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    Ezpz

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    804 views7 pages

    28 Substantive Test of Shareholders' Equity

    Uploaded by

    Luke Rigel Serate
    Ezpz

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 7
    ol see Company enters into a 1 72016, Less 0-year Ie a SE plicit in the lease at the com 858 fap S09 100,08 ate im men “ 3 Tho, wien the present value ofthe lease abi te aig Fae ne eps Ons and sear the cost of HRY oe (intermediate leS80r) subleases the sgeg*eP*itue™ 7220.09. eer the remaining terms Of 6 six years yy aye St na ses fe ane = ree lowing transactions, prepare all th Regu each of te following tr : ae January 1, 2020, on te part of . a intermedia bh Sublessee ‘ASE NO. 1: Assuming the intermediate lessor treats the sublease say lease. CASE NO. 2: operating lease. Assuming the intermediate lessor treats the sublease a back PROBLEM 27-35 Sale and leaset : ‘ABC Company sells a building to DEF Company. At the same time, AB Cons gnters into a contract with DEF Company for the right to use the building is relating to the sale and leaseback are as follows: Selling Price 2,000,000 Carrying amount 2,150,000 ‘Annual lease payment 120,000 Implicit rate 5% Lease term 10 years ‘Assume the following independent cases: Fair values are: Case No.1 2,000,000 Case No.2 1,800,000 : ‘ CaseNo.3 2,100,000 saute yore Required: Prepare all the necessary entries Buyer-Lessor. tantive Test of Shi guts 258 yee VE TEST OF SHAR ‘ANT! r EHOLDERS' BEANE EMOUDERS EQUITY RVIEW: aiscusses the audit of shareholder's equity, fs well as the management assertions relating olders! Equity its objectives and cedures toequity, NG OBJECTIVES: tying this chapter, you should be able to: iy the audit objectives for shareholders’ equity items and related accounts. 1 pain the primary substantive audit procedures for shareholders! gquity tems and related accounts. ientiiy assertions addressed by audit procedures for shareholders’ quity items and related accounts. Differentiate audit of partnership, sole proprietors other types of entity. ee fntroduction ‘hefinancing cycle involves the activities of the company that are designed cbtain capital funds. It typically involves the issuance and repayment of. «eit and equity, as well as payment of interest and dividends. Owners’ ‘wity or shareholders’ equity may include preferred and common shares, catibuted surplus arising from the issuance of common and preferred Stures,and retained earnings from which dividends are paid. corporation and 4's common for the rest of the accounts in the finance and investment ped lp focus of substantive tests is on the changes in the owners’ equity fas pa 38 ew stock issues, purchase oF reissuance of treasury eign pio" Period adjustments, dividend payments, and dividen {Considerations diy ting equity accounts of a corporation, consideration should be “pplicable laws to the entity being audited (e.g. Corporation Code of ey te eS and other applicable special laws). The auditor also should teats gna eS Of incorporation, the charter, the bylaws, and any ese nee ceTeeMents. Since auditors may not have the training and Bivlayg sttled fully to understand the legal implications of the terms of BenuneesGtlations, or agreements, the auditor may request the entity's "Woyed je ¢© @Ssist in such matters or may consult with any legal counse! Y the auditor, eee er ive Test of Shareholders’ Equity chapter 28 - Subs Audit ObJecUVES omponents of shareholder's When aid he We tests is to determine the f jective ee ory |______Account Balances Ai ig Categor — ees Audit Object; [ Assertion” All the equity accounts or -jwStive — pase statement of financial position exiee "SOF He. — aes ‘All equity interest that should hayes— : ness av Completer have been recorded and included = Tecg of financial position. Statemen | ‘The equity accounts are stated oth a financial position athe approp ne eT location —— Ec u alloca Ptanand | Equity accounts are properly cassiegese Disclosure and disclosed in the financial gat including notes, in accordance with the appin financial reporting framework, pliable Pome ‘Audit of Shareholder’s Equity ‘fer the auditor have obtained an understanding of the ‘Control over the financing cycle, they will often perform only Controls because of the limited number of transactions typically inte more efficient to assess control risk at a high level and peire is usual detailed substantive tests of transactions. The auditors’ primary substantive procedures for equity transactions wt typically include the following: i ule; 1. Obtain and verify equity reconciliation schedule; 2) Obtain and review board of director's (BOD) minutes of mit ies Shareholders