APPLIED AUDITING

CHAPTER 8
AUDIT OF STOCKHOLDERS’ EQUITY

Objective
1. Solving Audit of Stockholders’ Equity Problems
2. Theory of Audit of Stockholders’ Equity

PROBLEM NO. 1

Alcoy Corporation’s post-closing trial balance at December 31, 2006 was as

follows:

Alcoy Corporation
Post-Closing Trial Balance
December 31, 2006

Debit Credit
Accounts payable P 495,000
Accounts receivable P 963,000
Reserve for depreciation 360,000
Reserve for doubtful accounts 54,000
Premium on common stock 1,800,000
Gain on sale of treasury stock 450,000
Bonds payable 720,000
Building and equipment 1,980,000
Cash 396,000
Cash dividends payable on preferred 7,200
stock
Common stock (P1 par value) 270,000
Inventories 1,116,000
Land 684,000
APPLIED AUDITING

Available-for-sale securities at fair 513,000

value
Trading securities at fair value 387,000
Net unrealized loss on
available-for-sale securities 45,000
Preferred stock (P50 par value) 900,000
Prepaid expenses 72,000
Donated capital 800,000
Stock warrants outstanding 208,000
Retained earnings 415,800
Treasury stock – common, at cost 324,000
Totals P6,480,000 P6,480,000

At December 31, 2006, Alcoy had the following number of common and
preferred shares:

Common Preferred
Authorized 900,000 90,000
Issued 270,000 18,000
Outstanding 252,000 18,000

The dividends on preferred stocks are P0.40 cumulative. In addition, the

preferred stock has a preference in liquidation of P50 per share.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of
December 31, 2006:

1. Additional paid-in capital

a. P3,213,000 c. P3,050,000
b. P3,258,000 d. P2,600,000

2. Total contributed capital

a. P4,428,000 c. P3,770,000
b. P4,220,000 d. P1,170,000

3. Unappropriated retained earnings

a. P415,800 c. P91,800
b. P739,800 d. P37,800

4. Total stockholders’ equity

a. P4,266,800 c. P4,888,800
b. P4,519,800 d. P4,474,800

Suggested Solution:

Question No. 1
APPLIED AUDITING

Premium on common stock P1,800,000

Gain on sale of treasury stock 450,000
Donated capital 800,000
Stock warrants outstanding 208,000
Total additional paid-in capital P3,258,000

Question No. 2

Preferred stock (P50 par value) P 900,000

Common stock (P1 par value) 270,000
Additional paid-in capital (see no. 1) 3,258,000
Total contributed capital P4,428,000

Question No. 3

Total retained earnings P415,800

Less appropriation for treasury stock 324,000
Unappropriated retained earnings P 91,800

Question No. 4

Total contributed capital (see no. P4,428,000

2)
Retained earnings:
Unappropriated (see no. 3) P 91,800
Appropriated for treasury 324,000 415,800
stock
Total 4,843,800
Less : Treasury stock 324,000
Net unrealized loss on 45,000 369,000
AFS
Total stockholders equity P4,474,800

Answers: 1) B; 2) A; 3) C; 4) D

PROBLEM NO. 2

Your audit client, Argao, Inc., is a public enterprise whose shares are traded in
the over-the-counter market. At December 31, 2005, Argao had 3,000,000
authorized shares of P10 par value common stock, of which 1,000,000 shares
were issued and outstanding. The stockholders’ equity accounts at December
31, 2005 had a following balances.

Common stock P10,000,000

Additional paid-in capital 3,750,000
Retained earnings 3,250,000
APPLIED AUDITING

Transactions during 2006 and other information relating to the stockholders’

equity accounts were as follows:

 On January 2, 2006, Argao issued at P54 per share, 50,000 shares of P50
par value, 9% cumulative convertible preferred stock. Each share of
preferred stock is convertible into two shares of common stock. Argao had
300,000 authorized shares of preferred stock. The preferred stock has a
liquidation value equal to its par value.

 On February 1, 2006, Argao reacquired 10,000 shares of its common stock

for P16 per share.

 On April 30, 2006, Argao sold 250,000 shares (previously unissued) of P10
par value common stock to the public at P17 per share.

 On June 15, 2006, Argao declared a cash dividend of P1 per share of

common stock, payable on July 15, 2006, to stockholders of record on July
1, 2006.

 On November 10, 2006, Argao sold 5,000 shares of treasury stock for P21
per share.

