Audit of Share Capital

Overview

In the audit of share capital, we usually test various audit assertions, such as existence, completeness, and valuation. Hence, we usually try to detect the material misstatement that could occur at various assertion levels.

Additionally, we also need to review whether the client has complied with the law regarding share issues or the purchase of shares. Likewise, compliance with law and regulation is also our main concern, as auditors, when we perform the audit of share capital.

Share capital in the owner’s equity of the corporate clients can be the common share or preferred share. In this case, share capital accounts can change when the corporation issues or repurchases the shares.

Audit Assertions for Share Capital

In the audit of share capital, we usually test the audit assertions for share capital included in the table below:

Audit assertions for share capital
Existence	Share capital reported on the balance sheet really exists at the reporting date.
Completeness	All share capital transactions that should have been recorded have been recorded.
Valuation	Share capital balances are valued in accordance with applicable accounting standards.
Present and disclosure	Sufficient information about share capital have been properly disclosed in accordance with applicable accounting standards.

Audit Procedures for Share Capital

We usually use the substantive approach in the audit procedures for share capital. This is due to the number of transactions related to the share capital is usually small.

In this case, we usually perform the test of details in the audit work by testing various assertions, including existence, completeness, and valuation as well as present and disclosure.

Existence and Completeness

Existence assertion tests whether the share capital on the balance sheet actual exists while completeness assertion tests whether all share capital transactions have been recorded.

Example: test of existence and completeness assertions in the audit of share capital

Obtain the client’s articles of incorporation, bylaws and board meeting minutes
Agree the authorized share capital to the supporting documents above
Reconcile the authorized share capital with the general ledger

Valuation

Valuation assertion tests whether the share capital on the balance sheet has been properly valued in accordance with applicable accounting standards. Usually, valuation doesn’t have many issues as the share issue is usually done in the form of cash transactions.

However, if the share issue is not in the form of cash, we need be careful in evaluating whether share capital value is correct or not.

Example: test of valuation assertion in the audit of share capital

Obtain the client’s board meeting minutes
Agree share transactions records (either our own records or independent agent) to the board meeting minutes e.g. for the evidence of share issue
If the share issue is in the form of cash,
- trace the proceed from the share issue to the cash receipts journal
- vouch the share issue transactions to supporting documents to make sure that they are properly and accurately recorded in capital accounts.
If the share issue is in the form of non-cash transactions, make sure that the client has properly followed an applicable accounting standard, when recording the share issue.

Presentation and disclosure

In the audit of share capital, presentation and disclosure assertion is also an important assertion that we need to properly examine. We need to make sure that sufficient and proper information about share capital have been disclosed in accordance with applicable accounting standards.

The information that the client’s need to disclose in the note to financial statements regarding the share capital may include:

Each class of share capital
Special right related to each class of share
Number of shares authorized and issued
Any share options or convertible features of shares
Any restrictions on retained earnings
Any adjustment made in comprehensive income
Any adjustment made to prior-period, etc.