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Team B - 17-27 and 18-31 - 17-27(Substantive tests for...

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17-27 (Substantive tests for stockholders’ equity balances) Jones, CPA, the continuing auditor of Sussex, Inc., is beginning the audit of the common stock and treasury stock accounts. Jones has decided to design substantive tests with control risk at the maximum level. Sussex has no par, no stated value common stock, and acts as its own registrar and transfer agent. During the past year, Sussex both issued and reacquired shares of its own common stock, some of which the company still owned at year-end. Additional common stock transactions occurred among the shareholders during the year. Common stock transactions can be traced to individual shareholders’ accounts in a subsidiary ledger and to a stock certificate book. The company has not paid any cash or stock dividends. There are no other classes of stock, stock rights, warrants, or option plans. Required What substantive tests should Jones apply in examining the common stock and treasury stock accounts? 1. Analytical Procedure: Some of the following ratios may be calculated and compared to determine any potential misstatement in stockholders equity section. a. Return on common stockholders' equity b. Equity to total liability and equity c. Dividend payout rate d. Earnings per share e. Sustainable growth rate 2. Check changes in capital stock account made during the year by verifying entries passed for that purpose. All entries have been passed are permitted under the law. 3. Check changes in retained earnings account through addition or deduction of profit or losses, any prior year adjustment has been properly recorded, all stock dividends have been properly quantified in monetary terms and all cash dividend has been properly recorded. 4 Any issues made during the year by the company is within the authorized capital limited for all types of stocks and all issues are in conformity with the law prevailing at that time. 5 Verify the number of shares issued and outstanding for each class of stock either preferred or common stock. Any repurchase during the year as treasury stock should be properly verified.
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