Response to the following problem:
Items 1 through 6 are common questions found in internal control questionnaires used by auditors to obtain an understanding of internal control for owners' equity. In using the questionnaire for a client, a "yes" response indicates a possible internal control, whereas a "no" indicates a potential deficiency.
1. Are all entries in the owners' equity accounts authorized at the proper level in the organization?
2. Are issues and retirements of stock authorized by the board of directors?
3. Does the company use the services of an independent registrar or transfer agent?
4. If an independent registrar and transfer agent are not used: (a) Are unissued certificates properly controlled? (b) Are cancelled certificates mutilated to prevent their reuse?
5. Are common stock master files and stock certificate books periodically reconciled with the general ledger by an independent person?
6. Is an independent transfer agent used for disbursing dividends? If not, is an imprest dividend account maintained?
Required:
a. For each of the preceding questions, state the purpose of the control.
b. For each of the preceding questions, identify the type of potential financial statement misstatements if the control is not in effect.
c. For each of the potential misstatements in part b., list an audit procedure that the auditor can use to determine whether a material misstatement exists.