Page 58 - eBook Audit Of Financial Statement Components

CHAPTER 7: AUDITING PROCEDURES ON

EQUITIES

Those keys in auditing equity include risk assessment procedures,

determining relevant assertions, performing risk assessments,

and developing substantive procedures.

The most important issues to address are usually:

i. equity accounting (especially when there are more

complex types of equity transactions) and

ii. the classification of equity.

7.1 Developing the Audit Plan

Primary relevant equity assertions include:

i. Existence and occurrence
ii. Rights and obligations

iii. Classification

When a company reflects equity on its balance sheet, it is

asserting that the balance exists and that the equity transactions
occurred. For example, if common stock is sold, the balance of the

account is based upon the actual sale of stock and the monies

received. In other words, the balance is not fraudulently or

erroneously stated.

Equity instruments also have certain rights and obligations. For

example, common stock provides rights to retained earnings.

Also, some classes of stock provide voting privileges. Others do

not.

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