Question

You are a CPA engaged in the audit the Financial Statements of RKS Corporation for the year ended December 31, 2016. A CPA firm has not audited RKS before. Stockholder's Equity: Capital Stock 25,000 shares of $10 per value authorized 15,000 share's issued and outstanding : $. 150.000 Capital contributed in excess of par value of capital stock : $. 85,258. Retained Earnings :$ 40,152 Total Stockholder's Equity $ 275,410 HKS Corporation was founded in 2010. The corporation has 10 stockholders and serves as its own register and transfer agent. There are no capital stock subscription contracts in effect. Required: A Prepare the detail Audit Program for the audit of the three accounts comprising the stockholder's equily section of RKS Corporation's balance sheet. (Do not include in the verification of the results of the current year's operatiun). After every other figure on the balance sheet has been audited, it might appear that the retained earnings figure is a balancing figure and requires no further verification Why does the CPA verify retained earnings as is done with the other figures on the balance sheet? Discuss

Answer 1

Audit programme for audit of

Share capital issued and outstanding:

1. For checking The terms of the share issue can be examined from the

Memorandum of Association.
The Association Articles.
Prospectus.
Memorandum of Information as the case may be.

2. Until minimum subscription is received, it should also be verified that the applicant's money received is deposited in a scheduled bank, and that the grant only takes place after at least minimum subscription.

3. Section 76 addresses the commission to be paid to brokers and underwriters to brokers and underwriters. In its prospectus / Articles of agreement, the organization can recommend a lower rate. The auditor should here insure that the brokers and underwriters are paying the approved commission or brokerage fees.

4. The auditor will make sure that the ownership securities (section 81), which meet with all legal requirements, are properly given to existing shareholders.

Bill 2003 acknowledges the staff, officers or executive supervisors as a supply choice under a system, and it is accepted in compliance with the scheme by SEBI.

5. The prospectus lays out the conditions for the completion of conditional agreements. At the end of such preliminary contracts that could include the purchase of business or property etc, the auditor should ensure that all the requirements are met.

6. The auditor must also ensure that the guidelines issued by SEBI are followed by the company and that the auditor can examine the reports of leading managers on the issue to confirm compliance.

6. In the case of publicly issued shares, the auditor should ensure that the company applied for authority to issue shares on one or more recognized stock exchanges.. At least ten weeks before the date of the subscription list closing the company should obtain permission from the stock exchange.

8. The auditor will ensure that the Group has sufficient and efficient internal control of the problem of its securities.

Capital Contributed in excess of par value of capital:

Capital above par Capital above par shall be the amount paid by investors in excess of the par value of the stock to an investment company. The par value is the legitimate equity capital and is typically written on the stock certificate head. Because par value is generally a very small amount per share, such as $0.01, the majority of the amount paid by the investors is generally categorized as capital over and above par. In some countries, stocks that have no par value at all are issued. In these cases, the capital exceeding the par value is the total amount that investors pay to an investment company.

A company will issue its securities at its facial price. The securities are stated to be distributed similar to when the company issues its stock at their face value.
Company can also issue its shares in excess of its face value, i.e.' Premium' or' Discount.' Shares issued at premium or discount require an accounting treatment other than equity issues. Talk about the issue of premium stock.
Emission of premium shares The shares are said to have been issued at Premium if a company issued their shares at a price more than their face value. Premium' is the difference between the issue price and the face value or nominal value. If Rs 10 is a share

Auditors Responsibility to grant premium stocks

The auditor will ensure, in the manner set out in section 52, that the sum of stock premium is used. The organization may only use the stock incentive funds–· The issue of fully paid reward stocks to the company's owners.

Writing off preliminary charges or commission paid or allowable discount on any issue of the company's actions or debentures.

To supply the premium due on the restitution of any of the company's redeemable preferential shares.

Recovery of own shares, provided the Articles permit and authorized in the General Meeting by special resolution.

Audit procedure for retained earnings:

During your audit, you shouldn't deal with much activity on the retained income account, so you usually audit not sample and test all transactions. In reality, this is not just a high activity account such as profit and expenses. Three common items affect retained income: net income or loss, dividends and adjustments made to the preceding period.

The initial balance, which is normally the final balance since the previous year, confirms your audit. If your review client is on a calendar year-end, the original balance should be the same on January 1 as that for the final balance on December 31 of the previous year. If this is not true, talk to the customer about the problem and then talk to your audit team leader about the problem.

The actual balance may be contained in the previous year's work documents if the consumer is ongoing. When the consumer is fresh, use the previous year's balance sheet.
You would like to report any changes that affect the balance of the beginning.

Follow these steps to do this:

1. Get your customer's schedule that shows how the customer earns for the year under audit from the beginning to finish.

2. Implement the client's report of profit or deficit change.

3. Review dividends in money or stock.

4. When the company shows a mistake in the previous period, ensure that the changes to the retained earnings will potentially fix these mistakes.

Your key to this field is generally accepted accounting principles (GAAP). One example of an adjustment to the previous period is when the customer does not increase salary expenses properly at year-end to take into account wages paid but not yet paid.

Retained income can also be adjusted for marketable securities, translations of foreign currencies and change in retention appropriations. This essentially means adjusting how the consumer informs on the balance sheet assets. Translations of foreign exchange occur if your customer has a foreign subsidiary and the U.S. parent company combines its financial statements. Retained earnings appropriations impose dividend statement restrictions. The organization may have future expansion strategies as an example.

Why would a retained earnings still be audited by an CPA?

Retained profit is profit, less dividends or distributions paid to investors, that a company has gained to this day. This number is changed when an accounting application impacts an income or expense record

I assume that it is because this is very necessary that the auditor will proceed to review the retained revenues. Although debt and equity transactions are few in number, they should be thoroughly tested. It is very important that the auditor checks and monitors all information and ensures that none is ignored.

I will be thankful if you give me a credit for my sincere effort to answer your valuable question. Thankyou :D