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22-3 It is common to audit the balance in notes payable in conjunction withthe audit of interest expense and interest payable because it minimizes theverification time and reduces the likelihood of overlooking misstatements in thebalance. Once the auditor is satisfied with the balance in notes payable and therelated interest rates and due dates for each note, it is easy to test the accuracyof accrued interest. If the interest expense for the year is also tested at the same

time, the likelihood of omitting a note from notes payable for which interest hasbeen paid is minimized. When there are a large number of notes or a largenumber of transactions during the year, it is usually too time consuming tocompletely tie out interest expense as a part of the audit of the notes payableand related accrued interest. Normally, however, there are only a few notes andfew transactions during the year.

22-4 The most important controls the auditor should be concerned about inthe audit of notes payable are:

1. The proper authorization for the issuance of new notes (or

renewals) to insure that the company is not being committed to debtarrangements that are not authorized.

2. Controls over the repayment of principal and interest to insure thatthe proper amounts are paid.

3. Proper records and procedures to insure that all amounts in alltransactions are properly recorded.

4. Periodic independent verification to insure that all the controls overnotes payable are working.

22-5 The most important analytical procedures used to verify notes payableis a test of interest expense. By the use of this test, auditors can uncover

misstatements in interest calculations or possible unrecorded notes payable.

22-6 It is more important to search for unrecorded notes payable than unrecordednotes receivable because the omission of an asset is less likely to occur than theomission of a debt. Several audit procedures the auditor can use to uncoverunrecorded notes payable are:

1. Examine the notes paid after year-end to determine whether theywere liabilities at the balance sheet date.

2. Obtain a standard bank confirmation that includes specific referenceto the existence of notes payable from all banks with which the

client does business.3. Review the bank reconciliation for new notes credited directly to thebank account by the bank.

4. Obtain confirmation from creditors who have held notes from theclient in the past and are not currently included in the notes payableschedule.
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22-10 (continued)

2. Owners' equity transactions are recorded properly, as defined bythe following six transaction-related audit objectives:

Occurrence

Completeness Accuracy Posting and summarization Classification Timing

3. Owners' equity balances in the financial statements satisfy thefollowing balance-related audit objectives:

Detail tie-in Existence

Completeness Accuracy Classification Cutoff

4. Owners' equity balances are properly presented and disclosed tosatisfy the following presentation and disclosure-related auditobjectives:

Occurrence and Rights and Obligations Completeness

Accuracy and Valuation Classification and Understandability

22-11 Although the corporate charter and bylaws are legal documents, theirlegal nature is not being judged by the auditor. They are being used only toreference transactions being tested by the auditor and provide insight into someof the key control features of the company. The auditor should consult an attorneyif the information the auditor needs from the documents is not clear or if a legalinterpretation is needed.

22-12 The major internal controls over owners' equity are:

1. Proper authorization of transactions2. Proper record keeping3. Adequate segregation of duties between maintaining owners' equity

records and handling cash and stock certificates4. The use of an independent registrar and stock transfer agent

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22-13 The audit of owners' equity for a closely held corporation differs from thatfor a publicly held corporation in that the amount of time spent in verifyingowners' equity in a closely held corporation is usually minimal because of therelatively few transactions for capital stock accounts that occur during the year.For publicly held corporations, the audit of owners' equity is more complex due tothe existence of a larger number of shareholders and frequent changes in the

individuals holding stock.The audits are not significantly different in regard to whether the

transactions in the equity accounts are properly authorized and recorded andwhether the amounts in the accounts are properly classified, described, andstated in accordance with generally accepted accounting principles.

22-14 The duties of a stock registrar are to make sure that stock is issued by acorporation in accordance with the capital authorization of the board of directors,to sign all newly issued stock certificates, and to make sure old certificates arereceived and cancelled before a replacement certificate is issued when there is achange in the ownership of the stock.

The duties of a transfer agent are to maintain the stockholder records,and in some cases, disburse cash dividends to shareholders.

The use of the services of a stock registrar improves the effectiveness ofthe client's internal controls by preventing the improper issuance of stockcertificates. Along similar lines, the use of the services of an independent transferagent improves the control over the stock records by putting them in the hands ofan independent organization.

22-15 The number of shares outstanding, the correct valuation of capital stocktransactions, and par value can all be confirmed with a transfer agent. Thebalance can then be easily recalculated from this information.

