UNIVERSITY OF MINDANAO COLLEGE OF ACCOUNTING EDUCATION

AUDIT OF SHAREHOLDERS’ EQUITY

AUDIT PROGRAM e. Trace authorizations by reference to minutes of meetings of the board of

directors and shareholders
Audit Objectives:
5. Where the client is being serviced by an independent transfer agent or registrar
To determine: a. Confirm share capital issued and treasury shares
1. Proper authorization of transactions involving shareholders’ equity accounts b. Arrange for the inspection and count of treasury shares
2. Proper accounting treatment of transactions involving shareholders’ equity
3. Compliance with legal requirements related to corporate capitalization 6. Where the client does not maintain an independent transfer agent or registrar
4. Propriety of financial statement presentation and adequacy of disclosures a. Obtain from the corporate secretary a schedule of:
i. Shareholders
Audit Procedures: ii. Subscribers
iii. Subscriptions receivable
1. Obtain a copy of the latest articles of incorporation and determine, for each class of iv. Treasury shares
share capital, the: b. Foot and cross-foot the schedule
a. Authorized share capital c. Test-trace to stock and transfer book
b. Par or stated value; and d. Trace balances per schedule to general ledger balances
c. Preferences and limitations, if any e. Inspect and account for unissued, canceled, treasury share certificates
f. Determine if the treasury shares had been properly endorsed in favor of the
2. Obtain or prepare a schedule of the share capital, subscribed share capital, and corporation
treasury share accounts indicating the number of shares and amounts for the:
a. Beginning-of-year balances 7. Confirm subscriptions receivable and consider collectability
b. Additions and deductions for the current year
c. End of year balances 8. Review articles of incorporation, by-laws, and minutes of meetings of the board of
directors and shareholders relating to share capital and related accounts
3. Foot and cross-foot the schedule
9. Obtain or prepare schedules of other equity accounts, indicating:
4. Verify accuracy of the schedule a. Beginning-of-year balances
a. Trace beginning balances to last year’s working papers or in case of an initial b. Additions and deductions during the current year
audit, establish accuracy of beginning balances by: c. End-of-year balances
i. Test-tracing prior years’ recordings and supporting documents
ii. Tracing beginning balances to general ledger balances 10. Foot and cross-foot the schedules
b. Trace proceeds to cash receipts records for additional issues or subscriptions
to share capital and reissues of treasury shares 11. Verify the accuracy of the schedules
c. Trace payments for share capital retirements and acquisitions of treasury a. Trace beginning balances to last year’s working papers or, in case of an initial
shares to cash disbursements records and canceled checks audit, establish accuracy of beginning balances by:
d. Agree working paper ending balances with the general ledger balances i. Test-tracing to prior year’s recordings and supporting documents

Auditing Problems 1
UNIVERSITY OF MINDANAO COLLEGE OF ACCOUNTING EDUCATION

ii. Tracing beginning balances to general ledger balances 2. The shareholders’ equity of the OMAN COMPANY as of December 31, 2009, was as
b. For current year transactions: follows:
i. Ascertain authorization
ii. Determine propriety of accounting treatment Ordinary shares, P 10 par, authorized 300,000 shares;
c. Agree working paper ending balances with general ledger balances 250,000 shares issued and outstanding P 2,500,000

12. Reconcile dividends paid to rates authorized in directors’ minutes of meetings Share premium – issuance 3,500,000
Retained earnings 1,740,000
13. Ascertain compliance with the requirements of the Securities and Exchange
Commission (SEC) and other regulatory bodies and contractual obligations relating to On June 1, 2010, Oman reacquired 40,000 ordinary shares at P 40. The following
capitalization of retained earnings transactions occurred in 2010 with regard to these shares.

