 In this presentation we will take a look at the audit process related to retained earnings and dividends. Now when we consider retained earnings note that we're thinking about the balance sheet we're in the equity section and specifically we are in retained earnings. What is retained earnings? It's going to be that account that's the accumulation of earnings over time. So whenever we close out in essence the income statement the net income you'll recall is going to be increasing retained earnings and retained earnings then going up by the net income down by a loss if the company happened to have a loss and then it's going to be down going down by any dividends that we take out. So when we take the dividends and pay the earnings that have been retained from the company for the income that's accumulated over time and been accumulated in the account of retained earnings we then pay it to the owners at some point hopefully in the form of dividends and the dividends then of course are kind of like draws and they would be for a sole proprietor they would be draws kind of like draws for a sole proprietor although they're going to go through some more bureaucratic process in order to have the dividends and their taxable but in the case in their their draws or like draws in that they will be decreasing the retained earnings. So given that note that retained earnings shouldn't have a lot of transactions to it because I mean if it's nothing unusual happened if it's a really kind of plain normal type of year then retained earnings should be what it was at the end of last year nothing should happen to it except for some dividends should be taken out of it which should be a pretty straightforward not too many transactions with regards to dividends decreasing retained earnings and then of course we have the net income that would roll over to it so it's really just rolling over retained earnings and then taking out the dividends that means not many transactions with regards to retained earnings typically should be fairly simple to audit we should be able to basically consider all the transactions that are included in it on more of a kind of a substantive type procedural process. Primary concern with relation to dividends is primary concern is over violations of corporate bylaws or debt covenants so any kind any kind of violations of the bylaws is going to be our major concern with regards to the dividends and recall that the dividends are going to be the items that are leaving so we're going to be paying out the dividends which will be reducing the retained earnings if and and we're going to be paying them to the owners the stockholders of the organization so they're going to be retained earnings increases we're going to pay them out in the form of dividends dividends being the earnings that have accumulated over time that we're distributing to the owners the owners being the stockholders if an independent dividend dispersing agent is used the auditor will confirm the amount dispersed with the agent the amount is then agreed with the amount authorized by the board of directors so once again if it's a publicly traded company we have this basic bureaucratic kind of process third-party individual that we can really use within the auditing process which is kind of a function of it or part of it that we can go to and confirm these transactions with so if an independent dividend disbursement agent is used kind of like a third-party individual outside not directly connected to the company therefore good audit evidence to go talk to that individual audit will confirm the amount to disperse dispersed with the agent the amount is then agreed with the amount authorized by the board of directors if an independent agent is not used however so we now what if we don't have that independent agent and if it's a publicly traded company you think you probably would if it's not publicly traded company then it's quite possible we do not in that case auditor will recompute the amount of the dividend authorized by the board of directors so note when we have the dividends it's one of those kind of key issues that should be authorized by the board of directors and then therefore we can go through the authorization process to make sure that the dividend process was properly authorized and we can we can recompute what was authorized by the board of directors so we can then the amount of dividends authorized by the board of directors and trace the amount to the cash disbursements or dividends payable so then of course we'll take that recalculation and trace it out to what actually happened now we're going to consider retained earnings so that's going to be the accumulation of the net income minus the disbursements the dividends retained earnings are generally affected by the current year's income or loss and the dividends declared and or paid now note when we consider the dividends that's going to be an important point when we consider the valuation of retained earnings because remember there's basically three time periods that you have a dividend you declare the dividend and then you have a point in time basically when you the people that are holding the dividends that's who's going to get the dividends and then you pay the dividends and the two important points from a financial accounting standpoint is uh when should we record the dividend uh even though it's not paid we typically record it when it's declared so then we're going to record