 On December 15, 2006, Argao declared the yearly cash dividend on

preferred stock, payable on January 15, 2007, to stockholders of record on
December 31, 2006.

 On January 20, 2007, before the books were closed for 2006, Argao
became aware that the ending inventories at December 31, 2005 were
understated by P150,000 (after tax effect on 2005 net income was
P90,000). The appropriate correction entry was recorded the same day.

 After correcting the beginning inventory, net income for 2006 was
P2,250,00.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of
December 31, 2006:

1. Additional paid-in capital

a. P5,700,000 c. P5,500,000
b. P5,525,000 d. P5,725,000

2. Unappropriated retained earnings

a. P4,125,000 c. P4,045,000
b. P4,035,000 d. P3,955,000

3. Treasury stock
a. P160,000 c. P55,000
APPLIED AUDITING

b. P 80,000 d. P50,000

4. Total stockholders’ equity

a. P22,190,000 c. P24,690,000
b. P24,770,000 d. P24,840,000

5. Book value per share of common stock

a. P17.89 c. P17.71
b. P17.82 d. P15.41

Suggested Solution:

Questions No. 1 to 4

Preferred stock P 2,500,000

Common stock 12,500,000
Additional paid in capital 5,725,000 (1)
Retained earnings:
Appropriated P 80,000
Unappropriated 4,045,000 4,125,000 (2)
Treasury stock ( 80,000) (3)
Total SHE, 12/31/06 P24,770,000 (4)

Prepare T-accounts for each component of the stockholders’ equity. Place

the balances as of January 1, 2006, journalize the transactions affecting
the SHE accounts, post the entries to the affected accounts, then extract
the balances.

Journal entries affecting the stockholders equity accounts during 2006:

1/2 Cash (50,000 shares x P54) P2,700,000

Preferred stock (50,000 shares x P50) P2,500,000
APIC - excess over par of preferred stock 200,000

2/1 Treasury stock (10,000 x P16) P 160,000

Cash P 160,000

4/30 Cash (250,000 shares x P17) P4,250,000

Common stock (250,000 shares x P10) P2,500,000
APIC - excess over par of common stock 1,750,000

6/15 Retained earnings P1,240,000*

Dividends payable - common P1,240,000

* [(1,000,000 + 250,000 – 10,000) x P1]

11/10 Cash (5,000 shares x P21) P 105,000

Treasury stock (5,000 shares x P16) P80,000
APIC - from treasury stock transactions 25,000
APPLIED AUDITING

12/15 Retained earnings (2,500,000 x 9%) P 225,000

Dividends payable - preferred P225,000

12/31 Inventory, 1/1/06 P 150,000

Retained earnings P 90,000
Income tax payable 60,000

12/31 Income summary P2,250,000

Retained earnings P2,250,000

12/31 Retained earnings P 80,000

Retained earnings - appropriated (cost of TS) P 80,000

Question No. 5

Total stockholders' equity (see no. 4) P24,770,000

Less liquidation value of preferred stock 2,500,000
Common stockholders' equity 22,270,000
Divide by common shares outstanding 1,245,000
Book value per share of common stock P 17.89

Answers: 1) D; 2) C; 3) B; 4) B, 5) A

PROBLEM NO. 3

The stockholders’ equity section of the Asturias Inc. showed the following data
on December 31, 2005: Common stock, P3 par, 300,000 shares authorized,
250,000 shares issued and outstanding, P750,000; Paid-in capital in excess of
par, P7,050,000; Additional paid-in capital from stock options, P150,000;
Retained earnings, P480,000. The stock options were granted to key
executives and provided them the right to acquire 30,000 shares of common
stock at P35 per share. Each option has a fair value of P5 at the time the
options were granted.

The following transactions occurred during 2006:

Feb. 1 Key executives exercised 4,500 options outstanding at

December 31, 2005. The market price per share was
P44 at this time.

Apr. 1 The company issued bonds of P2,000,000 at par,

giving each P1,000 bond a detachable warrant
enabling the holder to purchase two shares of stock at
P40 each for a 1-year period. The bonds would sell at
APPLIED AUDITING

P996 per P1,000 bond without the warrant.

July 1 The company issued rights to stockholders (one right

on each share, exercisable within a 30-day period)
permitting holders to acquire one share at P40 with
every 10 rights submitted. All but 6,000 rights were
exercised on July 31, and the additional stock was
issued.