14. Determine propriety of financial statement presentation and adequacy of disclosures July 1 Sold 15,000 shares at P 48
August 1 Sold 19,000 shares at P 27
PRACTICE PROBLEMS September 1 Retired 1,000 shares

1. As the newly appointed auditor in 2010 for JORDAN COMPANY, you have analyzed The following entries were made by the company’s accountant to record the
the company’s “Share Premium” account. The following is a summary of the account preceding transactions.
since the inception of Jordan Company.
Debits Credits 2010
Cash dividends – preference shares P 160,000 June 1 Treasury shares 1,600,000
Cash dividends – ordinary shares 195,000 Cash 1,600,000
Excess of amount pair in over par value of ordinary shares P 375,000 July 1 Cash 720,000
Net income 500,000 Treasury shares 720,000
Gain on early extinguishment of debt 42,000 August 1 Cash 513,000
Treasury preference shares; issued and reacquired at par 90,000 Treasury shares 513,000
Loss on litigation 75,000 September 1 Ordinary shares 10,000
Correction of a prior period error 23,000 _______ Treasury shares 10,000
P 543,000 P 917,000
Credit balance of share premium account 374,000 _______ Oman’s net income for 2010 was P 135,000
P 917,000 P 917,000
Based on the preceding information, determine the correct balances of the following
What is Jordan’s correct net income for 2010? accounts:
What is the correct retained earnings balance (before appropriation for treasury  Treasury shares
shares) as at the end of the current year?  Ordinary shares
What is the correct share premium balance as at the end of the current year?  Share premium – issuance
 Share premium – treasury shares
 Retained earnings (before appropriation for treasury shares)

Auditing Problems 2
UNIVERSITY OF MINDANAO COLLEGE OF ACCOUNTING EDUCATION

3. You have been assigned to the audit of MALAYSIA CO., a manufacturing company. Malaysia’s net income for 2010 is P 950,000
You have been asked to summarize the transactions for the year ended December 31,
2010, affecting shareholders’ equity and other related accounts. The shareholders’ Based on the preceding information, determine the correct December 31, 2010,
equity section of Malaysia’s December 31, 2009, statement of financial position balance of each of the following:
follows:  Ordinary share capital
 Share premium – issuance
Ordinary share capital, P 2 par value, 1,000,000 shares authorized,  Share premium – treasury shares
180,000 shares issued, 177,580 shares outstanding P 360,000  Retained earnings (before appropriation for treasury shares)
Share premium – issuance 3,640,000  Treasury shares
Share premium – treasury shares 45,000  Total shareholders’ equity
Retained earnings 649,378
Cost of 2,420 treasury shares (145,200) 4. At the beginning of year 1, an entity grants 200 shares each to 500 employees. The
Total shareholders’ equity P 4,549,178 grant is conditional upon the employees remaining in the entity’s employ until the
performance condition described below is satisfied
You have extracted the following information from the accounting records and audit
working papers Performance Condition

2010 The shares will vest at the end of:

January 15 Malaysia reissued 1,300 treasury shares for P 40 per share. The 2,420 Year 1 – if the entity’s earnings increase by 15%
treasury shares on hand at December 31, 2009, were purchased in Year 2 – if the entity’s earnings increase by more than an average of 11% per year
one block in 2008 over the two-year period
Year 3 – if the entity’s earnings increase by more than an average of 8% per year over
February 1 Sold 180, P 1,000, 9% bonds due February 1, 2010, at 103 with one the three-year period
detachable share warrant attached to each bond. Interest is payable
annually on February 1. The fair market value of the bonds without The shares have a fair value of P 15 at the beginning of year 1, which equals the share
the share warrants is 95. The detachable warrants have a fair value price at grant date. The entity does not expect to pay dividends over the three-year
of P 50 each and expire on February 1, 2011. Each warrant entitles period.
the holder to purchase 10 ordinary shares at P 40 per share
The following events occurred:
March 6 2,800 ordinary shares were subscribed for at P 44 per share. 40% of
the subscription was collected Year 1
 30 employees have left during year 1 and the entity expects, on the basis of
March 20 The balance due on 2,400 shares was received and those shares were a weighted average probability, that a further 40 will leave during year 2
issued  The entity’s earnings have increased by 14% by the end of year 1 and the
entity expects that the earnings will continue to increase at a similar rate in
November 1 There were 110 share warrants detached from the bonds and year 2. Therefore, the entity expects that the shares will vest at the end of
exercised year 2

