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22-11
22-23 (continued)
procedures.
2. Confirm the balance in notes payable to payees included in
year.
4. Obtain a standard bank confirmation that includes a specific
client does business.
5. Review the minutes of the board of directors.
22-24 In each case, any actual failure to comply would have to be reported in
a footnote to the statements in view of the possible serious consequences of
advancing the maturity date of the loan. The individual audit steps that should
be taken are as follows:
a. Calculate the working capital ratio at the beginning of and through
b. Examine the client’s copies of insurance policies or certificates of
insurance for compliance with the covenant, preparing a schedule
c. Examine vouchers supporting tax payments on all property covered
by the indenture. By reference to the local tax laws and the
d. Vouch the payments to the sinking fund. Confirm bond purchases
and sinking fund balance with trustee. Observe evidence of
22-12
22-25 a. It is desirable to prepare an audit schedule for the permanent file
for the mortgage so that the appropriate information concerning
the mortgage will be conveniently available for future years’
b. The audit of mortgage payable, interest expense, and interest
payable should all be done together since these accounts are
c. The audit procedures that should ordinarily be performed to verify
the issue of the mortgage, the balance in the mortgage and interest
payable, and the balance in the interest expense accounts are:
1. Determine if the mortgage was properly authorized.
2. Obtain the mortgage agreement and schedule the pertinent
payments, interest rate, restrictions, and collateral.
lending institution.
4. Recompute interest payable at the balance sheet date and
the payments made.
5. Test interest expense for reasonableness.
d. Accounting standards require disclosures related to long-term debt.
The terms of the debt agreement are to be disclosed, including
the client’s disclosures are complete and accurate.
22-26
a.
PURPOSE
OF CONTROL
b.
POTENTIAL FINANCIAL
STATEMENT
MISSTATEMENT
c.
AUDIT PROCEDURES
TO DETERMINE
EXISTENCE OF
MATERIAL MISSTATEMENT
1. To insure that all
shares issued or
retired are properly
authorized.
Misstatement of
dividends declared on
balance sheet or
payment to the wrong
people, which could
result in a liability.
Verify authenticity of all
changes in owners’ equity
account.
2. To insure that stock
is issued and
retired only at the
discretion of the
board.
Illegal payments of cash
and issue of shares.
Examine cancelled shares
and newly issued ones to
make sure they are
included in the board of
directors’ minutes.
3. To insure that
records are
properly
maintained.
Misstatement of owners’
equity and the
disbursement of
dividends and capital to
the wrong people.
Determine if company uses
services of an independent
registrar, or transfer agent.
Confirm details of equity
accounts with them.
4. To insure that
records are
properly
maintained.
Misstatement of owners’
equity and earnings per
share.
Account for all unissued
certificates and account for
all cancelled certificates
and their mutilation.
5. To insure that the
general ledger
reflects the balance
of supporting
records.
Misstatement of owners’
equity and earnings per
share.
Trace postings from master
file and stock certificates
into general ledger.
Reconcile master file to
general ledger.
6. To insure that the
dividends declared
are paid to the
proper individuals.
Misstatement of
dividends declared on
balance sheet or
payment to the wrong
people, which could
result in a liability.
Obtain confirmation of paid
dividends from independent
transfer agent.
22-14
22-27 (continued)
entries affecting net earnings are required.
c. The audit procedures that should ordinarily be performed to verify
the repurchase of common stock, share-based compensation, and
common shares issued are described below:
1. Repurchase of common stock: The auditor would examine
The auditor would also examine the cash disbursements
journal and related documentation that supports the
2. Share-based compensation: The auditor would examine
documents that outline the terms of the compensation
committee for evidence of approval of the compensation
plan terms. The auditor would evaluate whether the
amounts reflected as share-based compensation are
transfer agent.
3. Common shares issued: The auditor would examine
minutes of meetings of the board of directors that document
the approval of the decision to issue common shares,
d. The amounts shown as of September 27, 2014, in the Statement of
Shareholders’ Equity should also be included as ending balances in
22-15
22-28
a.
PURPOSE OF
AUDIT PROCEDURES
b.
MISSTATEMENTS THAT
MAY BE UNCOVERED
1. To determine what type of stock
may be issued, under what
circumstances, and its description.
Unauthorized outstanding stock or
improper description of stock.
2. To determine the propriety of
changes in the accounts and to
verify their accuracy.
The issuance or retirement of stock
without proper authorization, improper
valuation, or incorrect dividend
calculations.
3. To determine if there were any
shares issued or retired during year,
or if any certificates are missing.
Unrecorded or unauthorized transactions,
or transactions not handled in a legal
manner.
4. To determine if all retired stock has
been cancelled.
Same as 3.
5. To determine if any stock issues,
retirements, or dividends were
authorized.
Unauthorized or omitted equity
transactions.
6. To verify that earnings per share
has been correctly computed.
Incorrect earnings per share computation.
7. To determine that dividends are
legal and disclosure in the financial
statements is proper.
Illegal payments of dividends and improper
disclosure of the information in the
financial statements.
