In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate management's financial statement assertions with respect to:

Question

Quizplus · Accepted Answer

Choice "C" is correct. Restrictions on retained earnings should be shown as appropriations in the financial statements. An auditor attempts to determine whether any such restrictions exist to verify that proper disclosures (i.e., retained earnings appropriations) have been made. Choices "A" and "B" are incorrect. Retained earnings appropriations restrict the company from paying dividends in excess of the unappropriated portion of retained earnings. This relates to presentation and disclosure, not to transactions, events, or balances. Choice "D" is incorrect. Audit risk and materiality are not financial statement assertions.

In Auditing a Client's Retained Earnings Account, an Auditor Should