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Audit of SHE
Audit of SHE
San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com
AP08-01 jabellar/ajabinal/jmaglinao
2. Which of the following assertions is least likely considered by the auditor in an audit of
shareholders’ equity?
a. Completeness
b. Presentation and disclosure
c. Existence
d. Rights and Obligations
3. Because of the limited number of transactions involved in shareholders’ equity items, the
auditor normally assess control risk at the maximum level and performs
a. Detailed test of balances
b. Detailed analytical procedures
c. Reunderstand the entity and its environment
d. Detailed test of controls
4. A registrar/transfer agent system relating to capital stock is most likely used by:
a. A small, nonpublic company
b. A large publicly traded company
c. All companies
d. Not even one company
7. Which of the following would the auditor be most concerned when examining the
stockholders’ equity section of an audit client’s statement of financial position?
a. Changes in the capital stock account are verified by an independent stock transfer
agent
b. Stock dividends and/or stock splits during the year under audit were approved by
the authorized parties
c. Stock dividends are capitalized at par or stated value on the dividend declaration
date
d. Entries in the capital stock account can be traced to resolution in the minutes of
the board of directors’ meeting
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8. During an audit of a company’s equity accounts, the auditor determines whether
restrictions have been imposed on retained earnings resulting from loans, agreements, or
law. This audit procedure most likely is intended to verify relevant assertion about:
a. Classification and Understandability
b. Existence
c. Valuation
d. None of the choices are correct.
10. In performing tests concerning the granting of share options, an auditor should
a. Trace journal entries to the bank statement
b. Trace authorizations made by a vote of the board of directors
c. Ensure that the share options payable is credited
d. Perform analytical procedures.
11. An auditor should vouch corporate share issuances and treasury stock transactions to the
a. General ledger
b. Bank statement
c. Minutes of meeting of the board of directors
d. Certificate of Registration with the Bureau of Internal Revenue
12. The following are minimal audit procedures that should be performed in the audit of
equity except which one?
a. Review minutes of meetings by the board of directors.
b. When share information is handled by an external party, share information must
be confirmed.
c. When cash dividends are declared, perform substantive analytics for dividends
paid and dividends payable.
d. When stock dividends are declared, ensure that the appropriate corporate officers
approved of the stock dividend declaration.
13. Which of the following is the most important consideration of an auditor when examining
the shareholders’ equity section of a client’s balance sheet?
a. Memorandum entries made for stock dividends
b. Authorization given to pay existing dividend payables
c. Entries in the capital stock account can be traced to a resolution in the minutes of
the board of directors’ meetings.
d. All of the choices are correct.
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PROBLEM NO. 1
You have requested the shareholders’ equity schedule of Cookie Inc. for the year-ended
December 31, 2023. The following balances where available:
Accumulated profit P820,000
Revaluation surplus 240,000
Bonds payable 440,000
Long-term investments in shares 420,000
Share premium on ordinary shares 920,000
Premium on bonds payable 60,000
Ordinary shares 800,000
Share premium on preference shares 224,000
Preference shares 600,000
Additional paid in capital from treasury shares 8,000
Unrealized decrease in the value of securities available for sale 6,000
Ordinary share warrants outstanding 40,000
Translation reserves 100,000
Additional information:
a. Ordinary shares is no-par, with stated value of P20 per share, 90,000 shares are authorized,
40,000 shares are issued and outstanding. 5,000 shares have been subscribed at a price of
P56 per share. 25% of the total ordinary shares subscription are still outstanding as of the
year end and are expected to be collected within the subsequent quarter.
b. Preference share has a P100 par value, 8,000 shares are authorized, 6,000 shares are issued
and outstanding. 900 shares are subscribed at a price of P140 per share. Each share is
cumulative, convertible into five ordinary shares, and pays a 7% annual dividend. No
dividends are in arrears. 20% of the total preference shares subscription are still outstanding
as of the year end and are expected to be collected within the next six months.
c. The subscriptions transactions both for the ordinary shares and preference shares are yet to
be recorded.
d. Bonds payable mature on July 1, 2027. These bonds carry a 12% annual interest rate,
payable semiannually. The premium is being amortized using the straight-line method.
