Audit of Stockholder's Equity

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Audit of Stockholder's Equity

• Dr. Donald K. McConnell Jr.

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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

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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

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Audit of Stockholders Equity Internal Control
Concepts

• See internal control issues in course packet ICQ

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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!

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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

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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

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Exemplary Workpapers in Packet