Oct. 1 All warrants issued in connection with the bonds on

April 1 were exercised.

Dec. 1 The market price per share dropped to P33 and options
came due. Because the market price was below the
option price, no remaining options were exercised.

Dec. 31 Net income for 2006 was P250,500.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of
December 31, 2006:

1. Common stock
a. P777,300 c. P833,850
b. P848,700 d. P850,050

2. Total additional paid-in capital

a. P7,522,200 c. P8,219,650
b. P8,402,800 d. P8,419,450

3. Total contributed capital

a. P8,299,500 c. P9,269,500
b. P9,053,500 d. P9,251,500

4. Retained earnings
a. P580,500 c. P730,500
b. P858,000 d. P654,150

5. Total stockholders’ equity

a. P10,000,000 c. P9,030,000
b. P 9,784,000 d. P9,982,000

Suggested Solution:

Questions No. 1 to 5

Common stock P 850,050 (1)

Additional paid in capital 8,419,450 (2)
Contributed capital 9,269,500 (3)
APPLIED AUDITING

Retained earnings 730,500 (4)

Total SHE, 12/31/06 P10,000,000 (5)

Note: Follow the same approach in Problem no. 2.

Journal entries affecting the stockholders equity accounts during 2006:

2/1 Cash (4,500 options x P35) P 157,500

APIC-stock options (4,500 x P5) 22,500
Common stock (4,500 shares x P3) P 13,500
APIC - excess over par 166,500

4/1 Cash P2,000,000

Bond discount [P2,000,000-(2,000xP996)] 8,000
Bonds payable P2,000,000
APIC-stock warrants 8,000

7/1 Memorandum: Issued rights to shareholders permitting holder to

acquire for a 30-day period one share at P40 with every 10 rights
submitted - a maximum of 25,450 shares (254,500 shares ÷ 10).

7/31 Cash {[25,450 - (6,000/10)] x P40} P 994,000

Common stock (24,850 shares x P3) P 74,550
APIC - excess over par 919,450

10/1 Cash (2,000 x 2 x P40) P 160,000

APIC-stock warrants 8,000
Common stock (2,000 shares x 2 x P3) P12,000
APIC - excess over par 156,000

12/1 APIC-stock options [P150,000-(4,500xP5)] P 127,500

APIC - expired stock options P127,500

12/31 Income summary P 250,500

Retained earnings P250,500

Answers: 1) D; 2) D; 3) C; 4) C, 5) A

PROBLEM NO. 4

Balamban Corporation was authorized at the beginning of 2004 with 540,000

authorized shares of P100, par value common stock. At December 31, 2004,
the stockholders’ equity section of Balamban was as follows:

Common stock, par value P100 per share;

authorized 540,000 shares; issued 54,000 P5,400,000
shares
Additional paid-in capital 540,000
Retained earnings 810,000
APPLIED AUDITING

Total stockholders’ equity P6,750,000

On May 10, 2005, Balamban issued 90,000 shares of its common stock for
P10,800,000. A 5% stock dividend was declared on September 30, 2005 and
issued on November 10, 2005 to stockholders of record on October 31, 2005.
Market value of common stock was P110 per share on declaration date. The
net income of Balamban for the year ended December 31, 2005 was
P855,000.

During 2006, Balamban had the following transactions;

Feb. 15 Balamban reacquired 5,400 shares of its common

stock for P95 per share.

May 15 Balamban sold 2,700 shares of its treasury stock for

P120 per share.

Jun 30 Issued to stockholders one stock right for each share

held to purchase two additional shares of common
stock for P125 per share. The rights expire on
December 31, 2006.

Aug. 15 45,000 stock rights were exercised when the market

value of common stock was P130 per share.

Sep. 72,000 stock rights were exercised when the market

30 value of the common stock was P140 per share.

Dec. 01 Balamban declared a cash dividend of P2 per share

payable on January 15, 2007 to stockholders of record
on December 31, 2006.

Dec. 15 Balamban retired 1,800 shares of its treasury stock

and reverted them to an unused basis. On this date,
the market value of the common stock was P150 per
share.