meeting, committee meetings and als incorporation; i based pay 3, Review the appropriateness of accounting for share-bs transaction og 4, Analyze retained earnings and review appropriaten and 5, Review presentation and disclosure of equity iter api ot i ebook merely iustrate OF ‘Audit procedures presented in this textbo - ‘ procedures (ie, primary substantive procedures) _ : and manufacturing entities. It is also ae for partners Tj) corporation; however, some discussions are Fy soa proprietorship businesses, In actual practice, audit Fr? to each client's risk and internal control. The armen audit programs may substantially vary from enga9 involved in equity transactions so tn assess control risk atthe mes shareholder's equity and test transactions may take many forms ations, share splits, share-based transaction, fransactions. IM examining the appropria sivion of equity transactions, the auditor o ving procedures: . ‘iain an equity reconciliation schedule (¢h f 1 ie rpraseatod in the statement of changessn eee 2. Agre to general ledger accounts; 4 Test movements from prior year end to current year end to verify proper accounting for changes in equity; 4, Determine that changes in equity have been authorized by the Board ofDirectors and appropriate officers; and 5. Determine completeness and compliance with applicable laws and regulations including taxation issues. im evel. for transactions. Equity 5 including dividend treasury shares and wteness “and proper rdinarily performs the Treasury shares ‘ortreasury transactions during the year, the auditor should: it is under the name of the corporation; He whether the reacquisition or reissuance was authorized by ment on restriction of retained earnings 4, Mauiting treasury shares; and ea Tuine whether the price paid or received was in accordance with vr eh Pecified by the BOD. For non-cash consideration, determine 'er it was properly accounted for under applicable PFRSs or not. prea throy cont ther comprehensive income (FVOCI) - this can be verified in ized gain or loss on available for sale (AFS) oF financial asset chang‘tion with the audit ofthe related investment by checking the 2 eta it value ofthe investment; vied in “Ohne ottion of cash flow hedge - this can be ver ‘ction with the audit of related derivative instrument; g 6 x < 9 S q Review Minutes of Meetings and Articles of Incorporation Primary ers’ Equ y ive Test of Shareholders’ Equity 5 28 - Substantive faa = ~ nition or change in revaluation surplus ~ this ¢-~ go the gener i ACCOUNtS to the amougr oy Retmtion with audit of related PPE accounts, Note wt ver feued a5 reported by the independent rps nd ou : conan of revaluation SUBIUS SHOU be trae cM : un, : jon request, it should be written ung fen un ss account; FRinalation gain oF loss on foreign Operation ~ the aug verifies this by inquiring to management the date of "1 Secting the balance reported in the financial statement 2 appropriate rate (e8, closing rate, historical rate, tc) *aining performing independent translation and comparing ¢° e balance reported; and wi ‘Actuarial gain or loss employee benefits ~ this can be Conjunction with the audit of the related plan asset ang yet! obligation. Note that this area is considered special in nana auditor may need the assistance of an expert. and wcrtead al i the auditors to prevent manipulation by the Iso be sent ation request ordinarily include th co fl ‘he total numberof each class of shares issued and eatin reporting date; Standing at th 1, bets of any changes in this amount during the year 3 The number of shares outstanding at the record date if d been declared; i {The amount of any subscriptions receivabl subscribed but not issued; le in respect of shares 5, Whether any shares are being reserved for future is le securities); Ne Issuance (eg, for 6 The amount of any unclaimed dividends; and e idends have ‘Audit | The auditor should obtain and review the articles |_-objectives:_| incorporation and by-laws of a corporation in very aaerenee the proper authorizations of equity transacting a ist of principal shareholders for each class of share, Completeness | most equity transactions require Board approval ie J sn the Entity Maintains the Shareholder Records | Presentation | auditor should review the minutes of Board mesing Lantdscesire I areholders meeting, committee meetings for apron nd intent. The auditor needs also to review shareholder and connie meetings as w affecting the financial statements “ items, the auditor should consider whether the company mainats shareholder records or the entity employs independent r transfer agent since this will affect the audit procedures to the entity acts as its own transfer agent and registrar, the ‘ecauont alternative procedures to obtain evidence that is not avallable nfirmation with outside parties. The audit lowing audit procedures: Se count for the share certificate numbers, both f ed share certificates; pe unsed and the —e of share transactions during the year to minutes of eetiny i Properly authoreeay®> {© determine thatthe transactions have been ‘as changes in the articles of incorporation for isus cluding the notes. When verifying ist registrar and sax be performed Independent Registrar and Stock Transfer Agent Reconci For some corporations, they employ the services of an eed raphe ledger from the supporting documentations; and registrar and stock transfer agent. A transfer agent is responsibly fener.) ieige! 