equity program

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AP-12: Audit Program for Equity

Company Balance Sheet Date

The company has the following general ledger accounts that will be classified in the equity caption of the balance sheet.

General Ledger Number Description or Brief Purpose of the ccount

udit Program for !quity

Company Balance "heet Date

udit#b$ecti%es

udit Procedures for Consideration

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+)NNC)L "TT!,!NT ""!-T)#N"

! !*istence or occurrence. & aluation orallocation.C Completeness. P&D Presentationand disclosure.- -ights and obligations.
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/D)T #B0!CT)!"

. !quity transactions are authori1ed and recorded correctlyas to account2 amount2 and period2 and the equity section of thebalance sheet is properly described and disclosed in accordance

with accounting standards and legal requirements 3assertions !C2 - &2 and P&D4.

)D!NT)+)CT)#N C#D!"

The letters preceding each of the abo%e audit ob$ecti%es2 i.e.2 2 B2etc.2 ser%e as identification codes. These codes are presented in theleft column labeled 5udit #b$ecti%es6 when a procedureaccomplishes an ob$ecti%e. )f the alpha code appears in a brac(et2e.g.2 782 7B82 etc.2 the audit procedure only secondarilyaccomplishes the ob$ecti%e. )f an asteris( precedes a procedure2 it isa preliminary step or a follow up step that does not accomplish an

ob$ecti%e.

B")C P-#C!D/-!"

9 :. )nspect the articles of incorporation2 bylaws2 partnershipagreement2 member agreement2 etc.2 and e*tract matters of auditinterest.

Practical Considerations;

,uch of this information may already be a%ailable in the prioryear. #btain or prepare an analysis of transactions in equityaccounts and perform the following procedures;

a. Determine the number of shares of stoc( issued andcanceled and compare quantities with the stoc( certificate boo(.

b. Determine that the method used to cancel shares isadequate to pre%ent reissuance.


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c. )dentify the number of shares held in treasury2 e*amine

certificates2 and determine that the company


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auditor should %ouch only indi%idually significant transactions or asample of transactions. 3"ee Chapter @.4

"" No. 2 udit Documentation2 requires documentation ofsubstanti%e tests of details in%ol%ing inspection of documents toinclude identification of the items tested. The authors belie%e itemstested can be identified by listing the items by including a detailschedule in the wor(papers2 such as an analysis of equity accounts2on which the items are identified or by documenting in thewor(papers the source and selection criteria. +or e*ample;

+or tests of significant items2 documentation may describe theauditor:&H=2 starting with chec( number =:F

and selecting e%ery :th chec( thereafter4.

"" No. is effecti%e for audits of financial statements forperiods beginning on or after ,ay :F2 ==2 with early applicationpermitted.

The step e*plained pre%iously regarding authori1ation oftransactions in the directors< minutes pro%ides e%idence regardingcompleteness of such transactions actually reported in theseaccounts.

ccounting for certain equity transactions can be complicatedand small business auditors may not frequently encounter comple*equity transactions. 'hen auditing equity transactions2 therefore2 itmay be necessary to consult other accounting and auditingprofessionals. )f consultation is necessary2 see "tep : of the auditprogram for other general procedures at P?:b. )n addition2 P)T+Practice lert =?:2 ccounting for Certain !quity
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Transactions2 pro%ides accounting guidance for se%eral forms ofequity transactions that may require scrutiny by the auditor.

F. #btain an analysis of transactions affecting the retainedearnings 3or equi%alent4 account for the period and perform thefollowing procedures;

a. Test the schedule for clerical accuracy and relate thebeginning and ending balances to the trial balance.

b. -econcile changes in retained earnings to net income forthe period and other appropriate transactions included.

c. #btain detailed lists of di%idends paid during the year."elect the largest indi%idual transactions for testing if there is asignificant quantity of di%idends paid 3normally there will be only afew payments made as di%idends in a small business4. Documentthe items tested.


The auditor should be aware of unusual transactions posted tothe retained earnings account that might indicate improperaccounting or use of the ta* method of accounting. Thesetransactions should be identified for potential ad$ustments2 if

appropriate.

"mall businesses typically ha%e few di%idend transactions. )fthere are di%idends2 they can be tested easily without significante*penditures of time.

)t is also important in this step to determine the authori1ationof di%idend payments or other types of entries that might affectretained earnings accounts.

)f the company is an " corporation2 more detailed retainedearnings classifications may be presented. "ee Guide toCompilation and -e%iew !ngagements and Guide to Preparing+inancial "tatements. These companion boo(s can be ordered fromPractitioners Publishing Company at 3I4 >=>?IJ=@.

. #btain an analysis of transactions affecting other


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comprehensi%e income for the period2 relate the beginning andending balances to the trial balance2 and re%iew the propriety ofclassifications. gree acti%ity to testing performed in other auditareas.

Practical Consideration;

+or e*ample2 changes in accumulated other comprehensi%eincome related to unreali1ed gains and losses on a%ailable?for?salesecurities should be tested in con$unction with the proceduresperformed to audit in%estments.

J. #btain copies of all company agreements associated withrights or restrictions on any equity accounts2 including any buy?sellagreements or related options to buy company stoc(. Perform the

following procedures;

a. Determine the nature of the agreement or pro%ision and itseffect on the company


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pri%ileges2 or other types of complicated equity agreements2 theauditor should consider the need for procedures 3such as2 inquiriesof management or re%iew of plan documents4 to determine theappropriate accounting and disclosure requirements for these

agreements.

