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Mylene L.

Capricho BSA-4B

Audit of Equity

Equity plays an important role in a company because it is one of the ways a company can

obtain funds to continue its operations. It may include preferred and common shares, contributed

surplus (share premium) arising from the issuance of common and preferred shares, and retained

earnings. Firms usually apply internal control procedures on its equity transactions such as

authorization, custody, record-keeping, and periodic reconciliation.

When conducting an audit an auditor must review the companys articles of

incorporation, charter, by-laws, and any contracts or agreements. In auditing the equity, the

auditor performs audit procedures based on important assertions. First, on the assertion of

existence, an auditor can do audit procedures such as obtaining and verifying equity

reconciliation schedule. On the assertion of completeness, an auditor can do procedures such as

obtaining and verifying equity reconciliation schedule. For the valuation and allocation assertion,

an auditor may conduct procedures such as reviewing appropriateness of accounting for share-

based compensation and analyzing retained earnings and reviewing appropriateness of dividends.

For the valuation and allocation assertion, an auditor can review appropriateness of accounting

for share-based compensation. Lastly, for the presentation and disclosure assertion, an auditor

can analyze retained earnings and review appropriateness of dividends.

Some usual challenges encountered by an auditor in equity audit are managing multiple

compliance audits, since new regulations continue to come out, and the lack of budget, because

managers usually tend to do cost-cutting or to trim down the fat wherever possible, and this

would most likely trim down the budget for the IT department for the conduct of audit

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