Audit of Stockholder's Equity

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Presentation transcript:

Audit of Stockholder's Equity Dr. Donald K. McConnell Jr. 11/23/2018

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 11/23/2018

What Do Registrars and Transfer Agents Do? 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 11/23/2018

Audit of Stockholders Equity: Internal Control Concepts See internal control issues in course packet ICQ 11/23/2018

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! 11/23/2018

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 11/23/2018

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 11/23/2018

Exemplary Workpapers in Packet 11/23/2018