Se basen 18 6 SunsTANrive rest OF SHAR ‘Chapter Outline: 1. Introduction 2. Audit objectives dure sole pro 6 3. Primary substantive P' rietorships and ypriet ip other, 4 Audit of partnerships for audit of shareheldery equi ™™ eh, per assertion ; 5. Sample audit prograt Sema Introduction se involves the activities of “ie com wing, i The financing ically involves the issuance It typical y and to obtain aera att a payment of interest and dividenge ay debt and e@ulty, equity May include preferred and common, equity or shareholdeP. from the issuance of common ang. ings from which dividends are paid, lem, the accounts in the finance ang tests is on the changes in the vest stock issues, purchase or reissuance an ety ‘od adjustments, dividend payments, and {easy accounts, Su shares, prior per declarations. Legal Considerations nts of a corporation, consideration When auditing eC the entity being audited (eg, corpora cand other applicable special laws), The auditor asp ” review the articles of incorporation, the charter, the bylaws, and : contracts and agreements. Since auditors may not have the expertise needed fully to understand the legal implications of the terms of such laws, regulations, or agreements, the auditor may request the entity legal counsel to assist in such matters or may consult with any legal counse employed by the auditor. the Philippi Audit Objectives When auditing the components of shareholder's equity, the principal objective for the substantive tests is to determine the followi Assertion Category | Account Balances. Existence ‘All the equity accounts or interest on the statement of financial position exist. ‘All equity interest that should have been [Completeness _ ‘Scanned with CamSeannerspstantive Test of su Shareholders’ equity PY have been recorded ; of financial re financial position at the ay Equity accounts are and disclosed in Pyotr a including notes, in financial reporti polder’s Equity sto have ner anaig Of the client's internal avi ancing cycle, often per Ao were the limited number of transactions oe tests of Me i" eco ficient tO a8SeSS control risk at a high ae It wy iY mor ntive tests of transactions, Perform f pst Ppa et Pint bond of eames ate wees MeeOME. cme ens ans mene stp appropriateness of accounting for share-based payment cee earnings and review appropriateness of dividends; 4 an presentation and disclosure of equity items, 5 res presented in this textbook merely gr 70 (ie, primary substantive procedures) for ye vuring entities. It is’ also prima ion; however, SOME discussions are made for partnership and sole wenn businesses. In actual practice, audit Programs must be tailored a “dent risk and internal control. The audit procedures comprising ’ 7 ragrams may” substantially vary from engagement to the next ai a mentioned in this textbook relate to Primary assertion addressed by ee procedures discussed. However, some other assertions may also be giesed illustrate typical audit audits of merchandising ily designed for audits of anu juinand Verify Equity Reconciliation Schedule ‘raayAvait | Normally, few transactions but in large amount a involved in equity transactions so the auditor general assess control risk at the maximum level f¢ shareholder’s equity and test all transactions. Eqi ‘Scanned with CamSeannerhold Chapter 28 - Substantive Test of Share! Equity distributions, share splits, hare-based transaction, sur, other tranenctions, inv examining tM. APropriatenggs ”, thy, authorization of equity transactions; the auditor ordingyy,, ANd yy fe ‘ “" Perfor, Dey following procedures | ™ 1, Obtain an equity reconciliation schedule (this. mj ht "th, those presented in th ement of changes in e 5 ern 's In equity), Ma 2. Agree to genel ral ledger accounts; , 6 ear end to cl 3. Test movements from prior v UITENE Year oy proper accountin g for changes in aul oy ranges in equity have been author y 4. Determine that changes in eq’) Hy ey, te of Directors and appropr'a 5, Determine completeness and compliance With applicable R regulations including taxation issues: My Treasury shares ; For Treseury transactions during the year, the auditor shoul Nd: 1. Inspect the securities on hand and examine if tis under th '. me of the corporation; ae i 2, Determine whether the reacquisition or reissuance was author; ized y the BOD; ; 4, Determine the legal requirement on restriction of retain acquiring treasury shares; and 4, Determine whether the price paid or received was in Accordance pate apeiied by the BOD. For non-cash consideration, de ial nether it was properly accounted for under applicable PFRss oy ed Cathings Other Comprehensive Income (OC!) For movements of OCI compone following: ’ 1. Unrealized gain or loss