2) Which of the following owners’ equity transactions usually require specific authorization from
a company’s board of directors?
A)
Repurchase of common
stock
Issuance of common
stock
Declaration of dividends
Yes
Yes
Yes
B)
Repurchase of common
stock
Issuance of common
stock
Declaration of dividends
Yes
Yes
No
C)
Repurchase of common
stock
Issuance of common
stock
Declaration of dividends
No
Yes
No
D)
Repurchase of common
stock
Issuance of common
stock
Declaration of dividends
No
No
Yes
3) When a company maintains its own records of stock transactions and outstanding stock,
internal controls must be adequate to ensure that
A) actual owners are recorded in the bylaws.
B) the correct amount of dividends is paid to stockholders owning the stock on the dividend
record date.
C) the correct amount of dividends is paid to stockholders owning the stock on the declaration
date.
D) actual owners are recorded in the minutes.
4) The amount of time spent verifying owners’ equity is frequently minimal for closely held
corporations because
A) these companies are so small that it is not necessary to audit the capital section.
B) the few owners all have access to the books so the auditor spends more time on accounts like
liabilities, which affect outsiders.
C) there are few if any transactions during the year for the capital stock accounts, except for
earnings and dividends.
D) there is no public interest in these companies.
5) Which of the following types of owners’ equity transactions would require authorization by
the board of directors?
A) issuance of capital stock
B) repurchase of capital stock
C) declaration of dividends
D) all of the above
6) The record of the issuance and repurchase of capital stock for the life of the corporation is
maintained in the
A) shareholders’ capital stock master file.
B) capital stock certificate record.
C) schedule of stock owners.
D) corporate directory.
7) The record of the outstanding shares at any given time is maintained in the
A) corporate directory.
B) stock certificate books.
C) schedule of stock owners.
D) shareholders’ capital stock master file.
8) When a dividend is declared by the board of directors, the source for determining who should
receive dividend checks is the
A) shareholders’ capital stock master file.
B) stock certificate books.
C) common stock account in the general ledger.
D) corporate directory.
9) The authorization of an issuance of capital stock normally includes all but which of the
following?
A) type of stock to be issued
B) number of shares to be issued
C) date shares are to be issued
D) amount of dividend to be paid on shares issued
10) Any company with stock listed on a securities exchange is required to engage a(n)
A) equity analyst.
B) stock transfer agent.
C) independent registrar.
D) equity placement specialist.
11) All of the following are owners’ equity accounts except for
A) common stock.
B) paid-in-capital in excess of par.
C) sales.
D) retained earnings.
12) When a company maintains its own records of stock transactions and capital stock
outstanding, its internal controls must be adequate to accomplish three objectives. List them
below.
13) What is the difference between an independent registrar and a stock transfer agent?
14) What are two important internal control procedures that companies should implement to
prevent misstatements in owners’ equity when a company maintains its own records of stock
transactions and outstanding stock?
15) Discuss the internal controls related to owners’ equity that are of concern to the auditor.
16) Match six of the terms (a-i) used in the capital acquisitions and repayment cycle with the
descriptions provided below (1-6):
a. capital acquisition and repayment cycle
b. capital stock certificate book
c. closely held corporation
d. independent registrar
e. note payable
f. publicly held corporation
g. stock transfer agent
h. schedule of notes payable and accrued interest
i. stock maintenance agent
________ 1. an outside person engaged by a corporation to make sure that its stock is issued in
accordance with capital stock provisions in the corporate charter and authorizations by the board
of directors
________ 2. the normal starting point for the audit of notes payable; includes detailed
information of all transactions related to notes payable that took place during the year
________ 3. a record of the issuance and repurchase of capital stock for the life of the
corporation
________ 4. an outside person engaged by a corporation to maintain the stockholder records, and
often to disburse cash dividends
________ 5. an entity that is required to engage an independent registrar
________ 6. the cycle that concerns the acquisition of capital resources through interest-bearing
debt and owners’ equity and repayment of the capital
17) The Securities and Exchange Commission requires companies listed on exchanges to employ
stock transfer agents.
18) Public companies whose stock is listed on a stock exchange must employ an independent
registrar.
19) The shareholders’ capital stock master file is used as the basis for the payment of dividends
and also acts as a check on the accuracy of the common stock balance in the general ledger.