22-16 Since it is important to verify that properly authorized dividends havebeen paid to owners of stock as of the dividend record date, a comparison of arandom sample of cancelled dividend checks to a dividend list prepared bymanagement would be inadequate. Such an audit step is useless unless thedividend list has first been verified to include all stockholders of record at thedividend record date. A better test is to determine the total number of sharesoutstanding at the dividend date from the stock registrar and recompute the totaldividends that should have been paid for comparison with the total amountactually paid. A random sample of cancelled checks should then be compared tothe independent registrar's records to verify that the payments were actually

made to valid shareholders.

22-17 If a transfer agent disburses dividends for a client, the total dividendsdeclared can be verified by tracing the amount to a cash disbursement entry tothe agent and also confirming the amount. There should ordinarily be no need totest individual dividend disbursement transactions if a stock transfer agent isused.

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22-18 The major emphasis in auditing the retained earnings account should beon the recorded changes that have taken place during the year, such as netearnings for the year, dividends declared, prior period adjustments, extraordinaryitems charged or credited directly to retained earnings, or setting up or eliminationof appropriations. Except for dividends declared, the other items should beverified during other parts of the engagement. This is especially true of the net

earnings for the year. Therefore, the audit of retained earnings primarily consistsof an analysis of the changes in retained earnings and the verification of theauthorization and accuracy of the underlying transactions.

22-19 For auditing owners' equity and calculating earnings per share, it is crucialto verify that the number of shares used in each is accurate. Earnings are verifiedas an integral part of the entire audit and should require no additional verificationas a part of owners' equity. The most important auditing considerations inverifying the earnings per share figure are the accounting principles prescribedby SFAS 128 and the descriptions of the various classes of stock in the corporatecharter and minutes of the board of directors.

Multiple Choice Questions From CPA Examinations

22-20 a. (2) b. (2) c. (2)

22-21 a. (4) b. (3) c. (1)

Discussion Questions and Problems

22-22

a.

PURPOSE OFCONTROL

b.POTENTIALFINANCIAL

STATEMENTMISSTATEMENT

c.AUDIT PROCEDURE

TO DETERMINEEXISTENCE OF

MATERIAL MISSTATEMENT

1. To insure that allnote liabilities areactual liabilities ofthe company.

Loss of assets throughpayment of excessinterest rates or thediversion of cash to

unauthorized persons.

Examine note request formsfor proper authorization anddiscuss terms of note withappropriate management

personnel.

2. To insure that notetransactions arerecorded in full andin detail.

Improper disclosure ormisstatements in notespayable throughduplication.

Reconcile detailed contents ofmaster file or other records tocontrol account.

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22-22 (continued)

a.

PURPOSE OF

CONTROL

b.POTENTIALFINANCIAL

STATEMENT

MISSTATEMENT

c.AUDIT PROCEDURE



3. To insure that allnote-relatedtransactions agreewith accountbalances.

Misstatement of notespayable.

Reconcile master file withoutstanding notes payable.

4. To prevent misuseof notes and fundsearmarked for notes.

Misstatement ofliabilities and cash.

Perform all substantiveprocedures on extended basis.Trace from paid notes file tocash receipts to determine thatthe appropriate amount of cashwas received when the notewas issued.

5. To insure that notesare not paid morethan once.

Loss of cash. Examine outstanding notesand paid notes for similaritiesand the potential for reusingthe notes.

6. To insure that onlythe proper interestamount is paid andrecorded.

Misstatement ofinterest expense andrelated accrual.

Recompute interest on a testbasis.

22-23 a.

AUDIT PROCEDURE PURPOSE

1 To determine the nature of restrictions on client as ameans of verifying whether the restrictions have beenmet and to insure they are adequately disclosed.

2 To insure that the bonds are not subject to unnecessaryearly retirement by bondholders and that properdisclosures are made.

3 To determine if the account balances are reasonable asrelated to each other and to examine for unreasonablechanges in the account balances.

4 To determine if the calculations are correct and accountsare accurate.

5 To obtain independent confirmation of bond indebtednessand collateral.

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22-23 (continued)

b. The auditor should be alert for the following provisions in the bondindenture agreement:

1. Restrictions on payment of dividends

2. Convertibility provisions3. Provisions for repayment4. Restrictions on additional borrowing5. Required maintenance of specified financial ratios

c. The auditor can determine whether the above provisions have beenmet by the following procedures:

1. Audit of payments of dividends2. Determine if the appropriate stock authorizations are adequate3. Determine if sinking fund is adequate

