UNIVERSITY OF JOHANNESBURG
DEPARTMENT OF ACCOUNTANCY
AUDITING 300/BCTA
2018
MODULE: Investment & Finance Cycle
, INVESTMENT AND FINANCE CYCLE
1.1 INTRODUCTION OF THE TOPIC
A company can raise funds by way of a share or debenture issue or through obtaining loan
capital. The funds are used to purchase fixed assets which will enable the company to
commence business. From time to time the company will also be required to raise funds for the
expansion of the business or the replacement of worn out assets. The cycle that controls the
funding and investing in fixed assets is the Investment and Finance cycle.
This cycle mainly deals with:
Acquisition of fixed assets
Raising of finance (funds) and the repayment thereof
Obligations which arise out of the finance raised (interest and dividends)
1.2 CHARACTERISTICS AND ACTIVITIES IN THE CYCLE
One of the characteristics of the cycle is that there are relatively few transactions that occur in
this cycle during an entity’s reporting period. Most companies only purchase a few assets
annually and new shares are not issued on a continuous basis.
Another important characteristic of the cycle is that the transactions within this cycle are usually
material. The expansion of a business or the continuous replacement of assets requires
substantial funding.
Lastly, the transactions in this cycle are governed by legal and regulatory requirements. The
Companies Act governs majority of the transactions within this cycle.
In order to evaluate the risk of significant misstatement and determine appropriate audit
responses, the auditor needs to understand the following aspects of the entity’s investment and
finance cycle:
The nature and significance of tangible and intangible assets used in the business
operations of the entity
The nature and incidence of additions and disposals of assets that have occurred during
the reporting period
How the assets acquired have been funded
Management’s strategic plans for growing the assets of the business and how
management proposes to fund future acquisitions, including capital commitments arising
from further capital expenditures approved
DEPARTMENT OF ACCOUNTANCY
AUDITING 300/BCTA
2018
MODULE: Investment & Finance Cycle
, INVESTMENT AND FINANCE CYCLE
1.1 INTRODUCTION OF THE TOPIC
A company can raise funds by way of a share or debenture issue or through obtaining loan
capital. The funds are used to purchase fixed assets which will enable the company to
commence business. From time to time the company will also be required to raise funds for the
expansion of the business or the replacement of worn out assets. The cycle that controls the
funding and investing in fixed assets is the Investment and Finance cycle.
This cycle mainly deals with:
Acquisition of fixed assets
Raising of finance (funds) and the repayment thereof
Obligations which arise out of the finance raised (interest and dividends)
1.2 CHARACTERISTICS AND ACTIVITIES IN THE CYCLE
One of the characteristics of the cycle is that there are relatively few transactions that occur in
this cycle during an entity’s reporting period. Most companies only purchase a few assets
annually and new shares are not issued on a continuous basis.
Another important characteristic of the cycle is that the transactions within this cycle are usually
material. The expansion of a business or the continuous replacement of assets requires
substantial funding.
Lastly, the transactions in this cycle are governed by legal and regulatory requirements. The
Companies Act governs majority of the transactions within this cycle.
In order to evaluate the risk of significant misstatement and determine appropriate audit
responses, the auditor needs to understand the following aspects of the entity’s investment and
finance cycle:
The nature and significance of tangible and intangible assets used in the business
operations of the entity
The nature and incidence of additions and disposals of assets that have occurred during
the reporting period
How the assets acquired have been funded
Management’s strategic plans for growing the assets of the business and how
management proposes to fund future acquisitions, including capital commitments arising
from further capital expenditures approved