on available for sale (AFS) or financial asst through other comprehensive income (FVOCI) ~ this can be verified in conjunction with the audit ofthe related investment by checking he change in fair value of the investment; 2, Effective portion of cash flow hedge ~ this can be verified in conjunction with the audit of related derivative instrument; 3. Recognition or change in revaluation surplus - this can be verifi conjunction with audit of related PPE accounts. Note that pi realization of revaluation surplus should be traced to the earnings account; Translation gain or loss on foreign operation - the audit verifies this by inquiring to management the date of, affecting the balance reported in the financial statement appropriate rate (e.g, closing rate, historical rate, performing independent translation and com balance reported; and nts, the auditor normally Performs th 1098 ‘Scanned with CamSeanner0 substantive Test of Shareholders’ Rquity “ careneneery’ 6 om atl gain or loss employee benefits = this can be verified in conjunction with the audit of the related plan asset and the benefit joligation. Note that this area is considered special in nature and the juditor may need the assistance of an expert, minutes of Meetings and Articles of incorporation pl The nae should obtain and review the articles of incorporation and by-laws of a in verifying the proper authorizations of heay-onmaa transactions, Since most equity transactions require Board approval, the auditor should review the minutes of Board meetings, shareholders meeting, committee meetings for approval nd intent ‘The auditor needs also to review shareholder and committee ecings as well as changes In the articles of incorporation for issues mectiNg the financial statements including the notes, When verifying these ems, the auditor should consider whether the company maintains the cqureholder records or the entity employs independent registrar and stock transfer agent since this will affect the audit procedures to be performed. independent Registrar and Stock Transfer Agent for some corporations, they employ the services of an independent registrar and stock transfer agent. A transfer agent \s responsible for issuing and cancelling the entity's share or bond certificates and for maintaining the record of share transfers, The registrar maintains the shareholders’ register showing the names and addresses of registered shareholders at any time. often the duties of both roles are assigned to the same party, When these duties are performed by independent registrar and stock transfer agent, the auditor ordinarily performs the following audit procedures: 1. Confirm the balance at year end and transactions during the year to the independent registrar and agent; 2. Trace replies from the confirmation request to the corporate records; and 3. Agree the general ledger controlling accounts to the amount of stock issued as reported by the independent registrar and stock transfer agent. comntation Mg ose When sending confirmation request, it should be written under the client's letterhead and be mailed by the auditors. Replies should also be sent directly to the auditors to prevent manipulation by the client. The contents ofthe confirmation request ordinarily include the following information; 1. The total number of each class of shares issued and outstanding at the reporting date; 2. Details of any changes in this amount during the year; 1099 ‘Scanned with CamSeannercpt 28 - satan Ls StS NM J 3, The er of chares ourstanding a the Fecord date 4 been declared: When, Lin ubecrgtions recehesthe i aguas ag = if oe ‘The amount of 4 ibscritved brut not Ie ed, s. Whether any shares are being reserved fOr fanwrg “ share options, convertible securities); besten ben 6 share Punt of any unciatmed awidende, and : 7. Tre of principal sharehcKGers (oF e#Ct RA8 OF Aaa - So wren the Eneiey Matncains tne Sharcholder Records oo entity acts its own transfer agent and When the as wn trates ovidenes ee a ae ternative Pn outside parties, The auditor ordinary pgs the following audit procedures: ¢ L share certificate numbers, both for wnlasaeg 4, # 2 3. 