'areholders ledger and share certificate book with the and can he record of share transfers. The registrar maintains the shave Os yy showing the names and addresses of registered sharehade! hy Aue iateNess of Accounting for Share. Often the duties of both roles are assigned to the same party: When these duties are performed by independe! transfer agent, the auditor ordinarily performs procedures: mf transactions dur 1 az snd for mainta the entity's share or bond certifiates and Fr gst Mi ed Compensation ves | any corporations grant share options or other similar ‘struments to officers and employees through incentive- “i 'yPe compensation plans. When understanding the client, ‘Berens S environment including its internal control, the auditor ‘jy, MUSE obtain an overall understanding of how eS, boy MANABement uses share-based payments to compensate Mogten to mmawttently and historically, and the process that is . 'anage and administer awards-including the approval nt reg the Confirm the balance at year end and the independent registrar and agent to the corp ‘Trace replies from the confirmation request and grapter 28 be made at the date of egaulessof the ass share based comp' audit proce utes of meetings of those charged with on committee to determine if the gram ‘options or other share-based pay, Pends on the t \ype of end, end, scrip dividends, etc.) ee wel aree declared on redeemable as finance cost, not asa ded 80Vemang dates dan eM (par stock option grants to key executives) i iy Preference share should be uction of retained earninas” earnings Significant th npied withthe requirement of appleable ype accountng records correspond to the actual dat iy apn 4 cep withholding tax ~ final or creditable) ae accomitiee met and approved the respective grants Prop (eg has legal counsel, stove wire management, Suc oo and human resource executives, regarding the coma nar aecuray of stock option records, including the geet . fates; and Review the amounts provided as compensation expense o ured at fair value and the amount is reasonable jew Financial Statement Presentation and emenolders’ Equity Items = The auditor should check at a minimum whether disclosure includes the following information: tte of each issue, par or stated value, dividend rate, dividend on preference shares, conversion and call provisions suber of shares authorized, issued and in treasury shares, dividend iy aars of cumulative preference shares and unissued shares reserved ee share options or for conversions, losure of ined Earnings and Review Appropriateness of Dividend earnings and quasi-reorganizations, but they may 2k) include adjustments to opening retained earnings asnp from changes in accounting policy and prior period err hen reviewing the appropriateness of financial statement presentation of “artolders’ equity items, the auditor needs to check that cost of treasury ‘ars and subscription receivable should be shown as deduction in the Presentation and disclosure corrections. Shreholders' equity section. i wy iu I stemable Preference Shar r res performed when auditing retained earnings m = pray eeiataaet ‘heran entity has issued new instruments during the year, particularly if ast Checl the opening retained earnings if they include p soruments have complex features, the auditor should consider the © feoesng lomenel exiina. Por ventinning woditch See ees dten@t the instruments and examine management’ assumptions in Fetained earnings may be verified from the rr rdncal orton! ga'iNE the classification. A common example of Incomes wi 2. Chock for proper authorization by appropriate of cluding! | et eure is redeemable preference shares Ths inswumere shee . : ngs, includ ed as directors for any movements in retained em re oss and at) FH a financic lity, rather than as part of equity based on the incom declaration other than closing of net : = period adjusting entries to retained arg gta pe 3. Check the propriety of entries relate earnings; and ede 4. Check for proper disclosure of restricted ret ~ When auditing dividends, the