Dec. 31 Net income for 2006 was P900,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of
December 31, 2006:

1. Common stock
a. P38,520,000 c. P38,340,000
b. P26,640,000 d. P38,250,000

2. Additional paid-in capital

APPLIED AUDITING

a. P8,329,500 c. P5,413,500
b. P8,338,500 d. P8,266,500

3. Retained earnings
a. P1,080,000 c. P1,017,000
b. P1,002,600 d. P1,008,000

4. Treasury stock
a. P18,000 c. P85,500
b. P90,000 d. P 0

Suggested Solution:

Questions No. 1 to 4

Common Stock Retained Treasury

APIC Earnings stock
Balances, P 5,400,000 P 540,000 P 810,000 P 0
1/1/05
May 10, 9,000,000 1,800,000
2005
Sept. 30, 720,000 72,000 (792,000)
2005
Net 855,000
income-200
5
Balances, 15,120,000 2,412,000 873,000 0
12/31/05
Feb. 15 513,000
May 15 67,500 (256,500)
Aug. 15 9,000,000 2,250,000
Sep. 30 14,400,000 3,600,000
Dec. 01 (765,000)
Dec. 15 (180,000) 9,000 (171,000)
Net 900,000
income-200
6
Balances, P38,340,000 P8,338,500 P1,008,000 P 85,500
12/31/06

Answers: 1) C; 2) B; 3) D; 4) C

PROBLEM NO. 5

Bogo Corporation began operations on January 1, 2006. The company was

authorized to issue 60,000 shares of P10 par value common stock and
120,000 shares of 10%, P100 par value convertible preferred stock.

In connection with your audit of the company’s financial statements, you noted
the following transactions involving stockholders’ equity during 2006:
APPLIED AUDITING

Jan. 1 Issued 1,500 shares of common stock to the

corporation promoters in exchange for equipment
valued at P510,000 and services valued at P210,000.
The property costs P270,000 3 years ago and was
carried on the promoters’ books at P150,000.

Jan. 31 Issued 30,000 shares of convertible preferred stock at

P150 per share. Each share can be converted to five
shares of common stock. The corporation paid
P225,000 to an agent for selling the shares.

Feb. 15 Sold 9,000 shares of common stock at P390 per share.

The corporation paid issue costs of P75,000.

May 30 Received subscriptions for 12,000 shares of common

stock at P450 per share.

Aug. 30 Issued 2,100 shares of common stock and 4,200

shares of preferred stock in exchanged for a building
with a fair market value of P1,530,000. The building
was originally purchased for P1,140,000 by the
investors and has a book value of P660,000. In
addition, 1,800 shares of common stock were sold for
P720,000 cash.

Nov. 15 Payments in full for half of the subscriptions and partial

payments for the rest of the subscriptions were
received. Total cash received was P4,200,000.
Shares of stock were issued for the fully paid
subscriptions. The balance is collectible next year.

Dec. 1 Declared a cash dividend of P10 per share on

preferred stock, payable on December 31 to
stockholders of record on December 15, and P20 per
share cash dividend on common stock, payable on
January 15, 2007 to stockholders of record on
December 15.

Dec. 31 Paid the preferred stock dividend.

Net income for the first year of operations was

P1,800,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of
December 31, 2006:
APPLIED AUDITING

1. Common stock
a. P204,000 c. P264,000
b. P144,000 d. P186,000

2. Paid-in capital in excess of par value of preferred stock

a. P1,500,000 c. P1,275,000
b. P1,545,000 d. P1,860,000

3. Paid-in capital in excess of par value of common stock

a. P 8,211,000 c. P11,121,000
b. P10,851,000 d. P10,032,000

4. Retained earnings
a. P1,050,000 c. P 930,000
b. P1,170,000 d. P1,458,000

5. Total stockholders’ equity

a. P17,295,000 c. P15,810,000
b. P16,950,000 d. P17,010,000

Suggested Solution:

Questions No. 1 to 5

Preferred stock P3,420,000

Common stock 204,000 (1)
Subscribed common 60,000
Additional paid in capital - 1,545,000 (2)
preferred
Additional paid in capital - 10,851,000 (3)
common
Retained earnings 930,000 (4)
Total SHE, 12/31/06 P17,010,000 (5)

Journal entries affecting the stockholders equity accounts during 2006:

1/1 Equipment P510,000

Organization expenses 210,000
Common stock (1,500 shares x P10) P15,000
APIC - excess over par of CS 705,000

1/31 Cash (30,000 shares x P150) P4,500,000

Preferred stock (30,000 shares x P100) P3,000,000
APIC - excess over par of PS 1,500,000