9 I. Consider the need to apply one or more additionalprocedures. The decision to apply additional procedures should bebased on a consideration of whether information obtained ormisstatements detected by performing substanti%e tests or fromother sources during the audit alter your $udgment about the need toobtain a further understanding of control acti%ities2 the assessedle%el of ris( of material misstatements 3whether caused by error orfraud42 and on an e%aluation of whether the basic procedures ha%ebeen sufficient to achie%e the audit ob$ecti%es. ttach audit

program sheets to document additional procedures.


Certain common additional procedures relating to thefollowing topics are illustrated following this program;

"ignificant number of shareholders.

)ndependent registrar or stoc( transfer agent.

"toc( option plan.

dditional procedures in response to fraud ris( assessment.

Practitioners may refer to PPC


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other completion procedures in P?:b2the auditor considers theneed to perform additional procedures based on the results ofprocedures performed in the indi%idual audit programs and thecumulati%e (nowledge gained from performing those procedures.

9 :. Consider whether the results of audit procedures indicatereportable conditions in internal control and2 if so2 add to the memoof points for the communication of reportable conditions. 3"eesection :F@for e*amples of reportable conditions2 and see CH?:Ifor a wor(sheet that can be used to document the points as they areencountered during the audit.4

C#NCL/")#N

'e ha%e performed procedures sufficient to achie%e audit

ob$ecti%es for equity2 and the results of these procedures areadequately documented in the accompanying wor(papers. 3)f youare unable to conclude on any ob$ecti%e2 prepare a memodocumenting your reason.4

Additional Audit Procedures for Equity

)nstructions; dditional procedures will occasionally be necessary on some smallbusiness engagements. The following listing2 although not all?inclusi%e2 representscommon additional procedures and their related ob$ecti%es.

"ignificant Number of "hareholders

)f the company has more stoc(holders than normally found in asmall business2 apply the following additional procedures to thestoc( certificate boo(;

a. -econcile the number of shares outstanding with certificatestubs and certificates representing unissued2 retired2 or treasuryshares.
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b. !*amine unissued shares.

c. Chec( the numerical sequence of stoc( certificates.

d. #btain a representation from the corporate secretary on theshares issued and outstanding.

Practical Consideration;

These additional procedures are necessary only when theauditor is concerned about fraud in sales of shares.

)ndependent -egistrar or "toc( Transfer gent

)n the rare case when the small business uses an independentregistrar or stoc( transfer agent2 confirm the following with theregistrar or transfer agent;

a. The number of shares authori1ed.

b. The number of shares issued and outstanding.

c. /nbilled registrar or transfer agent fees to the date of audit.

"toc( #ption Plan

)f the company has a stoc( option plan2 perform the followingprocedures;

a. -e%iew the pro%isions of the plan2 compare dollar %alues to

mar(et quotations2 and determine any necessary disclosures.

b. +or compensatory plans2 determine that compensatione*pense is computed in accordance with PB #pinion No. =F or"tatement of +inancial ccounting "tandards No. :=>2 asappropriate2 and is recogni1ed o%er the period the related ser%icesare performed.


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"toc( option plans can be accounted for under PB #pinionNo. =F2 ccounting for "toc( )ssued to !mployees2 or "+" No.:=>2 ccounting for "toc(?Based Compensation. Companies that

account for stoc( option plans using PB #pinion No. =F arerequired to disclose pro forma net income 3and earnings per share2if presented4 as if the fair %alue based method of accountingprescribed by "+" No. :=> had been followed.

PB #pinion No. =Fcan only be used to account for stoc(options issued to employees.

)f a plan is noncompensatory2 compensation e*pense is notrecorded under either PB #pinion No. =F or "+" No. :=>.

)n practice2 most companies account for stoc( options issued toemployees using PB #pinion No. =F. /nder PB #pinion No.=F2 companies typically do not record compensation e*penserelated to fi*ed stoc( option and purchase plans because the fair%alue of the stoc( to be issued is seldom higher than the option orpurchase price at the measurement date.

+or nonpublic companies2 pro forma disclosures as if the fair%alue based method of accounting had been followed should beestimated using the minimum %alue method prescribed by"tatement of +inancial ccounting "tandards No. :=>. /sing theminimum %alue method2 compensation e*pense that would ha%ebeen recorded is determined using the current stoc( price2 e*erciseprice2 ris(?free interest rate2 life of the option2 and e*pected futuredi%idends.

The +"B issued )nterpretation No. @@2 ccounting forCertain Transactions )n%ol%ing "toc( CompensationKaninterpretation of PB #pinion No. =F2 to pro%ide guidance withregard to the definition of employee and the scope of PB #pinionNo. =F.

dditional Procedures in -esponse to +raud -is( ssessment

)f the auditor2 based on his or her consideration of fraud ris(factors2 decides to modify procedures related to equity transactions2
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the following procedures may be performed;

a. Confirm shares held with all stoc(holders.

b. Confirm di%idends recei%ed with all stoc(holders.

Additional Audit Procedures for Equity

Beginning Balance in Initial Audit

Company Balance Sheet Date

udit#b$ecti%es

udit Procedures for Consideration

N&Performedby

'or(pap)nde*

Instructions: dditional procedures will be necessary in aninitial audit. These procedures are applied to opening balancesdepending whether you are relying on your re%iew of apredecessor


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would normally include income statements or ta* returns for thechange due to income or loss.

b. Consider whether the scanning of the predecessor


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financial statements.

equity program

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