4. Search for other liabilities5. Calculate ratios and compare to agreement

d. The auditor should verify the unamortized bond discount or premiumon a bond that was in force at the beginning of the year byrecalculation. This is done by dividing the premium or discount bythe number of total months the bonds will be outstanding andmultiplying by the number of months remaining. For bonds issuedin the current year, the bond premium or discount must first beverified. The monthly premium or discount is then calculated andmultiplied by the number of months still outstanding.

e. The following information should be requested from the bondholderin the confirmation of bonds payable:

1. Amount of bond2. Maturity date3. Interest rate4. Payment dates5. Payment amounts6. Assets pledged as security7. Restrictions on client activities

22-24 a. The auditing necessary for notes payable and related interestaccounts in these circumstances would be minimal. Aside fromchecking interest calculations and postings to the proper accountsas a matter of audit routine, the only major audit procedure wouldbe to confirm the amount and provisions of the note with the bank.

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22-24 (continued)

b. If Fox was unprofitable, had a need for additional financing, andhad deficient internal controls, it would be necessary to search forunrecorded notes. This could be done by obtaining standard bankconfirmations with specific reference to the existence of notes

payable, reviewing the bank statements and reconciliations for newnotes credited directly to the bank account by the bank, andanalyzing interest expense to uncover a payment to a creditor whois not included on the notes payable schedule.

22-25 a. The emphasis in the verification of notes payable in this situationshould be in determining whether all existing notes are included inthe client's records. The four audit procedures listed do not satisfythis emphasis.

b.

AUDIT PROCEDURE PURPOSE

1 To determine if the notes payable list reconciles to thegeneral ledger.

2 To determine if the notes payable on the list are correctlyrecorded and disclosed.

3 To verify that all recorded notes payable are properlyrecorded and disclosed.

4 To insure that interest expense is properly recorded onthe books.

c. Procedure 2 is not necessary in light of procedure 3. They bothperform the same function and the confirmation is from anindependent source. The sample sizes for the procedures areprobably appropriate, considering the deficiencies in record keepingprocedures.

d. In addition to the procedures mentioned, the following ones areessential because there must be a search for unrecorded notes:

1. Analyze interest expense and send a confirmation for notespayable to all payees not receiving a confirmation for notes.

2. Confirm the balance in notes payable to payees included inlast year's notes payable list but not confirmed in the currentyear.

3. Examine notes paid after year-end to determine whetherthey were liabilities at the balance sheet date.

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22-25 (continued)

4. Obtain a standard bank confirmation that includes a specificreference to notes payable from all banks with which the clientdoes business.

5. Review the minutes of the board of directors.

22-26 In each case, any actual failure to comply would have to be reported in afootnote to the statements in view of the possible serious consequences ofadvancing the maturity date of the loan. The individual audit steps that should betaken are as follows:

a. Calculate the working capital ratio at the beginning of and throughthe previous fiscal year. If it is under 2 to 1, determine compensationof officers for compliance with the limitation.

b. Examine the client's copies of insurance policies or certificates of

insurance for compliance with the covenant, preparing a scheduleof book value, appraised or estimated value, and coverage for thereport. Confirm policies held with trustee.

c. Examine vouchers supporting tax payments on all property coveredby the indenture. By reference to the local tax laws and the vouchers,determine that all taxes have been paid before the penalty-freeperiod expired. If the vouchers in any case are inadequate, confirmwith the trustee who holds the tax receipts.

d. Vouch the payments to the sinking fund. Confirm bond purchases

and sinking fund balance with trustee. Observe evidence ofdestruction of bonds for bonds cancelled. Report the fund as anasset, preferably giving the composition as to cash and bonds heldalive, if any.

22-27 a. It is desirable to prepare an audit schedule for the permanent filefor the mortgage so that the appropriate information concerning themortgage will be conveniently available for future years' audits. Thisinformation should include all the provisions of the mortgage as wellas the purchase price, date of purchase, and a list of items pledgedas collateral. It may also contain an amortization schedule of

principal and interest (especially if the auditor has access to acomputer program for preparation of such a schedule).

b. The audit of mortgage payable, interest expense, and interest payableshould all be done together since these accounts are related andthe results of testing each account have a bearing on the otheraccounts. The likelihood of misstatement in the client's records isdetermined faster and more effectively by doing them together.

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22-27 (continued)

c. The audit procedures that should ordinarily be performed to verifythe issue of the mortgage, the balance in the mortgage and interestpayable, and the balance in the interest expense accounts are:

1. Determine if the mortgage was properly authorized.2. Obtain the mortgage agreement and schedule the pertinent

provisions in the permanent file, including the face amount,payments, interest rate, restrictions, and collateral.