APIC - excess over par of PS P225,000

Cash P225,000

2/20 Cash (9,000 shares x P390) P3,510,000

Common stock (9,000 shares x P10) P90,000
APPLIED AUDITING

APIC - excess over par of CS 3,420,000

APIC - excess over par of CS P75,000

Cash P75,000

5/30 Subscriptions rec. (12,000 sh. x P450) P5,400,000

Subscribed common stock (12,000 shares x P10) P120,000
APIC - excess over par of CS 5,280,000

8/30 Cash P 720,000

Common stock (1,800 shares x P10) P18,000
APIC - excess over par of CS 702,000

Building P1,530,000
Common stock (2,100 shares x P10) P 21,000
APIC - excess over par of CS
[(2,100 sh x P400*)-21,000] P 819,000
Preferred stock (4,200 shares x P100) P420,000
APIC - excess over par of PS (balance) P 270,000

* (P720,000/1,800 shares)

Note: The fair value of the building should be allocated to the

preferred stock and common stock based on fair values. The problem
did not specifically mention the fair value of the common stock.
However, on the same date the company issued 1,800 common
shares for P720,000 cash. Therefore, common shares were selling at
P400/share (P720,000/1,800). Since the fair value of the preferred
stock is not determinable, it will be assigned the residual amount after
deducting the fair value of common stock from the fair value of the
building.

11/07 Cash P4,200,000

Subscriptions receivable P4,200,000

Subscribed common stock (120,000 x 1/2) P60,000

Common stock P 60,000

Note: Since the subscriptions receivable is collectible next year, it will

be presented under current assets. Incidentally, if the subscriptions
receivable is not collectible currently, it will be presented under
stockholders’ equity.

12/01 Retained earnings P870,000

Dividends payable - Preferred P 342,000
Dividends payable – Common 528,000

Preferred - (P3,420,000/P100 x P10)

Common - {[(P204,000 + P60,000)/P10] x P20}
APPLIED AUDITING

Note: Shares issued plus subscribed less treasury shares are entitled
to dividends.

12/31 Income summary P1,800,000

Retained earnings P1,800,000

Answers: 1) A; 2) B; 3) B; 4) C, 5) D

PROBLEM NO. 6

The Borbon Corporation has requested you to audit its financial statements for
the year 2006. During your audit, Borbon presented to you its balance sheet
as of December 31, 2005 containing the following capital section:

Preferred stock P10 par; 60,000 shares authorized

and issued, of which 6,000 are treasury shares
costing P90,000 and shown as an asset P 600,000
Common stock, par value P4; 600,000 shares
authorized, of which 450,000 are issued and 1,800,000
outstanding
Additional paid in capital (P5 per share on preferred
stock issued in 2000) 300,000
Allowance for doubtful accounts receivable 12,000
Reserve for depreciation 840,000
Reserve for fire insurance 198,000
Retained earnings 2,250,000
Total stockholders’ equity P6,000,000

Additional information:

1) Of the preferred stock, 3,000 shares were sold for P18 per share on August
30, 2006. Borbon credited the proceeds to the Preferred Stock account.
The treasury shares as of December 31, 2005 were acquired in one
purchase in 2005.

2) The preferred stock carries an annual dividend of P1 per share. The

dividend is cumulative. As of December 31, 2005, unpaid cumulative
dividends amounted to P5 per share. The entire accumulation was
liquidated in June, 2006, by issuing to the preferred stockholders 54,000
shares of common stock.

3) A cash dividend of P1 per share was declared on December 1, 2006 to

preferred stockholders of record December 15, 2006. The dividend is
payable on January 15, 2007.

4) At December 31, 2006, the Allowance for Doubtful Accounts Receivable

and Reserve for Depreciation had balances of P25,000 and P1,050,000,
respectively.
APPLIED AUDITING

5) On March 1, 2006, the Reserve for Fire Insurance was increased by

P60,000; Retained Earnings was debited.

6) On December 31, 2006, the Reserve for Fire Insurance was decreased by
P30,000, which represents the carrying value of a machine destroyed by
fire on that date. Estimated fire cleanup costs of P6,000 does not appear
on the records.

7) The December 31, 2005 Retained Earnings consists of the following:

Donated land from a stockholder

(Market value on date of donation) P450,000
Gains from treasury stock transactions 51,000
Earnings retained in business 1,749,000
P2,250,000

8) Net income for the year ended December 31, 2006 was P1,297,500 per
company’s records.

