AUDITING PROBLEMS

Topic: AUDIT PROCEDURES ( AUDIT of STOCKHOLDERS’ EQUITY)

1. In AUDITING shareholders’ equity, the auditor is most concerned that:

A. Stock splits are capitalized at par or stated value on the dividend declaration date
B. Changes in the accounts are verified by a bank serving as a registrar and stock transfer agent
C. Dividends during the year under audit were approved by the shareholders
D. Capital stock transactions are properly authorized.

2. In the AUDIT of a medium-sized manufacturing company, which one of the following areas can
be expected to require the least amount of time?
A. Assets B. Liabilities C. Revenue D. Owner’s Equity

3. When a corporate client maintains its own stock records, the AUDITOR primarily will rely upon
A. Confirmation with the company secretary of shares outstanding at year end.
B. Review of the corporate minutes for data as to shares outstanding
C. Confirmation of the number of shares outstanding at year end with the appropriate
government agency
D. Inspection of the stock book at year end and accounting for all certificate numbers.

4. When a client company does not maintain its own stock records, the AUDITOR should obtain
written confirmation from the transfer agent and registrar concerning
A. Restrictions on the payment of dividends
B. Guarantees of preferred stock liquidation value.
C. The number of shares subject to agreement to repurchase.
D. The number pf shares issued and outstanding.

5. With respect to treasury shares, the AUDITOR should not object to which of the following?
A. Restrictions on retained earnings have not been met.
B. Dividends have been paid on treasury shares.
C. The treasury share certificates have been destroyed.
D. Treasury shares are recorded at cost rather than at par value.

6. When a client company declared and paid a stock dividend, the external auditor should
determine that
A. Appropriate amounts were transferred from retained earnings to share capital and share
premium
B. Shareholders received their additional shares by confirming year-end holdings with them
C. The stock dividend was properly recorded by means of memorandum entry only
D. The officers authorized the issuance of the stock dividend,
7. When auditing the client company’s shareholders’ equity accounts, the auditor determines
whether there are restrictions on retained earnings resulting from loans, agreements, or law.
The audit procedure most likely is intended to verify management’s assertion of
A. Presentation and Disclosure C. Completeness
B. Existence D. Valuation

8. When at the end of the year, the client auditee has a significant material amount of treasury
shares, the independent external auditor should
A. Verify and count the certificates only if the company classifies treasury stock with other assets
B. Not count the certificates if treasury stock is a deduction from stockholders’ equity
C. Count the certificates only if the company had treasury stock transactions during the year
D. Count the certificates at the same time other securities are counted.

9. In conducting tests pertaining the granting of stock options, the external auditor should
A. Verify the existence of stock option holders in the entity’s payroll records or stock ledgers
B. Trace the authorization for the transaction to a vote of the board of directors
C. Confirm the transaction with the Securities and Exchange Commission
D. Determine that sufficient treasury stock is available to cover any new shock issued.

10. Where no independent stock transfer agents are employed and when the corporation auditee
issues its own stocks and maintains stock records, the cancelled stock certificates should
A. Be defaced and sent to the Secretary of the Department of Trade and Industry.
B. Be defaced to prevent reissuance and attached to their corresponding stubs.
C. Not be defaced but segregated from other stock certificates and kept in a cancelled certificates
file
D. Be perforated and destroyed to deter fraudulent reissuance.
AUDITING PROBLEMS (Part 2)

PROBLEM NO. 1 - EMERALD CORPORATION

The EMERALD CORPORATION engaged your services to conduct an audit on its 2019 financial
statements. Your client auditee is a public corporation and its shares are traded at the Philippine Stock
Exchange. In addition, you were told by the COMPTROLLER that there were many equity transactions
that took place during the mentioned year. In applying the necessary audit procedures, you discovered
the following data:

A. The shareholders’ equity accounts at December 31, 2018 were as follows:

*Preference Share Capital, P100 par value, 6% cumulative;
9,000 shares authorized; 5,400 shares issued and outstanding P 540,000
*Ordinary Share Capital, P1.00 par value, 540,000 shares
Authorized; 360,000 shares issued and outstanding 360,000
*Share Premium 720,000
*Retained Earnings 294,000
Total Shareholders’ Equity 1,914,000

B. In your AUDIT WORKING PAPERS, you summarized the following transactions during 2019
affecting the shareholders’ equity:

 January 5, 2019 - Issued 13,500 ordinary share capital in exchange for land. On the date
issued, the shares had a market price of P16.50 per share The land had a carrying value of
P122,000 and an assessed value for property taxes of P150,000.

 January 30, 2019 - Sold 720, P1,000 12% bonds due January 30, 2029, at 98 with one
detachable share warrant attached to each bond. Interest is payable annually on January
30. The fair value of the bonds without the share warrants is 95. The detachable warrants
have a fair value of P50 each and shall expire on January 30, 2019. Each warrant entitles the
holder to purchase 10 ordinary shares at P10 per share.

 February 20, 2019 - Of its own issued ordinary shares, EMERALD purchased 4,500 and held
as treasury shares for P24 per share.

 February 28, 2019 - Subscriptions for 12,600 ordinary shares were received at P26 per
share, payable 50% down and the balance by March 15.

 March 15, 2019 - The balance due on 10,800 ordinary shares was received and those shares
were issued. The subscriber who defaulted on the 1,800 remaining shares forfeited the
down payment in accordance with the subscription agreement.

 aAugust 31, 2019 - Reissued 1,800 treasury shares for :P20 per share.

 September 20, 2019 - There were 567 warrants detached from the bonds and exercised.
  November 30, 2019 - Declared a cash dividend of P0.50 per share to all ordinary
shareholders of record December 15, 2019. The dividend was paid on December 31, 2019.
The dividend was paid on January 14, 2020.

 January 9, 2020 – Before closing the accounting records for 2019, EMERALD became aware
that no depreciation had been recorded for 2018 for a machine purchased on July 01, 2018.
The machine was properly capitalized at P288,000 and had an estimated useful life of 8
years when purchased. The appropriate correcting entry was recorded on the same date.

 The adjusted net income for 2018 was P252,000.

Based on the above data and the result of your audit, answer the following: (disregard income tax
implications)

1. How much is the SHARE PREMIUM as of December 31, 2019:

A. P1,219,530 B. P1,271,880 C. P1,295,280 D. P1,308,960

2. The adjusted ORDINARY SHARE CAPITAL as of December 31, 2019

A. P 384,300 B. P387,270 C. P 389,970 D P391,770

3. The UNAPPROPRIATED RETAINED EARNINGS on December 31, 2019

A. P186,765 B. P229,965 C. P237,165 D P 294,765

4. How much is the TOTAL SHAREHOLDERS’ EQUITY on December 31, 2019

A. P2,390,415 B. P2,450,625 C. P2,455,215 D. P2,457,015