Learning Objectives

Able to:
•Understand the control objectives for shareholders’ equity and long-term liabilities
•Understand the audit procedures in auditing shareholders’ equity and long-term liabilities
AUDITING SHARE CAPITAL ACCOUNT
•Share capital account for private companies are different from public listed companies.
•PLCs - Include share capital (issued and fully paid ordinary shares and preference shares), share premium,
capital and revaluation reserves and retained profits
•Transactions:
 –Issuance of shares
 –Repurchase of shares
 –Revaluation of assets
 –Payment of dividends
 –Exchange differences
INTERNAL CONTROL OBJECTIVES FOR CAPITALACCOUNT

Examples of related controls for share capital:

Examples of audit procedures for share capital

AUDITINGRESERVESANDRETAINEDEARNINGS
•Objective
 –Recorded transaction is properly classified as retained earnings
 –Recorded transactions are accurately recorded
 –All transaction has been recorded
 –Restrictions on the reserves have been disclosed in the footnote
Examples of audit procedures for reserves and retained earnings

AUDITING LONG-TERM LIABILITIES

1 . R e l a t i v e l y f e w t r a n s a c t i o n s a f f e c t t h e a c c o u n t b a l a n c e s , b u t e a c h transaction is
often highly material in amount
 e.g., bond
2.The exclusion of a single transaction could be material in itself  
 e.g., omission of single debt transaction
3. There is a legal relationship between the client entity and the issuer of debt
e.g., agreement requirement
4. There is a direct relationship between the interest and debt account
e.g., audit of interest-bearing debt, audit also interest expenses and interest payable
COMMON TYPES OF LONG-TERM LIABILITIES
–Loans  –Derivatives
 –Bonds  –Repurchase
 –Notes  –Reverse purchase agreements
 –Mortgage  –Interest rates swaps
 –Convertible loan stocks  –Capitalized long term lease financing
 –Financial futures
Control objectives and related controls
1 . V a l i d i t y   a n d   a u t h o r i z a t i o n :
•Adequate documentation must verify authorization (properly signed)
•Should be approved by BOD
•If delegated to CFO, should be reviewed and approval in minutes
2 . C l a s s i f c a t i o n :
•Properly classify as current liability the portion of long-term debt that is due in the next 12 months
•Borrowings from holding company, subsidiaries and other related parties such as directors are to be classified
separately for disclosure purposes
3 . C o m p l e t e n e s s :
•Maintain adequate detailed records to ensure all borrowings and repayments are recorded
•Maintain a proper subsidiary ledger
•The amount then reconciled to the general ledger control account regularly
4 . V a l u a t i o n
•Bonds should be recorded in the accounting records at their face value plus or minus any premium or discount
•Premium or discounts should be amortized using the effective interest method to calculate interest charges
Examples of audit procedures for long-term liabilities
•Examine the loan agreement to verify the amount of the loan, the rate of interest chargeable, the security provided and
the repayment terms.
•Confirm the actual amount of the loan received by vouching the receipt into the company’s accounting records
and by the company bank. If applicable, examine property purchase documentation to verify direct payment of
loan funds to third party seller of property.
•Check the accuracy and disclosure of interest charge payments and accruals in the company’s financial statements.
•Obtain confirmation directly from the loan creditor/ lease creditor, of the amounts outstanding, accrued interest and what
security they hold
•Recompute accrued interest and interest charged to the income statement
•Verify the amount of the loan outstanding at the balance sheet date and ensure that this is accurately stated and
fully disclosed in the company’s statement of Financial position. The amount of the loan outstanding should be
disclosed as repayable within 12 months and repayable after 12months from the balance sheet date.