auditor should ens has been: instrument rather than its legal form. In this case, the ould ensure that this item should not be part of shareholder arnings APPENDIX ‘Sole Proprietorships and Other Types of an ether the dl “*Partnerships, tag ree h ‘ . fora 2udits conducted are on corporations smaller business may the ret for ay 1. Properly declared in accordance vemos en 2 ban ant audit for some busines purpose. for sample in Corporation Code ofthe Philippines, fo" S72! ts, °K loan in which the bank requires audited finan earnings should not be declared as dIvc™ Properly authorized in accordance with Properly accounted for, in accordan' applicable PERSs, for example: with the ee tive Test of Shareholders Equity =u ce the audit of Partners’ ACCOUNE the Procedures fo ership, the auditor should obtain bagic When audit Be Civil Code and of the partners a wisions P agre vet an the Articles of Partnership. Informatign oe ted i useful includes: eet ering profits (or loss, any); drawings; capital must be maintained; E loans to partners; for m: The conditions of withdrawal from the partnership: ang Tre conditions for making changes in the Partnership agreemeng agre t exist, the auditor may consi sritten agreement does not oe fa writer on letter from the partners to confirm there Accounts to bat rePreetion that the partnership has run its affairs in accordance witht is ‘atjrstandingamong the partners ‘the Audit of Sole Proprietorships Procedaret fog the Ainanclal statements of a proprietorship, the aut When ly will not find formal documents establishing the bene ey es se | assigned to the business. Under such circumstance in \ld ensure that: a nang inthe capital accounts are approved bythe proprietor ‘ 2. Personal transactions of the proprietor should not be incu et a proprietorship in accordance with accounting. es assumption, and = The nature of the transactions is appropri financial statements. Procedures for the Audit of Other Types ea : Otner types of entity, for example, trusts, muta sce ta incorporated under specific statute, will have Gaui) tT ye unique to that type of entity. When auditing et aoe es should obtain an understanding of the nature of 6 Re ie determine that the equity transactions have been mae Oy the relevant legislation, document of incorpo! reporting framework. of the pro rely disclosed in te 3 societies, or eit ‘alt are cai eh | ity (5h Sample Audit Program - Shareholders’ eq! ca ‘Audit procedure objective/ Possible misstatement i ye “iahation = Sub ipstantive Test of ders’ Equity ‘Verily share transactions Board of Directors’ meetings shareholders’ meetings, or Trace the transfer of sh; : ‘ares to the shareholder register, Reconcile the total number of shares outstanding to the general ledger, For disposals of shares, ensure that the relevant share certificates are cancelled Account for & inspect any unissued share certificates in the share certificate book. | Ensure that the value of the shares issued | is correctly taken up in the financial statements. ‘Trace the proceeds from the issue of new shares to supporting documents (eg. cash receipt documents). — TC t© minutes of] — Share cert, No. 14344 should be cancelled, No issue of new shares, Tedosure | Ensure proper disclosure in the financial statements, as follows: (a) No. of shares authorized, (b) No. of shares issued & fully paid. (©) Par value per share. (4) No. of shares outstanding at the beginning & the end of the period. No exceptions noted. Verify the amount disbursed with the amount authorized by the Board of Directors. Recompute the dividend by multiplying the number of shares outstanding on the record date by the amount/rate of dividend approved by the Board of Directors, This amount should agree to the dividend amount in the financial No exceptions noted. Statements, ‘summary of hee Completeness ertion Category | ¥ Obtain and review board ‘Test of Shareholders’ Equity fied per assertion — __ Primary audit procedigc Obtain and verify equine schedule. SHY rec: Of direct areholden. and minutes of meetings, sh committee meetings incorporation, Review appropriateness. of share-based compensation, Analyze retained earnings ang ropriateness of dividends, "ier Obtain and verify equity recog schedule. saul aig Obtain and review board of directors minutes of meetings, shareholders me, committee meetings and ankles incorporation. Meeting articles Accounting Valuation and Allocation eee] Rightsand Obligations 7 Obtain and verify equity recon schedule. q Review appropriateness of accounting f share-based compensation. / v Analyze retained | earings appropriateness of dividends. eerie appropriateness of acon share-based compensation __ v andres Presentation and Disclosure 7 Obtain and review board of direct