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Substantive Tests

17-27 (Substantive tests for stockholders' equity balances) Jones, CPA, the continuing auditor of Sussex, Inc., is beginning the audit of the common stock and treasury stock accounts. Jones has decided to design substantive tests with control risk at the maximum level.
Sussex has no par, no stated value common stock, and acts as its own registrar and transfer agent. During the past year, Sussex both issued and reacquired shares of its own common stock, some of which the company still owned at year-end. Additional common stock transactions occurred among the shareholders during the year.
Common stock transactions can be traced to individual shareholders' accounts in a subsidiary ledger and to a stock certificate book. The company has not paid any cash or stock dividends. There are no other classes of stock, stock rights, warrants, or option plans.

What substantive tests should Jones apply in examining the common stock and treasury stock accounts?

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The common stock account is the stockholders equity account that reports the par or stated value of the issued shares of common stock. On the other hand the treasury stock account shows the stock that is bought back by the issuing company.
The first substantive test is to ascertain from the stock certificate book the number of shares issued and the number of shares reacquired. The difference should be compared with the number of ...

Solution Summary

This solution gives you the substantive tests that should be applied in examining the common stock and treasury stock accounts