Founded eight years ago, Zeitlow Corporation has $10$ stockholders and serves as its own transfer agent. Prepare the detailed audit program for the examination of the three accounts composing the stockholders' equity section of Zeitlow Corporation's balance sheet. Do not include procedures related to the verification of the results of the current$-$year operations.

$13-16LO7$ Describe the evidence typically obtained from tests of controls when auditing debt or equity.

$13-17$ LO $8$ Review the two panels in Exhibit $13\mathrm{.}3.$ Describe the two alternative approaches to auditing interest expense and the reason for the difference in approaches.

$13-18$ LO $8$ Refer to Exhibit $13\mathrm{.}4$ and identify typical substantive procedures for relevant assertions related to debt.

$13-19$ LO $8$ Identify substantive procedures that the auditor should perform related to dividends.

$13-20$ LO $8$ Retained earnings is a component of stockholders' equity. What substantive procedures will the auditor typically perform related to retained earnings?

$13-21$ LO $8$ What important items should the auditor document related to substantive procedures for debt and equity?

$13-22$ LO $8$ What information should the auditor note when reading a bond indenture? How will the auditor use this information in the audit?

$13-23$ LO $8$ After the auditor completes auditing all other account balances on the balance sheet, it might appear that the retained earnings figure is a balancing figure and requires no further audit procedures. Why would an auditor still audit retained earnings?

$13-24$ LO $8$ Assume your audit client declared a $5\%$ stock dividend. Identify the evidence you would examine to determine whether the client appropriately accounted for the stock dividend.

$13-25$ LO $8$ Explain how the auditor might use a bond amortization spreadsheet when auditing interest expense over the life of a bond.

$13-26$ LO $8$ The auditor should review a bond indenture at the time a bond is issued and anytime subsequent changes are made to it$.$

a$.$ Briefly identify the information the auditor would expect to obtain from a bond indenture. List at least five specific pieces of information that would be relevant to the audit.

b$.$ Because auditors are especially concerned with the potential understatement of liabilities, should they confirm the existence of the liability with individual bondholders? State your rationale.

c$.$ Assume that a company issued bonds at a discount. Explain how to compute the amount of the discount and how the auditor could determine whether the amount is properly amortized each year.

Review Questions and Short Cases $727$

d$.$ Explain how the auditor could verify that semi$-$annual interest payments are made on the bond each year.

e$.$ Assume a company has a $15-$year, $$20$ million loan that is due on September $30$ of next year. It is the company's intent to refinance the bond before it is due, but it is waiting for the best time to issue new debt. Because its intent is to issue the bond next year, the company believes that the existing $$20$ million bond need not be classified as a current liability. What evidence should the auditor gather to determine the appropriate classification of the bond?