AUDIT OF SHAREHOLDERS' EQUITY

In examining shareholders' equity accounts, the accounts aims to determine:

(a.) the propriety of the charges and credits to the accounts
(b.) the propriety of presentation of the accounts on the balance sheet, and
(c.) client's compliance with the relevant legal requirement.

Management Assertions, Audit Objectives and Audit Procedures

EXISTENCE OR OCCURRENCE
A. To determine the validity of recorded shareholders' equity balances and
whether the transactions actually occurred
1. Obtain schedule of shareholders' equity accounts and reconcile to the
general ledger balances.
2. Review authorizations and terms of share issue
3. Confirm shares outstanding with registrar on share and transfer agent
4. Inspect share certificate books
5. Inspect certificates of shares held in treasury

COMPLETENESS
B. To determine whether recorded shareholders' equity accounts reflect
all data that should be recorded
6. Perform analytical review procedures

RIGHTS AND OBLIGATION

C. To determine whether the entity has the authority to execute the
shareholders' equity transactions, e.g. whether share capital was
legally issued and shareholders have a legal claim on corporate assets
at the balance sheet date.
7. Review articles of incorporation and by-laws
8. Make Inquiries of legal counsel

VALUATION AND ALLOCATION

D. To determine whether the shareholders' equity balances are shown in the
proper statement amounts in accordance with PAS/PFRS
9. Vouch share capital entries, dividend entries and entries to
retained earnings

PRESENTATION AND DISCLOSURE

E. To determine that the shareholders' equity accounts are properly presented
in the balance sheet
10. Review minutes of board directors' and shareholders' meetings for
share options and dividend restrictions
11. Evaluate financial statement presentation and disclosure for
shareholders' equity accounts

INTERNAL CONTROL MEASURES

A. 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 or transfer agent or an

fa
________________
Prepared by:
TM
Daniel John F. Falo, CPA, MBA
 AUDIT OF SHAREHOLDERS' EQUITY

independent registrar.
B. 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
C. 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
D. Cancelled certificates should be mutilated and any necessary documentary
stamps should be attached to the cancelled certificates.
E. Entries for share issuances and transfers should be made by a person who does
not have authority to sign and issue certificates.

Review on Shareholders' equity

Authorized share capital xx
Less: Unissued share capital (xx)
Issued share capital xx
Subscribed share capital xx
Subscription receivable (xx)
Share premium xx
Retained earnings unappropriated xx
Retained earnings appropriated xx
Treasury shares (xx)
Shareholders' equity xx

Issued share capital xx

Subscribed share capital xx
Subscription receivable (xx)
Share premium xx
Contributed capital / Paid in capital xx
*Excludes Retained earnings, treasury shares are not deducted

Retained Earnings
Stock dividend => 20% - charged to RE at par or stated value
Stock dividend < 20% - charged to RE at FV or par or stated value, whichever is higher.
Property dividend - charged to RE at fair value on the date of declaration, at year-end
and the date of settlement.
The property to be distributed is measured at year end, at the lower between
carrying amount or fair value less cost to distribute.
On the date of settlement, the difference between the dividend payable and
the carrying amount of the property is gain or loss on distribution of
property dividend
Items affecting unappropriated retained earnings include:
1. Prior period errors
2. Net income or loss
3. Dividends declared or paid
4. Changes in accounting policy
5. Realization of revaluation surplus and apprpriated retained earnings

fa
________________
Prepared by:
TM
Daniel John F. Falo, CPA, MBA
 AUDIT OF SHAREHOLDERS' EQUITY

Share options
Fair value of share options on the date of grant is recognized as total compensation
The total compensation is allocated over the vesting period.
If the the share options vest immediately, the total compensation is
recognized immediately.
Intrinsic value of the share options is measured at every year-end until the date
of settlement
Share appreciation rights -
The liability for the compensation is equal to the excess of the market price of the
share over a predetermined price.
Such liability is measured at every year-end until the date of settlement.

Book value per preference and ordinary share

Preference share equity equals preference shares outstanding plus liquidation premium
and preference dividends in arrears.
If cumulative, all dividends in arrears are paid.
If noncumulative, only current year dividend is paid
Ordinary share equity equals total shareholders' equity minus preference share equity

Basic earnings per share (BEPS)

Net income minus annual preference dividend divided by average ordinary shares outs.
If cumulative, the annual preference dividend is deducted from net income regardless
of declaration
If noncumulative, the annual preference dividend is deducted only when declared

Diluted earnings per shares (DEPS)

Adjusted net income divided by ordinary shares outstanding plus
potential ordinary shares
Potential ordinary shares:
Ordinary shares into which preference shares are convertible
Ordinary shares into which bonds are convertible
Ordinary shares covered by share options minus assumed treasury shares.
The number of assumed treasury shares is equal to the proceeds from the assumed
exercise of share options divided by the average market price of the share
The option price must be lower than the average market price, otherwise, the
share options are "anti-dilutive" and therefore ignored.
The adjusted net income is equal to the net income per book plus interest exense on
bonds, net of tax
The annual preference dividend is no longer deducted from net income.
The share options do not affect net income

fa
________________
Prepared by:
TM
Daniel John F. Falo, CPA, MBA