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Audit of Stockholder's Equity

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Audit of Stockholder's Equity Dr. Donald K. McConnell Jr. Some Basic Concepts Characteristics of capital stock Typically few transactions Inherent risk should be low ... – PowerPoint PPT presentation

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Title: Audit of Stockholder's Equity


1
Audit of Stockholder's Equity
  • Dr. Donald K. McConnell Jr.

2
Some Basic Concepts
  • Characteristics of capital stock
  • Typically few transactions
  • Inherent risk should be low
  • Historical transactions
  • No accounting estimates
  • Transactions are routine
  • Therefore usually more cost-effective to do
    substantive audit vs. controls reliance audit
    (i.e., due to few transactions)
  • Large companies will use registrars and transfer
    agents takes capital stock transaction activity
    out of employee hands

3
What Do Registrars and Transfer Agents Do?
  • Registrar
  • Bank or trust company responsible for preventing
    issuance of more stock than is authorized by
    corporate charter
  • Cancels surrendered stock certificates, issues
    new stock certificates
  • Transfer agents
  • Maintain stockholder records
  • That is, who owns how many shares

4
Audit of Stockholders Equity Internal Control
Concepts
  • See internal control issues in course packet ICQ

5
How do We Audit Sales of Capital Stock?
  • Trace collection of cash to cash receipts journal
    entries
  • Examine stock certificate books for issuance of
    certificates (where no transfer agent or
    registrar)
  • Confirm details of outstanding stock with
    registrars and transfer agents, if used
  • Verify board authorization of stock activity
    common CPA exam issue!

6
How Do We Audit Purchases of Treasury Stock?
  • Vouch payments to cash disbursements journal
  • Canceled stock certificates should be attached to
    stubs in stock certificate book (where no stock
    registrar used)
  • Verify board authorization

7
Retained Earnings Auditing Issues
  • Only entries should be
  • Net income (loss)
  • Prior period Adjustments, which are rare
  • Dividends paid
  • Vouch dividends declared per share to minutes of
    board of directors

8
Exemplary Workpapers in Packet
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