CHAPTER 9
AUDIT OF THE INVESTING CYCLE
INTRODUCTION
This chapter covers the explanation of the investing cycle, the types of the transactions in
this cycle and the internal control environment and objective pertaining thereto.
Consideration is then given to compliance tests of controls over transactions in the investing
cycle.
In the audit of the investing cycle, the following activities should be undertaken:
1. Identify the activities and types of transactions that occur in a company's investing
cycle;
2.Relate the internal accounting control objectives to investing activities,
3.Determine the essential features of internal control over the above-mentioned
transactions;
4.Perform compliance tests of controls over these transactions; and
5.After evaluating the effectiveness of internal control, perform substantive audit
procedures to determine whether financial statement assertions are materially
correct on accounts affected by the investing cycle.
6.Design tests of details of account balances and analytical procedures to satisfy
balance-related audit objectives.
Steps 1 1o 5 are discussed in this Chapter while Step no. 6 is covered in Chapters 14, 15 and
16.
NATURE OF THE INVESTING CYCLE
Basic Considerations
Investing cycle includes the processes, procedures and policies for authorizing, executing
and recording transactions involving acquisition and disposition of investments in securities
[e.g., government securities, equity securities, corporate bonds] short-term and long-term,
property and equipment, natural resources, intangible assets, non-trade loans, and
investment property.
Investing Cycle Transactions
Generally, the classes of transaction in the investing involve:
1.Acquisitions and disposals of securities, for temporary or long-term investments,
corporate bonds and government securities, plant assets, natural resources,
intangible assets and other assets fall into this category of transactions.
2. Lending to others, excluding open trade accounts with customers.
PROCESSING INVESTING CYCLE TRANSACTIONS
Figure 9-1 shows the flow of the entries in the accounts affected by the transactions in the
investing cycle.