3. Confirm the mortgage amount, terms, and collateral with thelending institution.

4. Recompute interest payable at the balance sheet date andreconcile interest expense to the decrease in principal andthe payments made.

5. Test interest expense for reasonableness.

d. Generally accepted accounting principles require disclosures relatedto long-term debt. The terms of the debt agreement are to bedisclosed, including interest rates, maturity dates, five-year paymentinformation, assets pledged as collateral, among other items.Significant restrictions on the activities of the company, such asmaintaining cash or other compensating balances or restricting theamount of dividends that can be paid, should be disclosed. Thus,auditors obtain copies of long-term debt agreements to determinethat the clients disclosures are complete and accurate.

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22-28

a.

PURPOSE

OF CONTROL

b.

POTENTIAL FINANCIALSTATEMENT

MISSTATEMENT

c.AUDIT PROCEDURES



1. To insure thatrecords areproperlymaintained.

Misstatement of owners'equity and thedisbursement ofdividends and capital tothe wrong people.

Determine if company usesservices of an independentregistrar, or transfer agent.Confirm details of equityaccounts with them.

2. To insure thatrecords areproperlymaintained.

Misstatement of owners'equity and earnings pershare.

Account for all unissuedcertificates and account for allcancelled certificates andtheir mutilation.

3. To insure that thegeneral ledgerreflects the balanceof supportingrecords.

Misstatement of owners'equity and earnings pershare.

Trace postings from masterfile and stock certificates intogeneral ledger. Reconcilemaster file to general ledger.

4. To insure that thedividends declaredare paid to theproper individuals.

Misstatement of dividendsdeclared on balancesheet or payment to thewrong people, whichcould result in a liability.

Obtain confirmation of paiddividends from independenttransfer agent.

5. To insure that stockis issued andretired only at thediscretion of theboard.

Illegal payments of cashand issue of shares. Examine cancelled sharesand newly issued ones tomake sure they are includedin the board of directorsminutes.

6. To insure that allshares issued orretired are properlyauthorized.

Misstatement of dividendsdeclared on balancesheet or payment to thewrong people, whichcould result in a liability.

Verify authenticity of allchanges in owners' equityaccount.

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22-29

a.PURPOSE OF

AUDIT PROCEDURES

b.MISSTATEMENTS THATMAY BE UNCOVERED

1. To determine what type of stockmay be issued, under whatcircumstances, and its description.

Unauthorized outstanding stock orimproper description of stock.

2. To determine the propriety ofchanges in the accounts and toverify their accuracy.

The issuance or retirement of stockwithout proper authorization, impropervaluation, or incorrect dividendcalculations.

3. To determine if there were anyshares issued or retired during year,or if any certificates are missing.

Unrecorded or unauthorized transactions,or transactions not handled in a legalmanner.

4. To determine if all retired stock hasbeen cancelled.

Same as 4.

5. To determine if any stock issues,retirements, or dividends wereauthorized.

Unauthorized or omitted equitytransactions.

6. To verify that earnings per sharehas been correctly computed.

Incorrect earnings per share computation.

7. To determine that dividends arelegal and disclosure in the financialstatements is proper.

Illegal payments of dividends andimproper disclosure of the information inthe financial statements.

22-30 The proposal for the limitation of procedure is not justified by the statedfacts. Although the transfer agent and the registrar know the number of shares issued,they do not necessarily know the number of shares outstanding. Furthermore, theaudit of capital stock includes more than determining the number of sharesoutstanding. For example, the auditor must determine what authorizations exist forthe issuance of shares, what assets were received in payment of shares, how thetransactions were recorded, and what subscription contracts have been enteredinto. Confirmation from the registrar could not help in determining these things.

In addition to confirmation from the registrar, the audit of capital stockmight include the following procedures, the purposes of which are briefly indicated:

1. Examine the corporation charter

to determine the number of sharesauthorized and the special provisions for each class of stock if morethan one class is authorized.

2. Examine minutes of stockholders' and directors' meetingstodetermine authorization for appointments of the registrar and thetransfer agent; to determine authorization for the issuance or reacquisi-tion of shares.

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22-30 (continued)

3. Examine provisions regarding capital stock in the corporation law ofthe state of incorporationto determine any special provisions,such as those for the issuance of no par stock.

4. Analyze the capital stock accounts to obtain an orderly picture of

stock transactions for use as a guide to other auditing proceduresand as a permanent record.

