Auditing Below are several questions that the auditor must address as part of th
ID: 2765680 • Letter: A
Question
Auditing
Below are several questions that the auditor must address as part of the audit of stockholder’s equity accounts.
a.Are issuances of capital stock properly authorized?
b.Are dividends declared by the client actually recorded?
c.Is all information related to stock warrants, options, and rights properly disclosed?
d.Are issuances of capital stock properly recorded?
e.Do recorded retirements or repurchases of capital stock represent legitimate transactions that actually occurred?
f.Are the beginning balances of capital stock and additional paid in capital accounts correct?
g.Do issuances of capital stock result in outstanding shares issued that exceed authorized shares?
REQUIRED: (1) For each of the questions listed, indicate the type of potential financial statement error or fraud that could occur.
(2) For each of the potential errors or fraud indicated in(1) above, list a specific audit procedure that the auditor can use to determine whether a material error or fraud has occurred.
Explanation / Answer
Hi, I have given the answers of your questions (1) and (2), agains your each statement:
a.Are issuances of capital stock properly authorized?
Answer: Issued capital stock cannot be more than authorized capital stock. Authorized capital stock means the maximum capital stock a company is authorized to issued and a company cannot issue capital stock more than its authorized capital.
If a company issue more capital stock as compare to their authorized stock, it will be wrong and attract penal provisions.
An auditor can trace the authorized capital of the company from previous year’s financial statement, registers, website of concern corporate ministry, stock exchanges where the shares are listed and other documents. He can trace the issued capital from the following modes:
A company is required to show the authorized and issued capital stock in the financial statement, statutory registers. Intimation of issuance of capital stock is also given to the stock exchanges where the share capital are listed. Also, a company is required to intimate to the concern corporate ministry regarding the issuance of share capital.
Auditor will also seek the justification for receipt of money in favour of issuance of capital stock.
b.Are dividends declared by the client actually recorded?
Answer: Yes, Once the dividend is declared becomes the liability for the company. And it will be shown under the current liability and provisions heading until the dividend is actually paid.
Yes, it is wrong when company don’t shows dividend declared in their books of account. Also a specific amount of corporate dividend tax is payable on the declared dividend.
Auditor is required to check for the dividend declaration, dividend payment, disclosure of dividend declaration and dividend payment in the books of account and he is also required to check whether the tax has been paid or not.
c.Is all information related to stock warrants, options, and rights properly disclosed?
Answer: Yes all information regarding to stock warrants, options, and rights are properly disclosed in the books.
It is the responsibility of the auditor to check whether the stock warrants, options, and rights have been fully disclosed or not.
d.Are issuances of capital stock properly recorded?
Answer: Yes, Issuance of capital stock is properly recorded in the books.
Intimation of issuance of capital stock shall be given to the relevant stock exchange where the stock are listed. Money to be received in the matter of issuance of capital shall be transferred through banking mode. A company shall complete all compliances and formalities related to the receipt of money and issuance of capital. It is difficult for the company to hide the same.
It is the responsibility of the auditor to check the details related to receipt of money and the compliance done by bank to remit the money in the company’s account. After it Auditor shall check the all formalities related to the issuance of stock capital.
e.Do recorded retirements or repurchases of capital stock represent legitimate transactions that actually occurred?
Answer: Yes, repurchase of capital stock is a legitimate transaction. Sometimes company want to minimize public control over the company therefore it decides to purchase its own stock from the market to reduce their shareholding and control. It is a legitimate transaction and required to be record in the books of account.
It is the responsibility of the auditor to check the transaction and check the compliance associated with repurchase of capital stock. It is required to reduce the stock from issued share capital.
f.Are the beginning balances of capital stock and additional paid in capital accounts correct?
Answer: It is the responsibility of the company to produce the financial statement showing the beginning balance of the stock, adding issued stock during the year to the beginning capital and then to disclose the ending capital.
It is the requirement of law to disclose the share capital in the above given manner.
Auditor will have the various alternatives to track the beginning capital and capital issued during the year. Hence, he can trace the same and satisfy the fully disclosure of the same.
g.Do issuances of capital stock result in outstanding shares issued that exceed authorized shares?
Answer: No, issued capital stock cannot be more than authorized capital. Although it will be very difficult for the company to try to issue more capital stock as compare to their authorized stock, but, in case if they do so. It will be fraud and attract penal provision.
A company is required to show the authorized and issued capital stock in the financial statement, statutory registers. Intimation of issuance of capital stock is also given to the stock exchanges where the share capital are listed. Also, a company is required to intimate to the concern corporate ministry regarding the issuance of share capital.
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