AP-12:

Company

Audit Program for Equity

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 +)N NC) L "T T!,!NT ""!-T)#N" !&# !*istence or occurrence. allocation. C Completeness. and disclosure. -&# -ights and obligations. .& P&D .aluation or Presentation

N& 'or(paper Performed )nde* by

/D)T #B0!CT).!" . !quity transactions are authori1ed and recorded correctly as to account2 amount2 and period2 and the equity section of the balance sheet is properly described and disclosed in accordance with accounting standards and legal requirements 3assertions !&#2 C2 -&#2 .& 2 and P&D4. )D!NT)+)C T)#N C#D!" The letters preceding each of the abo%e audit ob$ecti%es2 i.e.2 2 B2 etc.2 ser%e as identification codes. These codes are presented in the left column labeled 5 udit #b$ecti%es6 when a procedure accomplishes an ob$ecti%e. )f the alpha code appears in a brac(et2 e.g.2 7 82 7B82 etc.2 the audit procedure only secondarily accomplishes the ob$ecti%e. )f an asteris( precedes a procedure2 it is a 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 partnership agreement2 member agreement2 etc.2 and e*tract matters of audit interest. Practical Considerations; ,uch of this information may already be a%ailable in the prior year<s wor(papers. Before the auditor starts %ouching transactions2 it is important to be aware of all agreements or other documents that affect equity. 9 =. -ead the directors< or partners< minutes and note equity transactions authori1ed. >. #btain or prepare an analysis of transactions in equity accounts and perform the following procedures; a. Determine the number of shares of stoc( issued and canceled and compare quantities with the stoc( certificate boo(. b. Determine that the method used to cancel shares is adequate to pre%ent reissuance.

c. )dentify the number of shares held in treasury2 e*amine certificates2 and determine that the company<s name is on the certificates. Practical Considerations; These steps should pro%ide the auditor with support for the number of shares issued and outstanding as disclosed in the financial statements. These procedures should not be time?consuming. )f a significant %olume of transactions occurs2 sampling might be used. 3"ee Chapter @.4 )t would be efficient to prepare a permanent schedule for posting of the changes in all capital stoc( accounts each year. @. /sing the analysis of equity accounts2 perform the following procedures; a. !*amine supporting documents for significant transactions affecting paid?in capital2 contributed capital2 or treasury stoc(. Document the items tested. b. +rom a comparison with directors< minutes2 determine that such transactions ha%e been authori1ed. c. Determine that significant entries are accounted for in accordance with G P. d. )nclude in the current or permanent wor(paper files abstracts or copies of significant agreements or other documents e*amined to e%aluate appropriate accounting. Practical Considerations; The auditor should consider whether such transactions are in accordance with the company<s charter2 applicable state regulations2 partnership agreement2 or other rele%ant documents. Normally a small business has %ery few material equity transactions. Aowe%er2 if equity transactions are numerous2 %ouching all equity transactions is impractical. )n that case2 the

auditor should %ouch only indi%idually significant transactions or a sample of transactions. 3"ee Chapter @.4 " " No. BC2 udit Documentation2 requires documentation of substanti%e tests of details in%ol%ing inspection of documents to include identification of the items tested. The authors belie%e items tested can be identified by listing the itemsD by including a detail schedule in the wor(papers2 such as an analysis of equity accounts2 on which the items are identifiedD or by documenting in the wor(papers the source and selection criteria. +or e*ample; +or tests of significant items2 documentation may describe the auditor<s scope and the source of the items 3for e*ample2 all treasury stoc( purchases greater than EF2GGG from the =GH= stoc( certificate boo(4. +or hapha1ard or random samples2 documentation should include the identifying characteristics of the items 3for e*ample2 the specific stoc( certificate numbers2 chec( numbers2 etc.4. +or systematic samples2 documentation may indicate the source2 starting point2 and sampling inter%al 3for e*ample2 a selection of di%idend chec(s from the di%idend chec( register for the period :&:&H= to :=&>:&H=2 starting with chec( number =:FG and selecting e%ery :GGth chec( thereafter4. " " No. BC is effecti%e for audits of financial statements for periods beginning on or after ,ay :F2 =GG=2 with early application permitted. The step e*plained pre%iously regarding authori1ation of transactions in the directors< minutes pro%ides e%idence regarding completeness of such transactions actually reported in these accounts. ccounting for certain equity transactions can be complicated and small business auditors may not frequently encounter comple* equity transactions. 'hen auditing equity transactions2 therefore2 it may be necessary to consult other accounting and auditing professionals. )f consultation is necessary2 see "tep :B of the audit program for other general procedures at P?:b. )n addition2 P)T+ Practice lert =GGG?G:2 ccounting for Certain !quity

