Question: Stockholders' Equity. You are a CPA engaged in an audit of the financial statements 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 years. The stockholders' equity section of Pate Corporation's balance sheet at December 31 follows: Pate Corporation was founded in 1985. The corporation has 10 stockholders and serves as its own registrar and transfer agent. No capital stock subscription contracts are 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 the audit of the results of the current-year 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 audit work. Why do auditors audit retained earnings as they do the other figures on the balance sheet? Discuss.