Transactions Affecting Equity Balances The equity accounts of the corporate form of business organization are accounted for and presented in the financial statements according to source: This type of presentation ensures that the corporation is in compliance with fegulations prescribed by the corporation law and regulatory bodies and that it Manages appropriately the funds entrusted by the shareholders, applying the Principles of corporate governance . ‘ The most common transactions affecting the shareholders’ equity are Share capital transactions (new stock issuances, repurchase, and reissue), declaration and distribution of dividends, grants to and exercise by the holders of share options and warrants, profit or loss, gains and losses recognized in other Comprehensive income and prior period adjustments. Changes in the shareholders’ equity accounts must be presented in a Separate financial statement, the statement of changes in equity, which shows the beginning balances, the changes during the period and ending balances,Internal Control! . Strong internal control over shareholders’ equity accounts focuses on the following: ‘the proper authorization of transactions by the board of directors ang corporate officers; ‘¢the segregation of duties in handling shareholders’ equity transactions; and ‘the maintenance of adequate records. __ There are only a few transactions that affect share capital, but because of legality, these transactions must be extensively documented. Issuances and retirement of equity shares, and declarations and distributions of dividends should be formally authorized by the board of directors, and in some instances by the shareholders. The entity shall maintain ari independent registrar and stock transfer agent, In smaller companies that do not engage the services of an independent registrar land stock transfer agent, control is achieved by segregating the duties of authorization of transactions, custody of stock certificates, and record keeping of share capital transactions. For proper internal control, stock certificates should be sequentially numbered. Retired shares must be promptly cancelled and unissued certificates should be physically safeguarded. Detailed capital records such as stockholders’ ledger, transfer journal, certificate control records, and general_ ledger contro! accounts must be maintained for various share capital transactions. Treasury shares must be physically safeguarded and adequately controlled. The entity’s accountant should periodically analyze the shareholders’ equity ‘accounts and ensure that they are updated and reconciled to the general ledger. Audit Objectives ‘The auditor’s principal objectives in the examination of shareholders’ equity accounts are ‘to consider internal control over shareholders’ equity accounts; 4 to determine the existence of recorded shareholders’ equity; * ‘to establish the completeness of shareholders’ equity transactions; ‘¢to determine that the valuation of shareholders” equity is appropriate and accurate; and‘eto determine that the * eeiste Presentation and disclosure of shareholders’ equity is juditing Procedures The auditor should obtain an ung ayer ety warsocone ang ye, andesandig of internal cnt! precedes : mine articles of incor rantes of mectings ofthe board of decors. These ‘ocunents bec pa de manent audit file and must provide information on the number of shares Suthorized and issued, the par value of th i i eieinael i nies oe ea share capital, the dividend rates, policies If the transactions affecting share capital are hand col ats te oes tage the other hand, when share capital transactions are handled internally, the auditor would be concerned with control procedures over transaction authorization, execution and recording because inadequate segregation of duties could lead to fraud. The auditors usually use internal control questionnaire and narratives to identify deficiencies and to document procedures for transaction authorization, execution and recording. ‘An auditor tests existence of share capital and occurrence of transactions by verifying shareholders’ equity balances. The auditor examines the accounting records for equity transactions, recomputes dividends, accounts for unissued or retired shares and reconciles the stock certificate book and stockholders’ ledger with the general ledger control account. . If detailed records and stock certificates are maintained externally, the auditor confirms shares outstanding with stock certificate registrars and transfer agents. To establish completeness and valuation, the auditor performs analytical review procedures and reconciles beginning balances of equity accounts to ending balances, The auditor has to review supporting documentation and authorizations for stock issuances, stock dividends and stock splits. The proceeds from issuance of shares as recorded in the cash receipts journal must be compared with the price per share on the date of issue and with the entries in the general ledger. The auditor has to determine whether the bonus issue (stock dividends) are recorded correctly in accordance with appropriate accounting principles. For treasury share transactions, The auditor .has to examine supporting. documentation and authorization; compare authorized number of shares and price per share with entries in the general ledger; compare disbursements for purchases with cash records; and determine that the basis of accounting is appropriate. rnings involves the analysis of transactions affecting A retained ea . waa work Onn mds, treasury shares, recaptalzations, and even Fetained earings, such as divider appropriations.‘The auditor has to review the transactions affecting accumulated other ‘comprehensive income, These include transactions affecting revaluation of property, plant and equipment and intangible assets (and the disposal of revalued property, plant and equipment and intangible assets), measurement ang sale of available for sale securities (or financial assets at fair value through other comprehensive income), remeasurements of defined benefit asset or liablity Felating to employees’ defined benefit retirement plans and translation adjustments of the assets and liabilties of foreign operations. ‘The financial statements should contain a complete description of each issue of share capital, including such data as title of the issue; par value; number of shares authorized, issued, and in the treasury; call provisions; conversion provisions, shares reserved for stock options; and cumulative preference dividends in arrears, The auditor's documentation for shareholders’ equity accounts should include the articles of incorporation, working paper for summary of changes in equity balances, minutes for authorization of dividends and any issue and Purchase of share capital and confirmations with transfer agents or shareholders, Illustrative Working Paper You are making an audit of the shareholders’ equity accounts of Clarence Corporation for the year ended December 31, 2018. During the year ended December 31, 2018, the company was active in transactions affecting the shareholders’ equity. The following summarized these transactions: ‘Type of Transaction No. of Price/ Shares are Feb. 14 Issue of preference share 10,000 P25 May 31. Retirement of preference share (from shares 2,000 0 ‘outstanding as of January 1) July 31 Purchase of treasury share ~ ordinary (at cost). 5,000 80 Nov. 12 Sale of treasury shares 3,000 82 Nov. 15. Sale of treasury shares 1,000 7 Nov. 30. Deciaration of dividends, to preference at the annual rate; to ordinary, PS per share, Dec. 31. Increase In fa value of equity investments at fair value through other comprehensive income, P34,000 (acquired during the year), Dec. 31 Profit for the year, 500,000 Balances of the accounts in the stockholders’ equity section of the December 31, 2017 statement of financial position were:Preference Share Capital, 5 0,000 shares, P20 par P1,000,000 Ordinary Share Capital, P50 par, 100,000, 000, Share Premium —Preteenee” “00000stere, —5;00;00 Share Premium ~ Ordinary 1,200,000 Retained Earnings 850,000 Clarence Corporation ‘Analysis of Shareholders’ Equity For the Year Ended December 31, 2018 (ue) 9% | Ordinary ‘Cumulative Preference | Share, P50. Share Retained Other Share, P20 par | Premium | Eamings | Treasury Shares | Compreben pr sive Income No.of | Toul shares | Cost Tax. | P1,000,000 | 75,600,000] FI 600,000] “FESO aO i . Fee] 200,000 30,000 4 May | 40,000) Tapa} — a 00) 31 sa 5000 | PA00,000 i [ Row. 500 {G00 | 40,000) |2 Fier T.000) 0007] (605000) lis ‘Nov. *(599,400) x0 x P34,000 u a 500,000 5 i Dex | Fi,160,000] PS000,000] PI.G37,000] P740;00] —1000] P8000] —F3a,000 Computation of Dividends: To Preference Share: 9% x P1,160,000 = P104,400 To Ordinary Share: Issued Treasury Outstanding « __ Per share dividend Total Dividends 100,000 1,000) 99,000 El