Auditing Problems 3
UNIVERSITY OF MINDANAO COLLEGE OF ACCOUNTING EDUCATION

Year 2 the year. The entity expects that a further 15 employees will leave during year 3, and
 35 employees have resigned by the end of year 2 and the entity expects that that the entity’s earnings will increase by at least 6 percent, thereby achieving the
a further 30 will leave during year 3 average 10 percent per year
 Earnings have increased by only 7% during year 2. Hence, the shares do not
vest at the end of year 2 as expected by the end of year 1. The entity expects By the end of year 3, 10 employees have left and the entity’s earnings had increased
that by the end of year 3, its earnings will increase by at least 5%, thereby by 8 percent, resulting in an average of 10.67 percent per year
achieving the average of 8% per year
Based on the foregoing, answer the following
Year 3  What amount of compensation expense should be recognized in year 1
 28 employees have resigned by the end of year 3  What amount of compensation expense should be recognized in year 2
 The entity’s earnings have increased by 6% during year 3. This results in an  What amount of compensation expense should be recognized in year 3
average increase of 9% per year over the three-year vesting period  What amount should the entity report as share options outstanding at the
end of year 2?
Based on the preceding information, determine the following: r  What amount should the entity report as share options outstanding at the
 Cumulative compensation expense at the end of year 1 end of year3?
 Cumulative compensation expense at the end of year 2
 Cumulative compensation expense at the end of year 3 6. At the beginning of year 1, an entity grants to a senior executive 3,000 share options,
 The year in which the share options vested to the entity’s employees conditional upon the executive remaining in the entity’s employ until the end of year
 Share options outstanding at the end of year 2 3. However, the share options cannot be exercised unless share price However, the
share options cannot be exercised unless share price has increased from P 50 at the
5. At the beginning of year 1, the entity grants 100 shares each to 500 employees, beginning of year 1 to P 65 at the end of year 3. If the share price is above P 65 at the
conditional upon the employees remaining in the entity’s employ during the vesting end of year 3, the share options can be exercised at any time during the next seven
period. The shares will vest at the end of year if the entity’s earnings increased by years, i.e., by the end of year 10
more than 18 percent; at the end of year 2 if the entity’s earnings increase by more
than average of 13 percent per year over the two-year period; and at the end of year The entity applies a binomial option pricing model, which takes into account the
3 if the entity’s earnings increase by more than an average of 10 percent per year possibility that the share price will exceed P 65 at the end of year 3 (and hence the
over the three-year period. the shares have a fair value of P 20 per share at the start share options become exercisable) and the possibility that the share price will not
of year 1, which equals the share price at grant date exceed P 65 at the end of year 3 (and hence the options will be forfeited). It estimates
the fair value of the share options with this market condition to be P 20 per option
By the end of year 1, the entity’s earnings have increased by 14 percent, and 20
employees have left. The entity expects that earnings will continue to increase at a Based on the preceding information, determine the compensation expense for year
similar rate in year 2, and therefore expects that the shares will vest at the end of 1, 2, and 3
year 2. The entity expects, on the basis of a weighted average profitability, that a
further 30 employees will leave during year 2

By the end of year 2, the entity’s earnings have increased by only 10 percent and
therefore the shares do not vest at the end of year 2. 42 employees have left during

Auditing Problems 4
UNIVERSITY OF MINDANAO COLLEGE OF ACCOUNTING EDUCATION

7. The following information has been taken from the ledger accounts of CHINA 9. BRUNEI COMPANY has 50,000 shares of P 10 par value share capital outstanding. In
CORPORATION: declaring and distributing a 50% stock dividend, BRUNEI initially issued only 20,000
new shares; the other stock dividend shares were not issued because some investors
Total net income since incorporation P 3,200,000 did not own BRUNEI shares in even multiples of 10. To these shareholders, BRUNEI
Total cash dividends paid 150,000 issued fractional share warrants.
Carrying value of the company’s investment in
Yogi Company declared as property dividend 600,000 Prepare journal entries necessary to record the following:
Proceeds from sale of donated shares 150,500  Declaration of the stock dividend
Total value of stock dividends distributed 420,000  Issuance of the full and fractional stock dividends
Gains on treasury share transactions 375,000  Issuance of full shares through the surrender of the required fractional
Unamortized premium on bonds payable 413,200 warrants. (Assume that 80% of the fractional share warrants were ultimately
Appropriated for contingencies 700,000 turned in for shares)