20) Independent registrars commonly disburse cash dividends to shareholders.
21) Few large companies employ stock transfer agents, but small companies commonly do so.
22) Most closely held corporations have numerous transactions during the year for capital stock
accounts.
23) A shareholders’ capital stock master file is a record of the issuance and repurchase of capital
stock over the life of the corporation.
24) The board of directors must authorize the amount of the dividend per share and the dates of
record and payment of the dividend.
22.4 Learning Objective 22-4
1) In auditing debits and credits to retained earnings, other than net income and dividends, the
auditors first concern is
A) whether the transactions should have been included in retained earnings.
B) whether the transactions have been accurately recorded.
C) whether the transactions are classified correctly in the footnotes.
D) whether the transactions existed as of the balance sheet date.
2) Which of the following is an important source of information for determining whether the
presentation and disclosure-related objectives for capital stock activities are satisfied?
A) the corporate charter
B) the minutes of board of directors meetings
C) the auditor’s analysis of capital stock transactions
D) all of the above
3) Which of the following audit objectives is least important in the audit of capital stock and
paid-in-capital in excess of par?
A) completeness
B) accuracy
C) rights and obligations
D) presentation and disclosure
4) The primary concern in determining whether retained earnings is correctly disclosed on the
balance sheet is
A) correct calculation of the net income or loss for the year.
B) correct calculation of dividend payments for the year.
C) whether prior-period adjustments have been made correctly.
D) whether there are any restrictions on the payment of dividends.
5) When verifying if capital stock is accurately recorded,
A) the ending balance in the account does not need to verified.
B) the number of shares outstanding at the balance sheet date is verified by examining the
corporate minutes.
C) the recorded par value can be determined by multiplying the number of shares by the market
price of the stock.
D) a confirmation from the transfer agent is the simplest way to verify the number of shares
outstanding at the balance sheet date.
6) What type of audit test will auditors use when testing to see if the amounts of capital stock
transactions are accurately recorded?
A)
Tests of details of
balances
Substantive tests of
transactions
Tests of controls
No
Yes
Yes
B)
Tests of details of
balances
Substantive tests of
transactions
Tests of controls
Yes
No
Yes
C)
Tests of details of
balances
Substantive tests of
transactions
Tests of controls
No
Yes
No
D)
Tests of details of
balances
Substantive tests of
transactions
Tests of controls
Yes
No
No
7) Which of the following statements is correct regarding the audit of dividends?
A) The emphasis is on the ending balance in the dividends account.
B) When auditors verify that the dividends are paid to stockholders that exist, they are concerned
with the completeness objective.
C) If the client uses a transfer agent to disburse dividends, the total can be traced to a cash
disbursement entry to the agent and also confirmed.
D) All of the above are correct statements.
8) When conducting the audit of stockholders’ equity, it is normal practice to verify all capital
stock transactions
A) only when the client is small.
B) that are in excess of a material amount.
C) if there aren’t very many during the year.
D) regardless of the controls in existence, because of their materiality and permanence in the
records.
9) If a company employs a capital stock registrar and/or transfer agent, the registrar or agent, or
both, should be requested to confirm directly to the auditor the number of shares of each class of
stock
A) surrendered and canceled during the year.
B) authorized at the balance sheet date.
C) issued and outstanding at the balance sheet date.
D) sold at a price above par during the year.
10) State the four most important audit objectives for capital stock and describe how the auditor
typically verifies each of the four objectives.
11) Auditing capital stock transactions as part of a merger is challenging because judgment is
often involved.
12) A prior period adjustment may result in a debit or credit to a company’s retained earnings
account.
13) Any restrictions on the payment of dividends must be disclosed in the footnotes to the
financial statements.
14) The accuracy of a dividend declaration can be audited by recalculating the amount on the
basis of the dividend per share times the number of shares outstanding.
15) For most companies, the only transactions involving retained earnings are net earnings for
the year and dividends declared.
16) Examining the minutes of the board of directors’ meetings for proper authorization ordinarily
tests the existence objective for capital stock transactions.
17) Examining the minutes of the board of directors’ meetings for proper authorization ordinarily
tests the occurrence objective for capital stock transactions.
18) The emphasis in the audit of dividends is on the ending balance rather than the transactions.