 in this presentation we will take a look at the audit process related to stockholders equity so we're in the equity section now stockholders equity types of important transactions related to stockholders equity will include first a word from our sponsor well actually these are just items that we picked from the youtube shopping affiliate program but that's actually good for you because these aren't things that were just given to us from some large corporation which we don't even use in exchange for us selling them to you these are things that we actually researched purchase and use ourselves acer 27 inch monitor i've been using an acer monitor as my primary monitor for a few years now this is the first acer monitor that i have used after having used a series of different brands of monitors in the past the acer monitor has been performing well and i'm trusting the acer brand more and more as i use the monitor i have a 27 inch monitor which i think is ideal for what i do which is of course the screen recording and the editing if you would like a commercial free experience consider subscribing to our website at accounting instruction dot com or accounting instruction dot think of it dot com where we have many different courses you can purchase one at a time or have a subscription model given you access to all the courses courses which are well organized have other resources like excel files and pdf files to download and no commercials the issuance of stock sale of stock either for cash or the exchange of stock for assets services convertible debt issuance of stock in a stock split so obviously when we're talking about the stockholders equity section one of the key components would be if there's issuance of new stock now if we're talking about a publicly traded company it may be the case that new stock will be issued but it's probably not a lot of transactions as compared to other types of areas within the financial statements so we would expect the issuance of stock to not have a whole lot of transactions if we're talking about smaller companies then it's quite likely possibly that there's no stock issuance taking place if there's a stock issuance for cash fairly straightforward it gets a little bit more complex if stock was issued for something other than tax than cash which can be the case it can be the case that stock is issued in exchange for something or the relief of debt in some format and of course we have the component of stock splits which can be a little bit more complex than the straight transaction for cash as well as well the repurchase of stocks both the reacquisition of stock and retirement of stock is another type of transaction we want to look into of course if the stock is going to be repurchased off the market if we're talking about a publicly traded company for example and they repurchase their own stock either to hold on to it to acquire it as treasury stock or if they're going to basically retire the stock those are transactions we want to keep aware of or be aware of within the audit process and the payment of dividends both cash and stock dividends so the dividend payments something that we want to consider with relation to stockholders equity of course the dividends payment being the payment back kind of similar to a draw for a sole proprietor of the earnings so the dividends can be in the form of cash probably a more straightforward thing to audit or will be pretty much a more straightforward thing to audit stock dividends going to be a little bit more complex to audit control risk assessment so we're now we're going to consider the control risk with relation to stockholders equity a substantive strategy is generally used to audit stockholders equity because the number of transactions is usually small and the value is often large so in other words once again we typically will be using a substantive strategy why because just like it's kind of like with the fixed asset type of account if we buy things like property plants and equipment there's not a whole lot of transactions that are happening and therefore we probably can audit more of those transactions with a straight substantive procedural tests the same thing can be do do true with the stockholders equity in other words we have small transactions number wise not a whole lot of transactions so we can audit pretty much all the transactions and the transactions that are involved are typically all large dollar amount transactions so all the transactions that are there are things that we typically are going to want to audit want to do substantive procedural testing for and therefore although we will get an idea of the internal controls and the inherent risk we're probably going to be doing a lot of substantive testing no matter what our determination is about the controls and the inherent risk order still needs to understand the controls that are in place to prevent the misstatement of equity transactions so in other words when we say that this is going to be a substantive type of procedural approach we're going to take a substantive approach to substantive testing you might think well great i don't have to think about the controls or testing the controls or thinking about the internal controls or the inherent risk because i'm just going to do all the substantive testing anyways well that's not necessary that's not really the case we still have to know the controls because that's part of the process that's going to fill our bucket that we need of audit evidence in order to issue our opinion publicly traded companies will use an independent register registrar a transfer agent and dividend disbursement agent to process and record equity transactions so in that case if we're talking about a publicly traded company these individuals will be involved as we go through that formal process within a publicly traded company so relevant information about equity transactions may be confirmed with them that's great for us and part of the process part of the reason that is there is the type of internal control a type of regulation for publicly traded companies within the audit process it of course gives us these individuals these kind of bureaucratic type of institutional individuals outside of the organization that we can then help get an understanding of these transactions with now we'll consider assertions and the control activities related to those