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    Audit of Stockholders' Equity - Zeitlow Corporation

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    A CPA firm is engaged in the examination of the financial statements of Zeitlow Corporation for the year ended December 31, 2006. Zeitlow Corporation?s financial statements and records have never been audited by a CPA. The stockholders? equity section of Zeitlow Corporation?s balance sheet at
    December 31, 2006, follows:

    Stockholders? Equity:
    Capital stock?10,000 shares of $10 par value authorized:
    5,000 shares issued and outstanding $ 50,000
    Capital contributed in excess of par value of capital stock 58,800
    Retained earnings 105,000
    Total stockholders? equity $213,800

    Founded in 1985, Zeitlow Corporation has ten stockholders and serves as its own registrar and transfer agent. It has no capital stock subscription contracts in effect.

    a. Prepare the detailed audit program for the examination of the three accounts composing the stockholders? equity section of Zeitlow Corporation?s balance sheet. (Do not include in the audit program the verification of the results of the current year operations.)
    b. After all other figures on the balance sheet have been audited, it might appear that the retained earnings figure is a balancing figure and requires no further verification. Why would an auditor still choose to verify retained earnings? Discuss.

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    Solution Preview

    a. The audit objective is to determine that equity transactions are authorized and recorded correctly as to account, amount, period and that the equity section of the balance sheet is properly described and disclosed in accordance with accounting standards and legal requirements.

    1. Inspect the articles of incorporation, bylaws, shareholders? agreements and extract matters of audit interest.

    2. Read the directors minutes and note equity transactions authorized.

    3. Obtain or prepare an analysis of transactions in equity accounts and perform the following procedures:
    a. Determine the number of shares of stock issued and canceled and compare ...

    Solution Summary

    The solution presents a step by step audit program to determine that equity transactions are authorized and recorded correctly in 400 words.