James Carson and Martin Tighe, CPAs have audited all the figures on the balance sheet. James Carson argues with Martin Tighe that since the retained earnings figure is a balancing figure, it requires no further verification. Martin Tighe, however, disagrees and argues that they should still choose to verify retained earnings. Who do you agree with and why?
Martin Tighe is correct.
The retained earnings account should be audited because these audit procedures help to provide reasonable assurance that:
? no important items were overlooked in the examination of the account;
? the account is handled in accordance with GAAP, for example, only prior period correcting entries are taken to retained earnings directly;
? extraordinary items are recorded through the income statement; and
? stock dividends are recorded correctly.
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