$16-14$ Relating Errors, Frauds, Audit Procedures, and Assertions in Substantive Tests of Capital Stock

The following are errors, frauds, or other circumstances that an auditor might encounter as a result of applying audit tests to capital stock as of December $31,$ the balance sheet date.

$1.$ Shareholders$$ equity accounts are not accurate.

$2.$ Stock dividends were issued during the year.

$3.$ Treasury stock was purchased in December.

$4.$ Dividends were declared and paid before the end of the year.

$5.$ The client$$s common stock is traded actively on a national stock exchange.

Required: For each, indicate $($a$)$ a specific substantive test or tests that might address the error, fraud, or circumstance and $($b$)$ the financial statement assertion addressed by each test.

$16-15$ Auditing Shareholders$$ Equity

On May $1,2007,$ you were engaged by a committee of shareholders to perform a special audit as of December $31,2006,$ of the shareholders$$ equity of Major Corporation, whose stock is actively traded on a stock exchange. The shareholders who engaged you believe that information in the shareholders$$ equity section of the published annual report for the year ended December $31,2006,$ is incorrect. If your conclusions confirm their suspicions, they intend to use the report in a proxy fight. Management agrees to permit your audit but refuses to permit any direct confirmation with shareholders. To secure cooperation in the audit, the committee of shareholders has agreed to this limitation$,$ and you have been instructed to limit your audit accordingly. You also have been instructed to exclude the audit of revenue and expense accounts for the year.

Required:

$1.$ Prepare an audit program to audit shareholders$$ equity, assuming no scope limitations$.$

$2.$ Describe any special auditing procedures you would undertake given the limitations and other special circumstances you confront in the Major Corporation engagement.

$3.$ Discuss the content of your report for the special engagement, including comments on the opinion that you would issue.