Transactions2 pro%ides accounting guidance for se%eral forms of equity transactions that may require scrutiny by the auditor. F. #btain an analysis of transactions affecting the retained earnings 3or equi%alent4 account for the period and perform the following procedures; a. Test the schedule for clerical accuracy and relate the beginning and ending balances to the trial balance. b. -econcile changes in retained earnings to net income for the 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 a significant quantity of di%idends paid 3normally there will be only a few payments made as di%idends in a small business4. Document the items tested. Practical Considerations; The auditor should be aware of unusual transactions posted to the retained earnings account that might indicate improper accounting or use of the ta* method of accounting. These transactions should be identified for potential ad$ustments2 if appropriate. "mall businesses typically ha%e few di%idend transactions. )f there are di%idends2 they can be tested easily without significant e*penditures of time. )t is also important in this step to determine the authori1ation of di%idend payments or other types of entries that might affect retained earnings accounts. )f the company is an " corporation2 more detailed retained earnings classifications may be presented. "ee Guide to Compilation and -e%iew !ngagements and Guide to Preparing +inancial "tatements. These companion boo(s can be ordered from Practitioners Publishing Company at 3IGG4 >=>?IJ=@. C. #btain an analysis of transactions affecting other

comprehensi%e income for the period2 relate the beginning and ending balances to the trial balance2 and re%iew the propriety of classifications. gree acti%ity to testing performed in other audit areas. Practical Consideration; +or e*ample2 changes in accumulated other comprehensi%e income related to unreali1ed gains and losses on a%ailable?for?sale securities should be tested in con$unction with the procedures performed to audit in%estments. J. #btain copies of all company agreements associated with rights or restrictions on any equity accounts2 including any buy?sell agreements or related options to buy company stoc(. Perform the following procedures; a. Determine the nature of the agreement or pro%ision and its effect on the company<s equity. b. Determine the appropriate accounting treatment for any transactions that might be the result of such agreements. c. )nclude in the current or permanent wor(paper files abstracts or copies of significant agreements e*amined to e%aluate appropriate accounting. "ummari1e the pro%isions of the agreements for disclosure. d. Determine the amount of equity balances that are restricted due to pro%isions in such agreements2 and summari1e such amounts for disclosure in the financial statements. Practical Considerations; )f practical2 a schedule for the permanent file should be prepared presenting a continuing analysis of pro%isions of such agreements and their effect on the corporation. "uch agreements also can be identified in other types of entities such as partnerships and proprietorships. )n unusual cases in which small businesses ha%e stoc( option plans2 warrants2 stoc( rights2 stoc( redemption2 and con%ersion

pri%ileges2 or other types of complicated equity agreements2 the auditor should consider the need for procedures 3such as2 inquiries of management or re%iew of plan documents4 to determine the appropriate accounting and disclosure requirements for these agreements. 9 I. Consider the need to apply one or more additional procedures. The decision to apply additional procedures should be based on a consideration of whether information obtained or misstatements detected by performing substanti%e tests or from other sources during the audit alter your $udgment about the need to obtain a further understanding of control acti%ities2 the assessed le%el of ris( of material misstatements 3whether caused by error or fraud42 and on an e%aluation of whether the basic procedures ha%e been sufficient to achie%e the audit ob$ecti%es. ttach audit program sheets to document additional procedures. Practical Considerations; Certain common additional procedures relating to the following 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<s Guide to +raud )n%estigations for more e*tensi%e fraud detection procedures if it is suspected that the financial statements are materially misstated due to fraud. 9 B. Consider whether procedures performed are adequate to respond to identified fraud ris( factors. )f fraud ris( factors or other conditions are identified that require an additional audit response2 consider those ris( factors or conditions and the auditor<s response in connection with the performance of "tep :: in P?:b. Practical Consideration; "pecific responses to identified fraud ris( factors are addressed in indi%idual audit programs. )n connection with e%aluation and

other completion procedures in P?:b2 the auditor considers the need to perform additional procedures based on the results of procedures performed in the indi%idual audit programs and the cumulati%e (nowledge gained from performing those procedures. 9 :G. Consider whether the results of audit procedures indicate reportable conditions in internal control and2 if so2 add to the memo of points for the communication of reportable conditions. 3"ee section :FG@ for e*amples of reportable conditions2 and see CH?:I for a wor(sheet that can be used to document the points as they are encountered during the audit.4 C#NCL/")#N 'e ha%e performed procedures sufficient to achie%e audit ob$ecti%es for equity2 and the results of these procedures are adequately documented in the accompanying wor(papers. 3)f you are unable to conclude on any ob$ecti%e2 prepare a memo documenting your reason.4

Additional Audit Procedures for Equity

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

"ignificant Number of "hareholders )f the company has more stoc(holders than normally found in a small business2 apply the following additional procedures to the stoc( certificate boo(; a. -econcile the number of shares outstanding with certificate stubs and certificates representing unissued2 retired2 or treasury shares.

b. c.

