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Thursday, July 7, 2016

Audit of Equity: Internal Control Measures and Substantive Procedures

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Internal Control Measures for Equity/Shareholder's Equity

1. Internal control measures regarding the issuance of share certificates and proper accounting for transfers and registration of shares should be established. One of these measures is the appointment of a share and transfer agent or an independent registrar.
2. Share certificates should be serially prenumbered by the printer and that the authority for signing and issuing the certificates be designated by the board of directors.
3. As individual certificates are issued, corresponding records of the certificates should be prepared containing the name and address of the shareholders and the number of shares issued to each.
4. Cancelled certificates should be mutilated and any necessary documentary stamps should be attached to the cancelled certificates.
5. Entries for the share issuances and transfers should be made by a person who does not have authority to sign and issue certificates.

Substantive Audit Procedures

Existence: Recorded equity accounts exist
1. Obtain schedules of shareholder's equity accounts and reconcile to the general ledger balances.
2. Review authorization and terms of share issues.
3. Confirm shares outstanding with registrar on share and transfer agent.
4. Inspect share certificate book.
5. Inspect certificates of shares sheld in treasury.

Completeness: All equity accounts are recorded
6. In addition to the above mentioned procedures, perform analytical review procedures.

Rights and obligations: the entity has the authority to execute the shareholder's equity transactions
7. Review articles of incorporation and by laws.
8. Make inquiries of legal counsel.

Valuation and allocation: Shareholder's equity balances are shown at appropriate amounts
9. Vouch share capital entries, dividend entries and entries to retained earnings.

Presentation and disclosure: Shareholder's equity accounts are properly presented and adequately disclosed in the financial statements.
10. Review financial statements and perform analytical procedures to determine whether accounts are classified and disclosed int he financial statements in accordance with GAAP.
11. Review minutes of board of directors' and shareholders' meetings for share options and dividend restrictions.

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