Question: (Audit of Stockholders’ Equity) 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.
Required to do:
Q1. 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.)
Q2. 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.