The current balance of unappropriated retained earnings is? 10. UZBEKISTAN COMPANY reported the following amounts in the shareholders’ equity
section of its December 31, 2009, statement of financial position:
8. The following selected accounts were taken from the December 31, 2010, trial
balance of INDONESIA CORPORATION: Preference shares, 10%, P 10 par
(100,000 shares authorized, 20,000 shares issued) P 200,000
Subscribed share capital P 1,250,000 Ordinary shares, P 5 par (50,000 shares authorized, 10,000 shares issued) 50,000
Treasury shares, 600 shares, at cost 90,000 Share premium 96,000
Unissued share capital Retained earnings 600,000
6,000,000 Total P 946,000
Share premium 180,000
Appropriation for plant expansion 500,000 The following transactions occurred during 2010:
Retained earnings  Paid the annual 2009 P 1 per share dividend on preference shares and P 0.50
1,200,000 per share dividend on ordinary shares. These dividends had been declared on
Authorized share capital – 100,000 shares December 31, 2009
10,000,000  Purchased 2,000 shares of its own outstanding ordinary shares for P 20 per
Subscriptions receivable 320,000 share
 Reissued 700 treasury shares for equipment valued at P 25,000
The minutes of meetings of the board of directors reveal that on December 5, 2010,  Issued 5,000 preference shares at P 15 per share
the company’s board declared a 10% cash dividend payable to shareholders and  Declared a 10% stock dividend on the outstanding ordinary shares when the
subscribers of record on December 20, 2010. The dividend checks are to be shares were selling for P 12 per share
distributed on January 10, 2011. The company’s accountant has not recorded this  Issued the stock dividend
dividend declaration.
 Declared the annual 2010 P 1 per share dividend on preference shares and
the P 0.50 per share dividend on ordinary shares. These dividends are payable
What is the amount of unrecorded dividend payable?
in 2011.

Auditing Problems 5
UNIVERSITY OF MINDANAO COLLEGE OF ACCOUNTING EDUCATION

 Appropriated retained earnings for plant expansion, P 300,000  Yemen’s July 1, 2010, statement of financial position after the quasi-
 Appropriated retained earnings for treasury shares reorganization should show total assets of?
 The balance in the share premium account after the quasi-reorganization on
The net income for 2010 was P 470,000 July 1, 2010, should be?
 Yemen’s deficit after the quasi-reorganization on July 1, 2010, should be?
Based on the above data, determine the correct December 31, 2010, balances of each
of the following accounts: 12. You are auditing the financial statements of the ITALY COMPANY as of December 31,
 Preference shares 2010. The company’s general ledger shows the following liability and equity accounts
 Ordinary shares at the end of the reporting period.
 Share premium
 Treasury shares Accounts payable P 530,000
 Unappropriated retained earnings Accrued expenses 41,600
Reserve for bond retirement 320,000
11. YEMEN CORPORATION has incurred losses from operations for many years. At the Preference shares, 6% cumulative, P 100 par;
recommendation of the newly hired president, the board of directors voted to 6,000 authorized, 4,000 issued; 3,700 outstanding
implement a quasi-reorganization, subject to shareholders’ and creditors’ approval. (P 110 liquidation value per share) 400,000
Immediately, prior to the quasi-reorganization, on June 30, 2010, YEMEN’s statement Ordinary shares, P 10 par; 200,000 shares authorized;
of financial position was as follows: 80,000 shares issued and outstanding 800,000
Share premium 154,600
Assets Retained earnings 262,500
Current assets P 1,375,000 Treasury preference shares, at cost 36,000
Property, plant, and equipment (net) 3,375,000
Other noncurrent assets 500,000 What is the book value of the preference shares on December 31, 2010?
Total assets P 5,250,000 What is the book value of the ordinary shares on December 31, 2010?

