AUDIT OF SHAREHOLDERS-discussion

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AUDIT OF SHAREHOLDERS' EQUITY

In examining shareholders' equity accounts, the accounts aim to determine:


(a.) the propriety of the charges and credits to the accounts
(b.) the propriety of presentation of the accounts on the balance sheet, and
(c.) client's compliance with the relevant legal requirement.
Management Assertions, Audit Objectives and Audit Procedures
EXISTENCE OR OCCURRENCE
A. To determine the validity of recorded shareholders' equity balances and whether the transactions actually occurred
1. Obtain schedule of shareholders' equity accounts and reconcile to the general ledger balances.
2. Review authorizations and terms of share issue
3. Confirm shares outstanding with registrar on share and transfer agent
4. Inspect share certificate books
5. Inspect certificates of shares held in treasury
COMPLETENESS
B. To determine whether recorded shareholders' equity accounts reflect all data that should be recorded
6. Perform analytical review procedures
RIGHTS AND OBLIGATION
C. To determine whether the entity has the authority to execute the shareholders' equity transactions, e.g., whether share
capital was legally issued and shareholders have a legal claim on corporate assets at the balance sheet date.
7. Review articles of incorporation and by-laws
8. Make Inquiries of legal counsel
VALUATION AND ALLOCATION
D. To determine whether the shareholders' equity balances are shown in the proper statement amounts in accordance with
PAS/PFRS
9. Vouch share capital entries, dividend entries and entries to retained earnings
PRESENTATION AND DISCLOSURE
E. To determine that the shareholders' equity accounts are properly presented in the balance sheet
10. Review minutes of board directors' and shareholders' meetings for share options and dividend restrictions
11. Evaluate financial statement presentation and disclosure for shareholders' equity accounts
INTERNAL CONTROL MEASURES
A. Internal control measures regarding the issuance of share certificates and proper accounting for transfers and
registration of shares should be established. One of these measures is the appointment of a share or transfer agent or an
independent registrar.
B. Share certificates should be serially prenumbered by the printer and that the authority for signing and issuing the
certificates be designated by the board of directors
C. As individual certificates are issued, corresponding records of the certificates should be prepared containing the name
and address of the shareholders and the number of shares issued to each
D. Cancelled certificates should be mutilated and any necessary documentary stamps should be attached to the cancelled
certificates.
E. Entries for share issuances and transfers should be made by a person who does not have authority to sign and issue
certificates.

*Excludes Retained earnings, treasury shares are not deducted 


Retained Earnings
Stock dividend => 20% - charged to RE at par or stated value
Stock dividend < 20% - charged to RE at FV or par or stated value, whichever is higher.
Property dividend - charged to RE at fair value on the date of declaration, at year-end and the date of settlement.
The property to be distributed is measured at year end, at the lower between carrying amount or fair value less cost to
distribute.
On the date of settlement, the difference between the dividend payable and the carrying amount of the property is gain or
loss on distribution of property dividend.
Items affecting unappropriated retained earnings include:
1. Prior period errors
2. Net income or loss
3. Dividends declared or paid
4. Changes in accounting policy
5. Realization of revaluation surplus and appropriated retained earnings
Share options
Fair value of share options on the date of grant is recognized as total compensation
The total compensation is allocated over the vesting period. 
If the share options vest immediately, the total compensation is recognized immediately.
Intrinsic value of the share options is measured at every year-end until the date of settlement Share appreciation rights
-The liability for the compensation is equal to the excess of the market price of the share over a predetermined price.
Such liability is measured at every year-end until the date of settlement.
Book value per preference and ordinary share
Preference share equity equals preference shares outstanding plus liquidation premium and preference dividends in
arrears.
If cumulative, all dividends in arrears are paid.
If noncumulative, only current year dividend is paid
Ordinary share equity equals total shareholders' equity minus preference share equity
Basic earnings per share (BEPS)
Net income minus annual preference dividend divided by average ordinary shares outs.
If cumulative, the annual preference dividend is deducted from net income regardless of declaration
If noncumulative, the annual preference dividend is deducted only when declared
Diluted earnings per shares (DEPS)
Adjusted net income divided by ordinary shares outstanding plus potential ordinary shares
Potential ordinary shares:
Ordinary shares into which preference shares are convertible
Ordinary shares into which bonds are convertible
Ordinary shares covered by share options minus assumed treasury shares.
The number of assumed treasury shares is equal to the proceeds from the assumed exercise of share options divided by the
average market price of the share
The option price must be lower than the average market price, otherwise, the share options are "anti-dilutive" and
therefore ignored.
The adjusted net income is equal to the net income per book plus interest expense on bonds, net of tax the annual
preference dividend is no longer deducted from net income.
The share options do not affect net income

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