$16-17$ Discrepancies Between Authorized and Outstanding Shares

Eaton Company was incorporated July $10,2007,$ with authorized capital as follows: a$.$ Common stock, Class A$,20,000$ shares, par value $$25$ per share.

b$.$ Common stock, Class B$,100,000$ shares, par value $$5$ per share.

The capital stock account in the general ledger is credited with only one item in the year $2007,$ capital stock sold for cash, at par, as follows:

a$.$ Class A$,12,000$ shares.

b$.$ Class B$,60,000$ shares.

The sum of open certificate stubs in the stock certificate books at December $31,2007,$ indicates that $82,000$ shares of stock were outstanding.

Required:

$1.$Explain the discrepancy.

$2.$What procedures would you perform to determine the cause of the discrepancy?

$16-18$ Earnings Manipulation and Financial Instruments

Signet Corporation management is transferring securities across their held$-$to$-$maturity, trading, and available$-$for$-$sale portfolios. Within the industry, management has the reputation of being aggressive, both in operating the business and in securities trading. In prior years, income from investments has exceeded $10$ percent of reported earnings.

Required: Identify, and explain the motive for, the key questions an auditor must ask to judge whether management's accounting for financial instruments is appropriate.