Audit of Equity

Internal Control. Strong internal control over shareholders equity accounts focuses on the following:

(1) the proper authorization of transactions by the board of directors and corporate officers;
(2) the segregation of duties in handling shareholders equity transactions; and
(3) the maintenance of adequate records.

The following can also be adopted by entities in internal control over their equity transactions:
(1) Proper authorization of transactions; maintaining an independent registrar and stock transfer
agent. For smaller companies, control can be achieved by segregating authorization of
transactions, custody of stock certificates and record keeping;
(2) Sequentially numbering stock certificates; retired shares promptly cancelled; and physical
safeguarding unissued certificates and treasury shares
(3) Keeping detailed capital records: stockholders ledger, transfer journal etc.

The companys accountant must periodically analyse the shareholders equity accounts and ensure that

they are updated and reconciled to the general ledger.

Assertions and Procedures. The following assertions are important in the audit of equity: existence,

completeness, valuation and allocation, and presentation and disclosure. The primary substantive

procedures include: obtaining and verifying equity reconciliation schedule; obtaining and reviewing BOD,

shareholders and committees minutes, and articles of incorporation; reviewing appropriateness of

accounting for share-based payments, as well as of dividends; analysing RE; and reviewing presentation

and disclosure of equity items.

Documents. Usually, the auditor obtains and examines AOI, by laws and minutes of meetings of the BOD.

These for part of the permanent file audit; it must provide information on the number of shares authorized

and issued, including par values, dividend ratios and policies on repurchases and sales of share capital.

Usual challenges.