Audit of Shareholder’s Equity

 Existence

A firm records the equity interest of each of its investors on its balance sheet. For publicly traded
companies, these records are filed with the Securities and Exchange Commission. As a means of gathering
evidence, an auditor can gauge the records a public or private firms keeps of its assets and liabilities -- in
addition to the firm's equity interests -- to ensure complete records of a firm's financial position exist. A
firm must disclose all of its shareholder equity to an auditor.

 Rights and Obligations

Managers and shareholders in a firm have certain rights and obligations pertaining to the firm's equity.
An entity, be it an individual or a group investor, is entitled to the equity it purchased from the firm and
is obliged to cover all liabilities it undertook, according to the AICPA. The company's management is
responsible for asserting this information to the auditor in compliance with generally accepted accounting
principles.

 Completeness

In addition to recording and disclosing all of a firm's equity interests, each disclosure made to an auditor
must be factually complete and accurate. All assets, liabilities and equity interest that management should
have recorded must be recorded on the firm's balance sheet, according to AICPA. An auditor should pay
attention to the completeness of all records pertaining to cash transactions; according to Yellow Book
CPE, employees can often overlook or fail to report cash receipts.

 Valuation and Allocation

The AICPA requires a firm's equity interests to be accurately recorded in its financial statements. Company
managers must also record any equity valuations and allocations. If a firm issues additional shares of
common stock, for example, the volume of shares issued must be recorded. The price at which the
company issued the shares must also be recorded. If a firm issues additional stock -- or recalls additional
stock -- the percentage of shareholder equity changes; such a change must also be reflected in the firm's
financial statements.

Page | 1
4 Audit of SHE
 Problem 1

The India COMPANY is authorized to issue 600,00 shares of 10 par value ordinary share capital. India’s
accounting year ends on December 31. The following transactions occurred in 2010, the company’s first
year of operations.

a. Issued 20,000 shares at 20 per share; received cash.

b. Issued 2,500 shares to attorneys for services in securing the corporate charter and for preliminary
legal costs of organizing the corporation. The value of the services was 85,000.
c. Issued 300 shares, valued objectively at 15,000 to the employees instead of paying them cash
wages.
d. Issued 325,000 shares in exchange for a building valued at 3,000,000 and land valued at 4,000,000.
(The building was originally acquired by the investor for 2,500,000 and has 1,000,000 of
accumulated depreciation; the land was originally acquired for 1,500,000).

Questions:

1. What is the ordinary share capital balance on December 31,2010?

2. The amount of share premium to be reported on India’s statement of financial position at
December 31,2010 is

Problem 2

The shareholders’ equity of the JEJU COMPANY as of December 31,2009, was follows:

Ordinary shares, 10 par, authorized 300,00 shares; 250,00 2,500,000

shares issued and outstanding
Share premium -issuance 3,500,000
Retained earnings 1,740,000

On June 1,2010, JEJU reacquired 40,000 shares at 40. The following transactions occurred in 2010 with
regard to these shares.

July 1 Sold 15,000 shares at 48

Aug. 1 Sold 19,00 shares at 27
Sept. 1 Retired 1,000 shares

The following entries were made by the company’s accountant to record the preceding transactions.

2010 Debit Credit

June 1 Treasury shares 1,600,000
cash 1,600,000

Page | 2
4 Audit of SHE
 July 1 Cash 720,000
Treasury shares 720,000
August 1 Cash 513,000
Treasury shares 513,000
Sept. 1 Ordinary shares 10,000
Treasury shares 10,000

JEJU’s net income for 2010 was 135,000.

Questions:

Based on the preceding information, determine the correct balances of the following accounts:

1. Treasury shares
2. Ordinary shares
3. Share premium- issuance
4. Share-premium-treasury shares

Problem 3

The shareholder’s equity section of KOTA CORPORATIION’S statement of financial position as of December
31,2009, is as follows:

Ordinary share capital (5 par,250,000 shares 687,500

authorizes, 137,500 issued and outstanding)
Share premium 275,000
Total paid in capital 962,500
Un appropriated retained earnings 667,500
Appropriated retained earnings 250,000
Total retained earnings 917,500
Total shareholder’s equity 1880,000

KOTA Corporation had the following shareholder’s equity transactions during 2010:

Jan . 15 Completed the building renovation for which 250,000 of retained

earnings had been restricted. Paid the contractor 242,500, all of which
is capitalized.
March 3 Issued 50,000 additional ordinary shares for 8 per shares.
May 18 Declared a dividend of 1.50 per share to be paid on July 31, 2010 to
shareholders of record on June 30,2010.
June 19 Approved additional building renovation to be funded internally. The
estimated cost of the project is 200,000, and the retained earnings are
to be restricted for that amount.
July 31 Paid the dividend
Page | 3
4 Audit of SHE
 Dec 31 Declared a property dividend to be paid on January 10,2011, to
shareholders of record on January 5,2011. The dividend is to consist of
equipment with a carrying value of 150,000. The equipment’s fair
value at December 31,2010 is 157,500.
Dec 31 Reported 442,500 of net income on December 31,2010 income
statement.

Questions:

1. The balance in the ordinary share capital account at December 31, 2010 should be,
2. The balance in the share premium account at December 31,2010, should be
3. The balance in the unappropriated retained earnings account at December 31,2010
should be
4. The total shareholder’s equity at December 31,2010, should be

Page | 4
4 Audit of SHE