Tr minutes of meetings, shareholles 2) committee meetings and ration. = incre retained earings appropriateness of dividends, ¥ Review financial statem v 5! egul disclosure of shareholders SSTIONS - THEORETICAL ee medium sized manufacturing concer, which one of ne of the the least amount of audit . Revenue, 4d. Liabilities, ch of the fo 2 2 Witjof shareholder's equity? Completeness & presentation and disclosure least likely considered by the auditor in ©. Existence . Rights and obligations + ecuse of the limited number of transactions involved in shareholder's equity tems, the auditor normally assess control risk atthe maximum level forms led test of balances, led analytical procedures . Detailed test of transactions d. Detailed test of controls, 4 Aregistrar/transfer agent system relating to capital stock is most likely used by: a Asmall, nonpublic company. 1b. Alarge, publicly traded company. © Allcompanies. 4 Noteven one company. 5 An auditor obtains evidence of stockholders’ equity transactions for a publicly traded company by reviewing the entity’ & Minutes of board of directors meetings. 5. Registrar's record of interbank transfers. © Canceled stock certificates, 4 Treasury stock certificate book. ‘ oe ‘in capital stock accounts should normally be approved by: ' board of directors. ¢. The audit committee 1, estockholders. 4. The president. = of the following is the most important consideration of an auditor faneag ining the stockholders’ equity section ofa client’ statement of ial position? a Gl2rses in the capital stock account are verified by an independent & Soge ransfer agent, : ank dividends and/or stock splits during the year under audit were © stage wed by the stockholders. ‘i death dividends are capitalized at par or stated value on the dividens 4 Ene ctation date. TS in the capital stock account canbe traced resolution inthe eS of the board of directors’ meeting. u g x ¢ Q S Q 10 uw 12, 13, chapter 28 the general ledgey option plans, -e with sto “Analysis of Ca pect ion of shares issued with the independent registrar ing for the proceeds of major stock issues. ion of a stock certificate book with the gene ledger, Which ofthe fllowing is correct in confirming shareholder's eq toindependent registrar and stock transfer agent? tes "The confirmation request should be written under the x letterhead and mailed by the Board of Directors. Replies to confirmation request should be sent to the Boa rectors. Tho confirmation request should be written under the cad letterhead and mailed by the auditor. 4. The control of the dispatch and receipt of confirmation request st be under the control of the appropriate client personnel ‘When the client of a CPA firm does not maintain its own shareholiy che auditor should obtain written confirmation from the tas records, agent and registrar concerning, oo a, Guarantees of preferred stock liquidation valu b. The number of shares subject to repurchase agreements (treasuy) Any restrictions on dividend payments 4. The type and number of shares issued and outstanding ic transfor age independent stocl Company A does not employ an independ ie records ins its stod rather issues its own stock and maintalns itS S10 taper outstanding shares are transferred from on certificate ofthe selling shareholder should be: a Canceled (generally by perforation) and att book b. Destroyed to prevent fraudulent reissuance- Ider. rar of invest od to the otf ities. Sent ment secu! the state's regi 4g earis An audit program for the exal should include a step that requires verification ¢ a. Market value used to charge retained earm!s one stock split. b. Approval of the adjustment to the begin?! write-down ofan account receivable. ing balance it was not approved by the BOD? 4°85 ROt concer the issuance of convertible debt securities, % Declaration of 20% share dividends. Oe etch {Changes in retained earnings due to closing ofnet income. audit of an entity's stockholders’ puring an audit of olders’ equity a , om loans, agreements, or state law, This audit procedure ney \ded to verily management's assertion of eae when auditing the retained earnings account? oo a, Changing from one method of depreciation to another. Correcting an error in depreciation ina prior year, si ‘eau approach or aquired treasury stock wl normaly ince a Confirmation with shareholdere sea da b Inspection of certieates & Inspection oeash receipts entries 4 Recomputation ofa gaes ond lanes ting ly is Valuation or allocation. lowance for doubtful An auditor should 3 should trace corporate ees an od pao porate stock issuances and treasury stock jf Numbered stock certificates. Transfer: agent's records, When au r ig treasui litor includes

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