4. employees, both currently and historically, and the process that © undertaken to manage and administer awards-including the process. Regardless of the assessment of the risk involving the process of grasteg share based compensation, the auditor ordinarily performs the following audit procedures: 1. Account for the cancelled share certificates; Check the details ‘of share transactions during the YOO 0 Peas the directors’ meetings to determine that the transactions fave tn properly: authorized; Reconcile the stock ledger from the supporting documentations, sa Reconcile the shareholders ledger and share certificate book wits tue general ledger. » management uses share-based payments to compensate appre ee Review minutes of meetings of those charged with governance o remuneration committee to determine if the grant dates desigaet for share options or other share-based payments significant stock option grants to key executives) in the accounting records correspond to the actual date the committee met and approved the respective grants; Inquire management, such as legal counsel, stock plan admins2, and human resource executives, regarding the completeness . 1100 ‘Scanned with CamSeanner= | ee Pr gubstantive Test of Shareholders’ Equit: att vy of stock option records, including the designated grant “ares: an aates the amounts provided as compensation expense if it is nevi at fair value and the amount is reasonable. tained Earnings and Review Appropriateness of Dividends Transactions in retained earnings normally consist of net income oF loss, dividends, appropriations in retained earnings and quasi-reorganizations, but they may also includes adjustments to opening retained earnings arising a) from changes in accountin, riod error regscosute_) corrections, body and prior perion sai procedures performed when auditing retained earnings may include following: . i , ; 1 Check the opening retained earnings if they include prior years jgjusting journal entries, For continuing auditor, opening balance of retained earnings may be verified from the prior year working paper: Check for proper authorization by appropriate official or the board of directors for any movements in retained earnings, including dividend declaration other than closing of net income or loss and any prior period adjusting entries to retained earnings; 3, Check the propriety of entries related to transactions in retained earnings; and 4, Check for proper disclosure of restricted retained earnings. When auditing dividends, the auditor should ensure whether the dividend has been’ 1. Properly declared in accordance with the requirements of the Corporation Code of the Philippines, for example, restricted retained earnings should not be declared as dividends; Properly authorized in accordance with the entity's procedures; and Properly accounted for, in accordance with the requirements of the applicable PFRSs, for example; a. Adebit to retained earnings account should be made at the date of declaration b. Amount debited to retained earnings depends on the type of dividends (eg. non-cash/property dividend, small and large share dividend, serip dividends, etc.) Dividend declared on redeemable preference share should be recorded as finance cost, not as a deduction of retained earnings, Complied with the requirements of applicable tax law and regulation (eg, withholding tax final or creditable) ation 1101 L aa, ‘Scanned with Camseanneree SE Review Financial Statement Presentation and Shareholders’ Equity Items Disclosure ‘The auditor should check at a disclosure includes the following eile whet, Presentation | each issue, par or stated value, dividend : tithe and Disclosure | Freference shares, conversion” and. calf WaeM number of shares authorized, issued and in treasury shares, Provisions, arrears of cumulative preference shares and unissued shares divideng share options or for conversions. FseF 3s ‘When reviewing the appropriateness of financial statement shareholders’ equity items, the auditor needs to check that cost of mean shares and subscription receivable should be shown as deduction in shareholders’ equity section. Redeemable Preference Share When an entity has issued new instruments during the year, articulary i such instruments have complex features, the auditor should consider the nature of the instruments and examine management's assumptions in determining the classification. A common example of instruments with complex feature is redeemable preference shares. This instrument should be reported as a financial liability, rather than as part of equity based on the substance of the instrument rather than its legal form. In this case, the auditor should ensure that this item should not be part of shareholders’ equity. APPENDIX Audit of Partnerships, Sole Proprietorships and Other Types of an Entity Although most audits conducted are on corporations, smaller business may arrange for an independent audit for some business purpose, for example, in obtaining a bank loan in which the bank requires audited financial statements. Procedures for the Audit of Partners’ Account When auditing a partnership, the auditor should obtain basic understanding of the provisions of the Civil Code and of the partnership agreement, which is documented in the Articles