5. Trace the consideration received for capital stock into the recordsto determine what consideration has been received and how it hasbeen recorded.

6. Examine and schedule treasury stock and review entries for treasurystockto determine the existence of treasury stock as authorizedand to determine that a proper record has been made.

7. Review registrar's invoices and cash disbursementsto determinethat original issue taxes have been paid.

8. Compare dividends with stock outstanding at dividend datesto

determine that dividends have been properly paid and also tosubstantiate the stock outstanding.

9. Review subscription and option contracts, etc.to determine the factsin regard to subscriptions and options and to determine that these factshave been properly recorded and that they are adequately disclosed.

22-31 a. The audit program for the audit of Rakin Corporation's capital stockaccount would include the following procedures:

1. Examine the articles of incorporation, the bylaws, and theminutes of the board of directors from the inception of thecorporation to determine the provisions or decisionsregarding the capital stock, such as classes of stock, parvalue or stated value, authorized number of shares,authorization for the sale of new issues or additional sales ofunissued stock, declarations of stock splits and dividends inthe form of cash or stock, and granting of stock options orstock rights. Determine that the accounting records are inaccordance with these provisions or decisions and thatappropriate disclosure is made by footnote if necessary.Extract pertinent data for the auditor's permanent file.

2. Examine the stock certificate stub book and determine

whether the total of the open stubs agrees with the CapitalStock account in the general ledger. Examine cancelledstock certificates, which are generally attached to thecorresponding stub.

Information on the stubs regarding the number of shares,date, etc. for both outstanding and cancelled stockcertificates should be compared with the Capital Stockaccount. All certificate numbers should be accounted for

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and, if the CPA deems it necessary, confirmation of thenumber of certificates printed should be obtained from theprinter. A test check should be made to determine that theproper amounts of original issue and capital stock transfertaxes have been affixed to the stubs and the cancelledcertificates. The stockholders shown in the stock certificate

stub book should be compared with the stockholders' masterfile if one is maintained.

3. Analyze the Capital Stock account from the corporation'sinception and verify all entries. Trace all transactionsinvolving the transfer of cash either to the cash receipts orthe cash disbursements records. If property other than cashwas received in exchange for capital stock, trace therecording of the property to the proper asset account andconsider the reasonableness of the valuation placed on theproperty. Transactions showing the sale of stock at a

discount or premium should be traced to the CapitalContributed in Excess of Par Value account. If capital stockhas been sold at a discount, consideration should be givento the possible violation of state laws and the client'sattention should be directed to the matter. Should theanalysis of the Capital Stock account disclose that thecorporation has engaged in treasury stock transactions,determine that the increase or decrease in net assetsresulting from these transactions has not been placed in theRetained Earnings account.

The audit procedures to be applied to the audit of the CapitalContributed in Excess of Par Value account are usuallyapplied at the same time that the Capital Stock account isbeing audited because the two accounts are interrelated.The accounts should be analyzed and the entries verifiedwhen the related entries in the Capital Stock account areverified. If an entry is not related to Capital Stock accountentries, as in the case of a write-off of a deficit as the resultof a quasi reorganization, authorization for the entry and thesupporting material should be examined.

4. The following audit procedures would be applied to theRetained Earnings account:

i. Analyze the account from its inception. Consider thevalidity of the amounts representing income or lossthat were closed from the Profit and Loss account.

Amounts representing appraisal increments or writingup of assets should be considered forreasonableness, and the increase should be reported

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22-31 (continued)

separately from retained earnings in the stockholders'equity section of the balance sheet.

ii. Any extraordinary gains or losses carried directly tothe Retained Earnings account should be investigated

and their treatment reviewed in relation to generallyaccepted accounting principles.

iii. Entries recording the appropriation of retainedearnings or the return of such appropriations shouldbe reviewed for reasonableness, and authorization forthe entries should be traced to the proper authority.Similarly, actions of the board of directors thataffected retained earnings should be traced to theaccount analysis.

iv. Conditions such as loan covenants or contingentliabilities that were uncovered during the audit that

might require or make desirable the placing ofrestrictions on retained earnings should be reviewedfor proper disclosure in the financial statements.

v. Entries recording cash or stock dividends should betraced to the minutes of the board of directors forauthorization and traced to the Cash account or theCapital Stock account. A separate computationshould be made by the CPA of the total amount ofdividends paid based upon his or her schedules ofoutstanding stock as an overall test of the existenceof the distributions. If stock dividends have been

distributed, the amount removed from retainedearnings should be reviewed for compliance withgenerally accepted accounting principles.

