You are engaged in the audit of Bordon Corporation, whose records have not previously been audited by your firm. The company has an independent transfer agent, as well as a registrar for its capital stock. The transfer agent maintains the record of

Question

stockholders, while the registrar checks that there is no overissue of stock. Both the transfer agent and registrar are required to validate stock certificates. One of the seniors on the audit proposes that confirmations be obtained from both the transfer agent and registrar regarding the outstanding stock balance at the balance sheet date. If the confirmations agree with the books, then he proposes that no additional work is to be performed on the capital stock account. REQUIRED: Do you agree or disagree that this will be sufficient? If yes, give the justification for your position. If no, state specifically all additional steps you would take and why you would take them.

Answer 1

The senior's proposal of limiting work to the confirmations is not justified by the facts in the scenario. Although the transfer agent and the registrar know the number of shares issued, they do not necessarily know the number of shares outstanding. Furthermore, an audit of capital stock includes more than just determining the number of shares outstanding. For example, do authorizations exist for the issuance of shares? What assets were received in payment of shares? How were the transactions recorded? Are there any subscription contracts? Confirmation from the registrar could not help in determining these things.
Additional audit steps that need to be taken for the Bordon Corporation audit are:
1 . Examine the corporation charter to determine the number of shares authorized and the special provisions for each class of stock if more than one class is authorized.
2 . Examine minutes of stockholders' and directors' meetings to determine authorization for appointments of the registrar and the transfer agent; to determine authorization for the issuance or reacquisition of shares.
3 . Examine provisions regarding capital stock in the corporation law of the state of incorporation—to determine any special provisions, such as those for the issuance of no par stock.
4 . Analyze the capital stock accounts to obtain an orderly picture of stock transactions for use as a guide to other auditing procedures and as a permanent record.
5 . Trace the consideration received for capital stock into the records—to determine what consideration has been received and how it has been recorded.
6 . Examine and schedule treasury stock and review entries for treasury stock—to determine the existence of treasury stock as authorized and to determine that a proper record has been made.
7 . Review registrar's invoices and cash disbursements—to determine that original issue taxes have been paid.
8 . Compare dividends with stock outstanding at dividend dates—to determine that dividends have been properly paid and also to substantiate the stock outstanding.
9 . Review subscription and option contracts, etc.—to determine the facts in regard to subscriptions and options and to determine that these facts have been properly recorded and that they are adequately disclosed.