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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
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
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
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