!*amine unissued shares. Chec( the numerical sequence of stoc( certificates.

d. #btain a representation from the corporate secretary on the shares issued and outstanding. Practical Consideration; These additional procedures are necessary only when the auditor is concerned about fraud in sales of shares.

)ndependent -egistrar or "toc( Transfer gent )n the rare case when the small business uses an independent registrar or stoc( transfer agent2 confirm the following with the registrar or transfer agent; a. b. c. The number of shares authori1ed. The number of shares issued and outstanding. /nbilled registrar or transfer agent fees to the date of audit.

"toc( #ption Plan )f the company has a stoc( option plan2 perform the following procedures; 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 compensation e*pense is computed in accordance with PB #pinion No. =F or "tatement of +inancial ccounting "tandards No. :=>2 as appropriate2 and is recogni1ed o%er the period the related ser%ices are performed.

Practical Considerations; "toc( option plans can be accounted for under PB #pinion No. =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 are required to disclose pro forma net income 3and earnings per share2 if presented4 as if the fair %alue based method of accounting prescribed by "+ " No. :=> had been followed. PB #pinion No. =F can only be used to account for stoc( options issued to employees. )f a plan is noncompensatory2 compensation e*pense is not recorded under either PB #pinion No. =F or "+ " No. :=>. )n practice2 most companies account for stoc( options issued to employees using PB #pinion No. =F. /nder PB #pinion No. =F2 companies typically do not record compensation e*pense related to fi*ed stoc( option and purchase plans because the fair %alue of the stoc( to be issued is seldom higher than the option or purchase price at the measurement date. +or nonpublic companies2 pro forma disclosures as if the fair %alue based method of accounting had been followed should be estimated using the minimum %alue method prescribed by "tatement of +inancial ccounting "tandards No. :=>. /sing the minimum %alue method2 compensation e*pense that would ha%e been recorded is determined using the current stoc( price2 e*ercise price2 ris(?free interest rate2 life of the option2 and e*pected future di%idends. The + "B issued )nterpretation No. @@2 ccounting for Certain Transactions )n%ol%ing "toc( CompensationKan interpretation of PB #pinion No. =F2 to pro%ide guidance with regard to the definition of employee and the scope of PB #pinion No. =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

the following procedures may be performed; a. b. Confirm shares held with all stoc(holders. 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$ecti%es udit Procedures for Consideration Instructions: dditional procedures will be necessary in an initial audit. These procedures are applied to opening balances depending whether you are relying on your re%iew of a predecessor<s wor( or placing no reliance on a predecessor<s audit. 3"ection :IG> discusses considerations when replacing a predecessor auditor2 including a discussion of what the term reliance means when used in this program.4 These procedures may be applied in con$unction with the basic procedures applied to the ending balance. The asteris(s preceding the procedures indicate that they are an intermediate step in achie%ing audit ob$ecti%es for the ending balance. 9 :. )f a predecessor<s audit of the prior period<s financial statements is to be relied on; a. "can the predecessor<s wor(papers for equity accounts from the inception of the business or for a reasonable period such as the last fi%e yearsD consider whether the predecessor<s procedures included e*amination of authori1ation and supporting documentation for all significant transactionsD compare closing amounts of the prior period with opening balances. Practical Consideration; "upporting documentation for changes in retained earnings

N& 'or(paper Performed )nde* by

would normally include income statements or ta* returns for the change due to income or loss. b. Consider whether the scanning of the predecessor<s wor(papers has identified any necessary disclosures2 such as preferred stoc( di%idends in arrears2 or the need for modification of reported equity amounts2 such as a misapplication of G P in the charges to retained earnings or owners< capital. Practical Consideration; change in state law may require restructuring of equity accounts e%en though no errors ha%e been made in prior periods< financial statements. 9 =. )f no reliance on a predecessor is planned or possible;

a. #btain or prepare an analysis of all equity accounts from the inception of the business2 or for a reasonable period such as the last fi%e years2 and perform the following procedures. 3:4 Test clerical accuracy.

3=4 +or all significant transactions2 compare to director<s minutes for the rele%ant period to determine authori1ation and inspect supporting documentation. Document the items tested. 3>4 .ouch changes in retained earnings or capital due to income or loss to income statements or ta* returns. 3@4 Compare the closing balances of the prior period to the opening balances of the current period. b. Consider whether the procedures applied ha%e identified any necessary disclosures2 such as preferred stoc( di%idends in arrears2 or the need for modification of reported equity amounts2 such as a misapplication of G P in the charges to retained earnings or owner<s capital. Practical Consideration; change in state law may require restructuring of equity accounts e%en though no errors ha%e been made in prior periods<

financial statements.