Response to the following problem:
You are a CPA engaged in an audit of the financial statements of Pate Corporation for the year ended December 31, 2013. The financial statements and records of Pate Corporation have not been audited by a CPA in prior years. The stockholders' equity section of Pate Corporation's balance sheet at December 31, 2013, 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 2006. 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 program for the audit of the three accounts comprising the stockholders' equity section of Pate Corporation's balance sheet. (Do not include in the audit program the verification of the results of the current year's operations.)
b. After every other figure on the balance sheet has been audited, it might appear that the retained earnings figure is a balancing figure and requires no further verification. Why does the CPA verify retained earnings as is done with the other figures on the balance sheet? Discuss.