APPLIED AUDITING 2: SEATWORK APRIL 5, 2019

Chrishelle Mae A. Canda

BSA IV

QUESTIONS:

1.Identify substantive procedures that the auditor should perform related to dividends.

One of the purposes in the internal control related to stock transactions is to assure that the correct amount
of dividends is paid to the stockholders owning the stock as of the dividend record date. Some of the most
important substantive procedures performed by auditors relating to dividends include:

a. For authorization of the dividend per share amount and the dividend record date: Examination of the
minutes of the board of directors (board meetings)
b. For clients maintaining their own records and pay the dividends:
Recalculation of the amount of the dividends and matching that amount to the cash disbursements
journal
c. For clients enlisting the services of a stock transfer agent:
Tracing the payment to a cash disbursement made by the client to the agent
d. For evidence regarding dividend payment to stockholders owning the stock as of the dividend record
date:
Tracing the payee’s name on the cancelled check to the dividend records to make sure the payee was
to have received the dividend

In addition, auditors must also look out for any restrictions related to dividend payments and determine
that such restrictions are adequately disclosed in the financial statements.

2. Retained earnings is a component of stockholders’ equity. What substantive procedures

will the auditor typically perform related to retained earnings?

Retained earnings are profits generated by a company that are not distributed to stockholders
(shareholders) as dividends but are either reinvested in the business or kept as a reserve for specific
objectives (such as to pay off a debt or purchase a capital asset). Auditors typically examine all
transactions recorded in the retained earnings account during the audit period, particularly common
entries including net income or loss, for potential misappropriation or misstatements. The major emphasis
in auditing the retained earnings account should be on the recorded changes that have taken place
during the year.

Among the substantive procedures commonly performed by auditors relating to retained earnings include:

a. analysis of the changes in retained earnings and verification of the authorization and accuracy of
the underlying transactions
b. For entries relating to revenues and expenses : examining documentations supporting that such
entries should be included
c. For corrections made of an error from a prior period: determining that the correction is made in
accordance with relevant accounting standards.
3. After all other account balances on the balance sheet have been audited, it might appear
that the retained earnings figure is a balancing figure and requires no further audit
procedures. Why would an auditor still choose to audit retained earnings?

The major emphasis in auditing the retained earnings account should be on the recorded changes that
have taken place during the year. Although it might appear that the retained earnings figure is a
balancing figure and requires no further audit procedures, an auditor would still choose to audit the
retained earnings to check for corrections made and their compliance if any adjustments were made. Also,
I believe that the auditor should still continue the audit in the retained earnings because this account is
highly material. Even if transactions in debt obligations and stockholder’s equity are few in quantity, they
should be thoroughly tested. It is very important that the auditor should check and verify all (if possible)
the information and make sure that none of the documents and information is ignored.

4. Assume your audit client declared a 5% stock dividend. Identify the evidence you would
examine to determine whether the stock dividend was accounted for properly.

As being justified, one of the purposes in the internal control related to stock transactions is to assure that
the correct amount of dividends is paid to the stockholders owning the stock as of the dividend record
date, and properly accounted for. In reference to my answers from question number 1, some of the
evidences I would examine to determine whether the stock dividend was accounted for properly are:

a) The minutes of the BOD meetings to confirm declaration of dividend, rate per share, and record
date.
b) Transfer agent (if client uses the service; confirm records and verify date with the agent)
c) The cash disbursement journal (to check if dividend amount corresponds or agrees therewith)
d) Accounting standards, law, and relevant legal requirements (if dividend was declared
accordingly)

5. What is the most relevant financial statement assertion in an audit of stockholders’ equity?
Give some substantive procedures to test such assertion.

The most important/relevant audit assertion in an audit of stockholders’ equity, are:

1. Completeness and Existence. The audit objective of this assertion is to determine whether the
recorded shareholder’s equity accounts reflect all data that should be recorded (completeness) and
capital transactions are valid and actually occurred (existence/occurrence). Some relevant audit
procedures performed to test these assertions include :
a. For capital stock transactions: confirmation with the registrar or transfer agent whether any
capital stock transactions occurred; inspection of share certificate book, and if there are
shares held in the treasury, inspection of the certificates of shares held in the treasury should
also be performed
b. Preparing, or ask the client to prepare, an analysis of all capital stock transactions.
c. Reviewing authorization and terms of share issues

2. Valuation/Allocation. This assertion determines whether the shareholders’ equity balances are
shown in the proper statement amounts in accordance with PAS/PFRS. Valuation difficulties can
occur in instances when stocks are issued in a nonmonetary transaction (such as when issued in
exchange transactions, and issued in the form of stock options). This pose difficulty in
determining the proper value representation and proper accounting.
 Some substantive procedures auditors perform to test this assertion includes:
(1) Reviewing the minutes of the board of directors meetings;
(2) Examining the stock records books (or confirm with the registrar and transfer agent) to
determine issuance and repurchase of capital stock;
(3) Vouching share capital entries, dividend entries to retained earnings.

3. Presentation and disclosure assertion. This assertion determines that shareholder’s equity
accounts are properly classified and appropriately presented and disclosed. Disclosure includes:

(1) Proper description of each class of stock outstanding and the number of shares authorized,
issued, and outstanding and special rights associated with each class, and
(2) Details of par or stated value, share option plans, dividend in arrears, etc.

Some of the substantive procedures performed to test this assertion are:

a. Review in the minutes of board directors’ and shareholders’ meetings for share options and
dividend restrictions and examining legal documents (through communication with legal
counsel) or other evidence of the provisions of these agreements;
b. Evaluation of financial statement presentation and disclosure for shareholders’ equity
accounts ( compare with GAAP)