Page 59 - eBook Audit Of Financial Statement Components

Additionally, the classification of equity balances is important.

Determining how to present equity is usually easy, but classification

issues arise when an entity has convertible stock. Another example

of a classification issue is non-controlling interests.

The directional risk for equity is that it is overstated (companies

desire strong equity positions). So, auditor will audit for existence.

Primary risks for equity include:
i. Equity is intentionally overstated (fraud)

ii. Misclassified equity (error)

Risk of Material Misstatement for Equity

In auditing equity, the assertions that concern the most are

existence, classification, and rights. Thus, the risk of material

misstatement for these assertions is usually moderate to high.

A company may desire to overstate its equity. Also,

misclassifications occur due to misunderstandings about equity

accounting.

7.2 Substantive Procedures for Equity

The substantive tests for auditing equity include:

i. Summarizing and reviewing all equity transactions

ii. Reviewing all equity accounts for proper classification

iii. Agreeing all beginning of period balances to the prior

period’s ending balances
iv. Reviewing equity disclosures for compliance with the

requirements of the reporting framework (e.g., GAAP)

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