b. In conducting his or her audit, the CPA verifies retained earnings ashe or she does other items on the balance sheet for severalreasons. A principal reason is that the verification is an assuranceor double check that no important item(s) was overlooked in theaudit of the accounts that were the contra or balancing part of theentry recorded in retained earnings. An example of an importantitem that may be overlooked would be a balance sheet account that

was closed during the year under audit and the account removedfrom the general ledger current file. Another reason is that, thoughthe entry in the contra account may have been examined, theauditor may have overlooked that the balancing part of the entrywas to retained earnings, a treatment that may have been contraryto generally accepted accounting principles. His or her audit ofretained earnings would bring this noncompliance to his or herattention.

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22-32 a.

ACCOUNT

EXPECTEDCHANGE INBALANCE

2007 TO 2008EXPLANATION FOR

EXPECTED CHANGE IN BALANCE

Cash Increase While much of the proceeds were used to reducedebt and purchase hardware and software, unusedproceeds were deposited in company bank accounts.

AccountsReceivable

Little Change The process of becoming publicly held would likelyhave minimal impact on accounts receivable,unless the volume of business on the E-AntiquesWeb site significantly grows as a result of goingpublic.

Property,Plant, and

Equipment

Increase Because stock proceeds were used to purchasehardware and software, the balance in property,

plant, and equipment would be expected to increase.AccountsPayable

Increase Assuming the purchase of hardware and softwareis made on account, the balance in accountspayable would be expected to increase.

Long-TermDebt

Decrease Because stock proceeds were used to payoffloans, the balance in long-term debt would beexpected to decrease.

CommonStock

Increase Despite using stock proceeds to acquire originalshares from company founders, the issuance ofstock through the process of going public wouldresult in a significant increase in the commonstock account.

AdditionalPaid inCapital

Increase Despite using stock proceeds to acquire originalshares from company founders, the issuance ofstock through the process of going public wouldresult in a significant increase in the additionalpaid in capital account, assuming the stock wasissued at a price above par value.

RetainedEarnings

No Change The transactions associated with going publicwould not affect the retained earnings account.

Treasury

Stock

Increase The acquisition of the original shares from the

company founders would be treated as a purchaseof treasury stock, thereby increasing the accountbalance.

Dividends No Change The transactions associated with going public wouldnot directly affect the dividends account. If the companypays dividends, the account would increase becauseof the increase in the number of shares outstanding.

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22-32 (continued)

ACCOUNT

EXPECTEDCHANGE INBALANCE

2007 TO 2008EXPLANATION FOR

EXPECTED CHANGE IN BALANCE

Revenues Little Change The process of becoming publicly held wouldlikely have minimal impact on revenues for thecurrent year, unless the volume of business on theE-Antiques Web site significantly grows as a result.

b. While the decline in stock market price to $19 share is not favorablenews for E-Antiques, that decline would have no impact on the commonstock, additional paid-in capital, or retained earnings accounts sincethe company did not engage in any stock related transactions during2009. Rather, the decline in market value impacts E-Antiques investors.

c. The decline in stock price would likely increase the auditors assessmentof business risk and audit risk. The decline is likely to place significantpressure on management to generate favorable financial results inorder to boost stock prices to earlier highs. That pressure may createa strong enough incentive for management to engage in activities thatmay lead to an increased likelihood of material misstatements in thefinancial statements due to fraud.

Internet Problem Solution: Stock Exchange Requirements

22-1

Many companies aspire to go public and have their shares traded onexchanges such as the New York Stock Exchange (NYSE) and NASDAQ. Whilethere are numerous legal requirements to sell shares of stock to the public (seethe Securities and Exchange Commission website [http://www.sec.gov]), the NYSEhas different requirements that focus on financial performance and health. Visitthe NYSE [http://www.nyse.com/] and NASDAQ [http://www.nasdaq.com/]websites and find out the listing requirements for U.S. companies.

Answer: The listing requirements of the major US exchanges have changed in recent years.

Accordingly, refer to the exchanges websites (i.e., NYSE [http://www.nyse.com/]

and NASDAQ [http://www.nasdaq.com/]) prior to evaluating student responses tothis assignment. Note: The NYSE acquired the American Stock Exchange (AMEX)and AMEX was phased out in January 2009.

(Note: Internet problems address current issues using Internet sources. BecauseInternet sites are subject to change, Internet problems and solutions may change. Currentinformation on Internet problems is available at www.pearsonglobaleditions.com/arens.)

Documents

AEB_SM_CH22_1