assertions in regards to stockholders equity the first one being occurrence so the assertion of occurrence verify that stock and dividend transactions are valid and that they comply with the corporate charter the next assertion is accuracy with relation to accuracy verify that stock and dividend transactions have been correctly posted in the accounting records so we want to make sure that they're correctly posted in an accurate format and then the assertion of authorization we want to verify that stock dividend transactions were correctly approved did we go through the approval process and notice the stock dividend transactions is going to be something that could be a large major type of transaction so there should be a formal basically approval process and then we have the valuation assertion verify that stock and dividend transactions were correctly valued segregation of duties so segregation of duties are major internal control with relation with this relation to stockholders equities those responsible for issuing transferring and cancelling stock certificates will not have an accounting responsibility now this is ideal we're hoping that we're we're able to do this or that those responsible for maintaining the detailed stockholders records should be independent from the maintenance of the general control accounts then we have those responsible for maintaining the detailed stockholders records should not process cash receipts or disbursements and segregation of duties should be set among the preparation recording signing and mailing of the dividend checks note that these are pretty heavy segregation of duties especially this first one here those are responsible for issuing transferring and cancelling stock certificates will not have any accounting responsibility that's a pretty heavy kind of internal control in that you would think that someone that's involved with some type of accounting process might be the individual that would be involved with that process if there weren't some internal control in place so if these segregation duties are not doable because of personnel shortages in other words if we don't have the personnel to be able to do these separations of duties management review controls should be in place we should have then management review controls in place as a type of control setup if these types of segregation of duties are too heavy too many separations for that particular organization to handle now we're going to consider the auditing of capital stock and take a look at the assertion of occurrence and completeness if outside agents are used auditor confirms information relevant to the year and amounts with them so if we have an outside agent then the auditor can go to the outside agent and confirm information relevant to the year and the amounts when outside agents are not used then the auditor has to do something else what's the order going to do trace the transaction of shares between the stockholders to the stock register and or stock certificate book foot the shares outstanding in the stock register and or stock certificate book match them to total shares outstanding in the general ledger examine any cancel check certificates and inspect any unissued stock certificates in the stock certificate book so once again we have the capital stock auditing occurrence if outside agents are used if we have the outside agents the auditor can confirm the information relevant to the year with them when the outside agents are not used the auditor will have to go through some more procedural steps those steps being once again trace the transaction of shares between the stockholders to the stock register and or stock certificate book foot the shares outstanding in the stock register and or stock certificate book some means add them up of course match them to the total shares outstanding in the general ledger examine any cancel stock certificates and inspect any unissued stock certificates in the stock certificate book now we're going to consider the assertion of valuation stock issued for cash it's fairly simple transaction so when we consider the valuation of stock that's issued for cash because it's typically considered a market exchange if it's going to be a publicly traded company on a market exchange fairly straight forward type of transaction the valuation would be you would think the market exchange and the market exchange not too difficult to know considering cash was paid for it and so proceeds from the sale are traced to the cash receipts records for valuation valuation is more complex when stock is issued for property goods or services obviously when we have property goods or services we are issuing stock which we may not exactly know the value for although if other stock is being traded on the stock exchange that might help us with that type of transaction but it's more complex than if we just got cash in a market transaction and then of course the property goods and services that we're receiving it's hard to determine exactly what the market rate is for those property goods and services so that's a bit more complex of a valuation stock dividends can also be more complex auditing issue so when we have stock dividends so in essence when we're giving back value to the shareholders but instead of the giving back in essence the retained earnings the earnings of the company in the form of cash giving it in the form of dividends that could be a bit more complex to value as well auditor needs to recompute the stock dividend and trace the entries to the general ledger related to valuation now we're going to consider completeness disclosure items include so the disclosure items we need to include include number of shares authorized issued and outstanding so the number of shares authorized issued and outstanding call privileges prices and dates of preferred stock preferred stock sinking fund and of course these would only be applicable if we had preferred stock stock options or purchase plans so if there's already any stock options or purchase plans we want to disclose those items restrictions on retained earnings and dividends so if there's any kind of restrictions on the retained earnings and dividends those need to be disclosed all completed or pending transactions that may affect stockholders equity so any other types of transaction that may have a direct effect on the stockholders equity should be disclosed