of Partnership. Information in that document which may be useful includes: 1. The basis for sharing profits (or loss, if any); The basis for making drawings; The levels at which capital must be maintained; The basis for making loans to partners; The conditions of withdrawal from the partnership; and The conditions for making changes in the partnership agreement. auewn 1102 —_ = ‘Scanned with CamSeanner8 substantive Test of Shareholders’ Equit tet OF qn agreement does not exist the auditor may consider obtaining (fy entation letter from the partners to confirm their accounts to obtain ‘aft®"on that the partnership has run its affairs in accordance with the tit ‘andi among the partners, rst wr quressor ene Audit of Sole Proprietorships pred giting the financial statements of a 4 4 " en aut proprietorship, the auditor we all wl ot Se Wee establishing the basis for changes apital usiness. UI i , oy Rdemie ee Inder such circumstances, the ito ; a changes in the capital accounts are approved by the proprietor 2, Personal transactions of the proprietor should not be included in that of the proprietorship in accordance with accounting entity assumption, and ‘The nature of the transactions is appropriately disclosed in the financial statements. procedures for the Audit of Other Types of Entity other types of entity, for example, trusts, mutual societies, or entities incorporated under specific statute, will have equity accounts that are unique to that type of entity. When auditing these entities, the auditor should obtain an understanding of the nature of the equity accounts and determine that the equity transactions have been made in accordance with the relevant legislation, document of incorporation, or applicable financial reporting framework. sample Audit Program - Shareholders’ equity (Share Capital & Dividends) [Audit ‘Audit procedure ‘Comments objective/ Possible | misstatement | i [Existence & Verify share transactions to minutes of | completeness Board of Directors’ meetings or shareholders’ meetings. | trace the transfer of shares to the | i Share cert. register. | shareholder regi aaioid | Reconcile the total number of shares | should be outstanding to the general ledger. cancelled. For disposals of shares, ensure that the | relevant share certificates are cancelled | | account for & inspect any unissued share |__ sg 1103 ‘Scanned with CamSeannerEnsure that t js correctly taken up in the financial statements: “es ss ‘Trace the proceeds from the issue of new | new a shares to supporting documents (eg, ne. cash receipt documents). Disclosure Ensure proper disclosure in the financial statements, as follows: (a) No. of shares authorized. oe (b) No.of shares issued & fully paid, ering (o) Parvalue per share. rie (a) No. of shares outstanding at the beginning & the end of the period. Existence and valuation Verify the amount disbursed with the amount authorized by the Board of Directors. Recompute the dividend by multiplying | no the number of shares outstanding on the | exceptions record date by the amount/rate of | noted, dividend approved by the Board of ; Directors. This amount should agree to the dividend amount in the financial statements. Summary of audit procedures classified per assertion Assertion Category _ Primary audit. Existence Y Obtain and verify equity reconciliation schedule. ¥ Obtain and review board of director's (BOD) minutes of meetings, shareholders meeting, committee meetings and articles of incorporation. Y Review appropriateness of accounting for share-based compensation. appropriateness of dividends. = a sw v Analyze retained earnings and review Completeness schedule. committee meetings _and___ articles 1104 ia ‘Scanned with CamSeanner Y Obtain and verify equity reconciliation Y Obtain and review board of director's (BOD) minutes of meetings, shareholders meen o SCHAPTER 28: REVIEW | tn the audit of a medium sized manufacturing concern, which one of the following areas would be expected to require the least amount of audit ume? “ a Owners’ equity. & Revenue. b Assets. dk Liabitities. 2 Which of the following. likely considered by the auditor in an audit of shareholder's: ¢. Bxistence Presentation and disclosure. Rights and obligations Because of the limited number of transactions involved in shareholder's equity items, the auditor normally assess control risk at the maximum leve! and performs: «Detailed testofibalances ¢ Detailed test of transactions b Detailed analytical procedures d. Detailed test of controls 4A registrar/transfer agent system relating to capital stock is most likely used by: 4 Asmall, nonpublic b. Alarge, publicly company: c All companies. Not even ane company: 1105 Mi ‘Scanned with CamSeanner