Confirming Transactions When Auditing Stockholder Equity

By Maire Loughran from Auditing For Dummies

When performing an audit of stockholder equity, you will want to verify the transactions with an independent registrar, who can confirm that all stockholders’ equity transactions are authorized by a company’s board of directors and are in accordance with its corporate charter. For example, the registrar keeps track of the number of shares outstanding to make sure the company doesn’t issue more shares than the charter allows.

Independent registrars also verify that equity-related transactions are recorded correctly as to account (common or preferred), dollar amount, and financial period, and that the equity section of the balance sheet is properly described and disclosed. They advise their client about any recording issues so the company can adjust their books or make disclosures.

Here are a couple of examples of proper balance sheet descriptions. One is for common stock and one is for preferred:

Common: Common stock, $3 par value, 1,000,000 shares authorized, 250,000 shares issued at December 31, 20XX.

This means the stock value in the corporate charter is $3 (remember that this amount is usually an arbitrary number); the total number of shares the corporation can sell at any one time is 1,000,000; and as of December 31, 20XX, 250,000 shares have been sold to investors.
Preferred: Preferred stock, 5%, $100 par value, cumulative, 10,000 shares authorized, issued and outstanding.

Because preferred stock has a debt-like characteristic, the amount of return the corporation has to pay is printed on each share. In this description, it’s 5 percent. The face value per the corporate charter is $100. The number of shares the corporation can issue at any one time is limited to 10,000, and all 10,000 are currently sold to investors.

All corporations have to issue at least one share of common stock. After all, someone has to be in charge of voting in the board of directors!

Finally, independent registrars also monitor the actions of the stock transfer agent.

If your audit client uses an independent registrar, you should address the following in your confirmation:

The number of shares authorized.
The number of shares issued and outstanding.
The amount of any unbilled fees the company has incurred for the services of the independent registrar or transfer agent as of the balance sheet date. Check to make sure the corporation has listed this fee as a payable.

If you notice any discrepancies, discuss them with the client and your audit supervisor. Any discrepancies can be fixed by giving the client a journal entry or instructions to correct the share’s caption.

In addition to independent registrars, some corporations hire transfer agents and dividend-disbursing agents to handle certain aspects of equity transactions. If your audit client uses a transfer agent and/or a dividend-disbursing agent, confirm the relevant facts of actions they take on behalf of the client.

Transfer agents have three major duties:

Issuing and canceling stock certificates: Agents keep track of who owns the stock, how much stock they own, and how the stock is held. For example, is it held by the individual directly or by her brokerage firm?
Communicating with shareholders: This duty includes mailing monthly reports and sending proxy statements, which go to all shareholders of record when the board of directors solicits the shareholders’ vote on a proposed action the corporation wants to take.
Handling lost or stolen stock certificates: If a stockholder loses possession of his stock certificates, the transfer agent puts a stop transfer on the certificates, freezing them to prevent another person from transferring them to his own name. It’s kind of like putting a stop payment on a check.