22-29 a. The audit program for the audit of Pate Corporation’s capital stock
account would include the following procedures:
1. Examine the articles of incorporation, the bylaws, and the
minutes of the board of directors from the inception of the
corporation to determine the provisions or decisions regarding
the capital stock, such as classes of stock, par value or
22-16
22-29 (continued)
2. Examine the stock certificate stub book and determine
whether the total of the open stubs agrees with the Capital
Stock account in the general ledger. Examine cancelled
stock certificates, which are generally attached to the
corresponding stub.
Information on the stubs regarding the number of
shares, date, etc. for both outstanding and cancelled stock
certificates should be compared with the Capital Stock
account. All certificate numbers should be accounted for
3. Analyze the capital stock account from the corporation’s
inception and verify all entries. Trace all transactions involving
the transfer of cash either to the cash receipts or the cash
disbursements records. If property other than cash was
received in exchange for capital stock, trace the recording
of the property to the proper asset account and consider
the reasonableness of the valuation placed on the property.
Transactions showing the sale of stock at a discount
or premium should be traced to the capital contributed in
excess of par value account. If capital stock has been sold
account are verified. If an entry is not related to capital
stock account entries, as in the case of a write-off of a deficit
as the result of a quasi-reorganization, authorization for
the entry and the supporting material should be examined.
22-17
22-29 (continued)
retained earnings account:
i. Analyze the account from its inception. Consider the
validity of the amounts representing income or loss
that were closed from the profit and loss account.
Amounts representing appraisal increments or writing
of the balance sheet.
ii. Any extraordinary gains or losses carried directly to
reviewed for reasonableness, and authorization for
the entries should be traced to the proper authority.
traced to the minutes of the board of directors for
authorization and traced to the cash account or the
capital stock account. A separate computation should
be made by the CPA of the total amount of dividends
b. In conducting his or her audit, the CPA verifies retained earnings
as he or she does other items on the balance sheet for several
22-18
22-29 (continued)
treatment that may have been contrary to accounting standards;
his or her audit of retained earnings would bring this noncompliance
to his or her attention.
Still another reason for verifying the retained earnings account
from transactions free from any restrictions.
22-30 a.
ACCOUNT
EXPECTED
CHANGE IN
BALANCE
2014 TO 2015
EXPLANATION FOR
EXPECTED CHANGE IN BALANCE
Cash
Increase
While much of the proceeds were used to reduce
debt and purchase hardware and software,
unused proceeds were deposited in company
bank accounts.
Accounts
Receivable
Little Change
The process of becoming publicly held would
likely have minimal impact on accounts
receivable, unless the volume of business on the
E-Antiques Web site significantly grows as a
result of going public.
Property,
Plant, and
Equipment
Increase
Because stock proceeds were used to purchase
hardware and software, the balance in property,
plant, and equipment would be expected to
increase.
Accounts
Payable
Increase
Assuming the purchase of hardware and software
is made on account, the balance in accounts
payable would be expected to increase.
Long-Term
Debt
Decrease
Because stock proceeds were used to pay off
loans, the balance in long-term debt would be
expected to decrease.
22-19
22-30 (continued)
ACCOUNT
EXPECTED
CHANGE IN
BALANCE
2014 TO 2015
EXPLANATION FOR
EXPECTED CHANGE IN BALANCE
Common
Stock
Increase
Despite using stock proceeds to acquire original
shares from company founders, the issuance of
stock through the process of going public would
result in a significant increase in the common
stock account.
Additional
Paid-in
Capital
Increase
Despite using stock proceeds to acquire original
shares from company founders, the issuance of
stock through the process of going public would
result in a significant increase in the additional
paid in capital account, assuming the stock was
issued at a price above par value.
Retained
Earnings
No Change
The transactions associated with going public
would not affect the retained earnings account.
Treasury
Stock
Increase
The acquisition of the original shares from the
company founders would be treated as a
purchase of treasury stock, thereby increasing the
account balance.
Dividends
No Change
The transactions associated with going public would
not directly affect the dividends account. If the
company pays dividends, the account would
increase because of the increase in the number
of shares outstanding.
Revenues
Little Change
The process of becoming publicly held would likely
have minimal impact on revenues for the current
year, unless the volume of business on the
E-Antiques Web site significantly grows as a
result.
b. While the decline in stock market price to $19 per share is not
favorable news for E-Antiques, that decline would have no impact
on the common stock, additional paid-in capital, or retained
value impacts E-Antiques investors.
c. The decline in stock price would likely increase the auditor’s
assessment of business risk and audit risk. The decline is likely to
22-20
22-30 (continued)
22-31 a. The three distinct tiers of the NASDAQ market are The NASDAQ
Global Select Market®, The NASDAQ Global Market®, and The
NASDAQ Capital Market®. The NASDAQ Global Select Market®
has the most stringent listing requirements.
1,250,000 publicly held shares.
c. The four standards for the NASDAQ Global Market® are:
1. Income Standard
2. Equity Standard
3. Market Value Standard
4. Total Assets/Total Revenue Standard
400 round lot shareholders.
d. Securities issuances that require shareholder approval include:
Acquisitions where the issuance equals 20% or more of the
pre-transaction outstanding shares (or 5% or more of the
pre-transaction outstanding shares when a related party
Issuances involving equity compensation.
