AUD 589

AUDITING 1

Audit of Shareholders’ Equity

and Long-term Liabilities

Prepared by:
Yusarina Mat Isa
UiTM Kampus Puncak Alam
 Learning Objectives
 Able to:
• Understand the control objectives for
shareholders’ equity and long-term liabilities
• Understand the audit procedures in auditing
shareholders’ equity and long-term liabilities

2
AUDITING SHARE CAPITAL ACCOUNT
• Share capital account for private companies are different from
public listed companies.
• PLCs - Include share capital (issued and fully paid ordinary
shares and preference shares), share premium, capital and
revaluation reserves and retained profits
• Transactions:
– Issuance of shares
– Repurchase of shares
– Revaluation of assets
– Payment of dividends
– Exchange differences

3
INTERNAL CONTROL OBJECTIVES FOR CAPITAL
ACCOUNT
– Verify that shares and dividend transactions comply with
the company’s constitution (validity)
– Verify that shares and dividend transactions have been
properly approved (authorisation)
– Verify that shares and dividend transactions have been
properly valued (valuation)
– Verify that shares and dividend transactions have been
properly summarised in the accounting records (posting
and summarisation)

4
Examples of related controls for share capital:

• Segregation of duties
– The individual responsible for issuing, transferring, and
canceling share certificates should not have any accounting
responsibilities
– The individual responsible for maintaining the detailed
shareholders’ record should be independent of the maintenance
of the general ledger control accounts
– The individual responsible for maintaining the detailed
shareholders’ record should not also process cash receipts or
disbursements
– Appropriate segregation of duties should be established among
the preparation, recording, signing and mailing of dividend
cheques

5
Examples of audit procedures for share capital:
• Verify the transactions recorded in the current year to the
minutes of BOD or shareholders’ meetings and documents of
approval from relevant regulatory bodies
• Verify the total number of shares outstanding at the end of
period
• Recompute share premium, bonus shares and trace the
entries to general ledger
• Confirm that cash or other consideration has been received or
receivables are included as ‘calls in arrears’ or called up share
capital, not paid.
• Check the balances on shareholders’ accounts in the register
of members and the total list with the amount of total issued
share capital in the ledger.

6
AUDITING RESERVES AND RETAINED
EARNINGS
• Objective
– Recorded transaction are properly classified as
retained earnings
– Recorded transactions are accurately recorded
– All transaction have been recorded
– Restrictions on the researves have been disclosed
in the footnote

7
Examples of audit procedures for reserves and
retained earnings:

• Check that movements on reserves do not contravene

the legislation and the company’s constitution.
• Confirm that the company has distinguished between
distributable and non-distributable reserves.
• Ensure appropriate disclosures of movements on
reserves are made in the company’s financial
statements.
• Trace the entry in retained profits to the net profits
figure on the income statement

8
AUDITING LONG-TERM LIABILITIES
1. Relatively few transactions affect the account balances, but each
transaction is often highly material in amount
e.g. bond

2. The exclusion of a single transaction could be material in itself

e.g. omission of single debt transaction

3. There is a legal relationship between the client entity and the issuer of
debt
e.g. agreement requirement

4. There is a direct relationship between the interest and debt account

e.g. audit of interest-bearing debt, audit also interest expenses and interest
payable

9
COMMON TYPES OF LONG-TERM LIABILITIES
– Loans
– Bonds
– Notes
– Mortgage
– Convertible loan stocks
– Financial futures
– Derivatives
– Repurchase
– Reverse purchase agreements
– Interest rates swaps
– Capitalised long term lease financing

10
Control objectives and related controls:
1. Validity and authorisation:
• Adequate documentation must verify authorisation (properly
signed)
• Should be approved by BOD
• If delegated to CFO, should be reviewed and approval in
minutes

2. Classification:
• Properly classify as current liability the portion of long-term
debt that is due in the next 12 months
• Borrowings from holding company, subsidiaries and other
related parties such as directors are to be classified separately
for disclosure purposes

11
Control objectives and related controls:
3. Completeness:
• Maintain adequate detailed records to ensure all borrowings
and repayments are recorded
• Maintain a proper subsidiary ledger
• The amount then reconciled to the general ledger control
account regularly

4. Valuation
• Bonds should be recorded in the accounting records at their
face value plus or minus any premium or discount
• Premium or discounts should be amortised using the effective
interest method to calculate interest charges

12
Examples of audit procedures for long-term
liabilities:
• Examine the loan agreement to verify the amount of the loan, the rate of
interest chargeable, the security provided and the repayment terms.
• Confirm the actual amount of the loan received by vouching the receipt
into the company’s accounting records and by the company bank. If
applicable, examine property purchase documentation to verify direct
payment of loan funds to third party seller of property.
• Check the accuracy and disclosure of interest charge payments and
accruals in the company’s financial statements.
• Obtain confirmation directly from the loan creditor/ lease creditor, of the
amounts outstanding, accrued interest and what security they hold
• Recompute accrued interest and interest charged to the income statement
• Verify the amount of the loan outstanding at the balance sheet date and
ensure that this is accurately stated and fully disclosed in the company’s
statement of financial position. The amount of the loan outstanding
should be disclosed as repayable within 12 months and repayable after 12
months from the balance sheet date.
13
End of Topic 5c