Requirements:
1. How much is the total contributed capital?
a. 2,998,000 b. 2,958,000 c. 2,782,000 d. 2,902,800
2. How much is the total unrealized capital or accumulated other comprehensive income?
a. 346,000 b. 334,000 c. 340,000 d. 374,000
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PROBLEM NO. 2
iCARE Accountancy Review began operations on January 1, 2023. Based on their corporate
charter, the Securities and Exchange Commission authorized iCARE Accountancy Review to issue
240,000 shares of P5 par value common shares and 960,000 shares of 10%, P25 par value preferred
shares.
You were assigned as the audit staff who will handle the Audit of Shareholders’ Equity of iCARE
Accountancy Review. Upon gathering of sufficient appropriate evidence, you were able to
determine the following transactions that affected the equity section of iCARE Accoutancy
Review.
• On January 1, the Company issued 50,000 common shares to the investors in exchange for
a land with a zonal value of P950,000, book value of P500,000 and appraised value of
P1,020,000. The issued shares were also issued in payment for services on top of the
acquired land. Normally the services rendered by the investors are billed P500,000 but it
was agreed among the incorporators and the investors that the value of the services are at
P420,000.
• The Company issued 240,000 preferred shares on February 2. These shares have been
issued at a price of P38 and the Company paid the following share issue costs which were
all deducted to the share premium – preferred shares:
• Investors subscribed 50,000 common shares at P230 per share on April 5. No down
payment was made. The investor promised to pay a portion of the shares on August 5.
• The Company was in need of a corporate office, as such its Board of Directors searched
for a viable building for its business. Upon negotiating, they were able to obtain a building
with a fair value of P3,060,000 on July 14. The Company issued 8,400 common shares and
33,600 preferred shares.
• On July 14, the Company also issued separately common shares amounting to 7,200. Issue
price was P200 per share.
• iCARE Accountancy Review received P9,000,000 from the investors subscriptions made
by the investors on August 5. From this amount, only half of the common shares were
eligible for issuance of shares certificates.
• On November 2, the Company issued 10,000 common shares for the full payment of an
outstanding bank loan with principal amounting to P2,000,000. The fair value the
Company’s common stock is P205 per share and that the entity accrued interest amounting
to P100,000 in relation to the loan.
• Net income for the first year of operation was P4,550,000. Likewise, the Company declared
cash dividends of P2.5 per ordinary shares and preferred dividends at preferred rate.
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Balances of the Shareholders’ Equity of iCARE Accountancy Review are as follows:
PROBLEM NO. 2
At the beginning of year 1, IamQT grants share options to each of its 100 executive employees.
The share options will vest at the end of year 3, provided that the employees remain in the entity’s
employ, and provided that the volume of sales of a particular product increases by at least an
average of 5 percent per year. If the volume of sales of the product increases by an average of
between 5 percent and 10 percent per year, each employee will receive 100 share options. If the
volume of sales increases by an average of between 11 percent and 15 percent each year, each
employee will receive 200 share options. If the volume of sales increases by an average of 16
percent or more, each employee will receive 300 share options. On grant date, IamQT estimates
that the share options have a fair value of P20 per option.
By the end of year 1, seven employees have left and the entity still expects that a total of 20
employees will leave by the end of year 3. Hence, the entity expects that 80 employees will remain
in service for the three-year period. Product sales have increased by 12 percent and the entity
expects this rate of increase to continue over the next 2 years.
By the end of year 2, a further five employees have left, bringing the total to 12 to date. The entity
now expects only three more employees will leave during year 3, and therefore expects a total of
85 employees will remain at the end of year 3. Product sales have increased by 20 percent,
resulting in an average of 16 percent over the two years to date. The entity now expects that sales
will average 16 percent or more over the three-year period, and hence expects each sales employee
to receive 300 share options at the end of year 3.
By the end of year 3, a further two employees have left. Hence, 14 employees have left during the
three-year period, and 86 employees remain. The entity’s sales have increased by an average of
16 percent over the three years.
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Based on the preceding information, answer the following:
1. What is the compensation expense for year 1?
A. P53,333 B. P106,667 C. P160,000 D. P172,000
2. What is the compensation expense for year 2?
A. P168,000 B. P180,000 C. P233,333 D. P286,667
3. What is the compensation expense for year 3?
A. P114,667 B. P176,000 C. P188,000 D. P282,667
4. What is the cumulative compensation expense for years 1, 2, and 3?
A. P172,000 B. P320,000 C. P344,000 D. P516,000
5. At the end of year 2, the entity should report share options outstanding of
A. P226,667 B. P286,667 C. P328,000 D. P340,000
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