Reference no: EM13137169

Stockholders’ Equity. You are a CPA engaged in an audit of the financial statement of Pate Corporation for the year ended December 31. The financial statements and records of Pate Corporation have not been audited by a CPA in prior year.

The stockholders’ equity section of Pate Corporation’s balance
sheet at December 31, as follows:

Stockholders’ Equity:

Capital stock—10,000 shares of $10 par value authorized: $ 50,000
5,000 shares issued and outstanding
Capital contributed in excess of par value of capital stock 32,580
Retained earnings 47,320
Total stockholders’ equity $129,900

Pate Corporation was founded in 1985. The corporation has 10 stockholders and serves as its own registrar and transfer agent. There are no capital stock subscription contracts in effect.

Required

a. Prepare the detailed audit plan for the examination of the three accounts composing the stockholders’ equity section of Pate Corporation’s balance sheet. Organize the audit plan under broad financial statement assertions. (Do not include in the audit plan for the audit of the results of the current year operations.)

b. After every other figure on the balance sheet have been audited, it might appear that the retained earnings figure is a balancing figure and requires no further audit work. Why do auditors audit retained earnings as they do the other figures on the balance sheet? Discuss.