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Fundamentals of Auditing

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Fundamentals of Auditing ­ACC 311
VU
Lesson 35
VERIFICATION OF EQUITY
Equity consists of share capital and reserves. This part of the balance sheet represents interest of the owners in
net assets of the entity.
To verify the owners' equity the auditor verifies following aspects:
Share capital is properly classified and described in the accounts
Movement in share capital is properly authorized and correctly presented
Reserves are properly classified and presented
Movements in reserves are properly authorized
Verification Methods
Share capital is properly classified and described in the accounts in accordance with the Companies
Ordinance, 1984
1. Check disclosure using Company Accounts Checklist.
2. Agree authorized capital with memorandum of association.
3. Agree issued capital with form A, or obtain certificate from registrar.
4. Obtain list of shareholders.
Movement in share capital is properly authorized and correctly shown and described in accordance
with the Companies Ordinance, 1984
1. Ensure shareholders' pre-emption rights have been respected.
2. Check that directors were authorized to allot shares.
3. Ensure proper authorization for share redemption.
4. Check authority for share capital reductions.
5. Agree all movements to statement in lieu of prospectus, board minutes, memorandum and articles of
association.
6. Consider special rules for allotments of public company shares.
7. Test allotments with supporting evidence and trace entries in register.
8. Test payments with supporting evidence and trace entries in register.
9. Check additions to allotment lists and cash records and agree totals to recorded movements.
10. Ensure correct treatment of share premiums.
11. Vouch issue expenses.
Reserves are properly classified and described in the accounts in accordance with the Companies
Ordinance, 1984
1. Ensure disclosure complies with Companies Ordinance, 1984.
2. Ensure whether it is clear, which reserves are distributable.
Movements in reserves are properly authorized and currently shown and described in accordance
with the Companies Ordinance, 1984
1. Check movements to minutes of Board's meeting.
2. Check movements do not contravene statutory restrictions and articles of association.
3. Ensure disclosure of movements and related tax treatment.
115
Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT