debt/equity transactions occurred as authorized.
Completeness: Ensures all issuances are recorded via external tracking.
Presentation and Disclosure: Confirms proper disclosure of terms and ownership.
Purpose: Mitigates risks of unauthorized issuances or undisclosed off-balance-sheet obligations.
Record Keeping for Long-Term Liabilities
Control Activity: CFO/controller maintains records akin to accounts payable, comparing lender payment notices, monitoring due dates, preparing interest vouchers, and accruing interest. Large firms use control/subsidiary accounts.
Assertions Mitigated:
Completeness: Captures all debt obligations and interest accruals.
Valuation: Ensures accurate debt balances and amortization.
Presentation and Disclosure: Supports correct classification (current vs. long-term) and disclosure.
Purpose: Prevents omission of liabilities or misstated valuations.
Periodic Reconciliation
Control Activity: Reconciliation of stock ownership with registrar/transfer agent reports for public firms, or inspection of stock certificate books for smaller firms. Bonds reconciled via trustee reports.
Assertions Mitigated:
Completeness: Ensures all issued stock/bonds are recorded.
Existence/Occurrence: Verifies recorded securities exist.
Purpose: Detects discrepancies like counterfeit shares or unrecorded debt.
Authorization
Control Activity: Board or investment committee approves investment policies and major transactions, with documented approvals.
Assertions Mitigated:
Existence/Occurrence: Confirms investments are authorized.
Completeness: Ensures all investments are approved and recorded.
Purpose: Prevents unauthorized investments that could misstate financials.
Custody
Control Activity: Negotiable securities stored in brokerage accounts or safes/safe deposit boxes under dual control (e.g., two signatures). Intangibles (patents, trademarks) kept in secure company files.
Assertions Mitigated:
Existence/Occurrence: Protects against theft or fictitious assets.
Valuation: Safeguards assets critical for accurate valuation.
Purpose: Ensures physical security to support recorded balances.
Record Keeping for Investments
Control Activity: Board authorizations initiate purchases, with manual systems using vouchers/checks (CFO/treasurer approval) and electronic systems employing multifactor authentication/transaction limits. Skilled accountants apply complex standards (e.g., fair value, goodwill).
Assertions Mitigated:
Completeness: Captures all investment transactions.
Valuation: Ensures accurate application of accounting standards.
Presentation and Disclosure: Supports proper classification and disclosure.
Purpose: Reduces errors in recording and valuing complex investments.
Periodic Reconciliation
Control Activity: Broker confirmations or physical securities counts verify investment holdings, recording details like CUSIP numbers and ownership. Regular counts ensure accuracy.
Assertions Mitigated:
Existence/Occurrence: Confirms investments exist.
Completeness: Ensures all holdings are recorded.
Valuation: Supports accurate market valuations.
Purpose: Prevents overstatement or omission of investments.
Inquiries and Observations: Auditors assess management’s involvement in control activities, focusing on authorization and oversight.
Document Inspection: Verifies authorizations (e.g., board minutes, signatures) to ensure compliance with policies.
Walkthroughs: Tests controls over fair value determinations, critical for valuation assertions, to confirm design and operation.
Existence/Occurrence: Authorization and custody controls prevent fictitious or stolen assets.
Completeness: Reconciliation and record-keeping ensure all transactions are captured.
Valuation: Skilled accounting and reconciliations support fair value accuracy.
Presentation and Disclosure: Board approvals and record-keeping ensure proper classification (e.g., trading vs. available-for-sale).
Existence/Occurrence: Authorization verifies debt issuance.
Completeness: Record-keeping and reconciliation capture all obligations.
Valuation: Accurate record-keeping ensures proper amortization.
Presentation and Disclosure: Controls support correct classification and covenant disclosure.
Completeness: Reconciliation with registrars or certificate books ensures all issuances are recorded.
Presentation and Disclosure: Authorization controls verify proper allocation (e.g., stock options).
Completeness: Board authorization for dividends ensures recording, supported by record-keeping.
A properly designed system in the finance and investment cycle includes internal control activities to mitigate misstatement risks:
Authorization: Board approvals for financing and investments ensure valid transactions (Existence, Completeness).
Custody: Secure storage with dual control protects assets (Existence, Valuation).
Record Keeping: Detailed processes by skilled accountants capture and value transactions (Completeness, Valuation, Presentation/Disclosure).
Periodic Reconciliation: External confirmations or counts verify holdings (Existence, Completeness, Valuation).
These controls address relevant assertions—Existence/Occurrence, Completeness, Valuation, and Presentation/Disclosure—for significant accounts (Investments, Long-Term Debt, Capital Stock, Retained Earnings). Due to the cycle’s complexity, auditors emphasize management oversight and substantive testing to complement controls.