Liabilities and Shareholders’ Equity

Total liabilities P 1,500,000
Ordinary shares, P 10 par 4,500,000
Share premium 750,000
Retained earnings (1,000,000)
Total liabilities and shareholders’ equity P 5,250,000

The shareholders and creditors approved the quasi-reorganization effective July 1,

2010, to be accomplished by a reduction in property, plant, and equipment (net) of P
875,000, a reduction in other noncurrent assets of P 375,000, and a reduction in par
value from P 10 to P 5.

Auditing Problems 6
UNIVERSITY OF MINDANAO COLLEGE OF ACCOUNTING EDUCATION

AUDIT OF SHAREHOLDERS’ EQUITY POST-TEST

A. Following is the stockholders’ equity section of DEF Corporation’s balance sheet at B. With your representation, as Managing Partner of the GHI & Co., your firm was engaged
December 31, 2014: in the audit of the JKL Company at the close of the company’s first year of operations on
Common stock, P 10 par value; authorized 1,500,000 December 31, 2014. The company closed its books prior to the time you began your year-
shares; issued and outstanding 900,000 shares P 9,000,000 end fieldwork. Your audit and review showed the following stockholders’ equity accounts
Additional paid-in capital 750,000 in the general ledger:
Retained earnings 2,700,000 Common Stock
Total stockholders’ equity P 12,450,000 08/30/14 CD P 550,000 | 01/02/14 CR P 6,000,000
12/29/14 J 545,000
Transactions during 2014 and other information relating to the stockholders’ equity Retained Earnings
accounts were as follows: 12/29/14 J P 545,000 |12/01/14 CR P 287,500
12/31/14 J 4,000,000
 On January 26, DEF reacquired 75,000 shares of its common stock for P 11 per share. Income Summary
 On April 4, DEF sold 45,000 shares of its treasury stock for P 14 per share. 12/31/14 J P 26,000,000 | 12/31/14 J P 30,000,000
 On June 1, DEF declared a cash dividend of P 1 per share, payable on July 15, 2014 to 12/31/14 J 4,000,000
stockholders of record on July 1, 2014.
 On August 15, each stockholder was issued one stock right for each share held to Based on the other working papers submitted by your audit staff, the following
purchase two additional shares of stock for P 12 per share. The rights expire on additional information was forwarded:
October 31, 2014. From the Articles of Incorporation of JKL Company:
 On September 30, 150,000 stock rights were exercised when the market value of the  Authorized capital stock – 150,000 shares
stock was P 12.50 per share.  Par value per share – P 100
 On November 2, DEF declared a two for one stock split-up and charged the par value From the board of directors’ minutes of meetings, the following resolutions were
of the stock from P 10 to P 5 per share. On November 20, shares were issued for the extracted:
stock split  01/02/14 – authorized the issuance of 50,000 shares at P 120 per share.
 On December 5, 60,000 shares were issued in exchange for a secondhand equipment.  08/30/14 – authorized the acquisition of 5,000 shares at P 110 per share.
It originally cost P 600,000, was carried by the previous owner at a book value of P  12/01/14 – authorized the re-issuance of 2,500 treasury shares at P 115 per share.
300,000, and was recently appraised at P 390,000.  12/29/14 – Declared a 10% stock dividend, payable January 31, 2014, to
 Net income for 2014 was P 720,000. stockholders on record as of January 15, 2014. The market value of the stock on
December 29, 2014 was P 130 per share.
Based on the above and the result of your audit, determine the following as of December 31,
2014: REQUIRED:
1. Common stock  Based on the above and the result of your audit, determine the adjusted balances of
2. Additional paid-in capital the following as of December 31, 2014.
3. Unappropriated retained earnings o Capital stock
4. Total stockholders’ equity o APIC
o Total retained earnings
o Treasury stock
o Total stockholders’ equity

Auditing Problems 7