QUESTIONS:

Based on the above and the result of your audit, determine the adjusted
balances of the following as of December 31, 2006. (Disregard tax
implications)

1. Total Additional paid-in capital

a. P414,000 c. P810,000
b. P804,000 d. P864,000

2. Retained earnings - Appropriated

a. P258,000 c. P228,000
b. P303,000 d. P0
3. Retained earnings - Unappropriated
a. P2,677,500 c. P2,578,500
b. P2,626,500 d. P2,623,500

4. Treasury stock
a. P45,000 c. P36,000
b. P90,000 d. P 0
5. Total stockholders’ equity
a. P3,700,500 c. P6,316,500
b. P5,812,500 d. P6,319,500

Suggested Solution:

Questions No. 1 to 5

Preferred stock P 600,000

Common stock 2,106,000
APPLIED AUDITING

Additional paid in capital 864,000 (1)

Retained earnings - Appropriated 303,000 (2)
Retained earnings - 2,578,500 (3)
Unappropriated
Treasury stock ( 45,000) (4)
Total SHE, 12/31/06 P6,316,500 (5)

Journal entries affecting the stockholders equity accounts during 2006:

1) Cash (3,000 shares x P18) P 54,000

Treasury stock-preferred
[(90,000/ 6,000 shares) x 3,000] P 45,000
APIC - from treasury stock transactions 9,000

2) Retained earnings P 270,000*

Common stock (54,000 shares x P4) P 216,000
APIC - excess over par 54,000

* [(60,000 – 6,000) x P5]

3) Retained earnings P 57,000**

Dividends payable P 57,000

** [(60,000 – 3,000) x P1]

4) Ignore
5) Retained earnings P 60,000
Retained earnings - appropriated P 60,000

6) See no. 8.

7) Retained earnings P 501,000

APIC - donated capital P 450,000
APIC - from treasury stock transactions 51,000

8) Income summary P1,261,500

Retained earnings P1,261,500

Net income per company's records P1,297,500

Fire loss erroneously charged to reserve for fire ( 30,000)
insurance
Estimated fire clean up cost ( 6,000)
Adjusted net income P1,261,500

9) Retained earnings P 45,000

Retained earnings - appropriated (cost of TS) P 45,000

Answers: 1) D; 2) B; 3) C; 4) A, 5) C
APPLIED AUDITING

PROBLEM NO. 7

Select the best answer for each of the following:

1. When no independent stock transfer agents are employed and the

corporation issues its own stocks and maintains stock records, canceled stock
certificates should
a.Be destroyed to prevent fraudulent reissuance.
b.Be defaced and sent to the SEC.
c.Not be defaced but segregated from other stock certificates and retained in a
canceled certificates file.
d.Be defaced to prevent reissuance and attached to their corresponding stubs.

2. All corporate capital stock transactions should ultimately be traced to the

a.Numbered stock certificates.
b.Minutes of the Board of Directors.
c.Cash receipts journal.
d.Cash disbursements journal.

3.Which of the following information is most important when auditing

shareholders’ equity?
a.Entries in the capital stock account can be traced to a resolution in the
minutes of the board of directors' meetings.
b.Stock dividends and/or stock splits during the year were approved by the
shareholders.
c.Stock dividends are capitalized at par or stated value on the dividend
declaration date.
d.Changes in the capital stock account are verified by an independent stock
transfer agent.

4.The primary responsibility of a bank acting as registrar of capital stock is to

a.Verify that stock is issued in accordance with the authorization of the board
of directors and the articles of incorporation.
b.Act as an independent third party between the board of directors and outside
investors concerning mergers, acquisitions, and the sale of treasury stock.
c.Ascertain that dividends declared do not exceed the statutory amount
allowable in the state of incorporation.
d.Account for stock certificates by comparing the total shares outstanding to
the total in the shareholders’ subsidiary ledger.

5.The CPA's examination normally need not include

a.Determining that dividend declaration is in compliance with debt agreements.
b.Tracing the authorization for the dividends from the directors' meetings.
c.Testing the propriety of the payment to the individual stockholders.
d.Detailed checking from the dividend payment list to the capital stock records.
Answers: 1) D; 2) B; 3) A; 4) A, 5) D;
APPLIED AUDITING

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Reference:
Compilation of lecture notes by
Dean Rene Boy R. Bacay , CPA, CrFA, CMC, MBA, FRIAcc
APPLIED AUDITING