The Bergonzi Corporation is a medium-sized wholesaler of grocery products with 4,000 shares of stock outstanding to approximately 25 shareholders. Because of the age of several retired shareholders and the success of the company, management has decided to pay dividends six times a year. The amount of the bimonthly dividend per share varies depending on the profits, but it is ordinarily between $5 and $7 per share. The chief accountant, who is also a shareholder, prepares the dividend cheques, records the cheques in the dividend journal, and reconciles the bank account. Important controls include manual cheque signing by the president and the use of an imprest dividend bank account.
The auditor verifies the dividends by maintaining a schedule of the total shares issued and outstanding in the permanent working papers. The total amount of shares outstanding is multiplied by the dividends per share authorized in the minutes to arrive at the current total dividend. This total is compared with the deposit that has been made to the imprest dividend account. Since the transfer of shares is infrequent, it is possible to verify dividends paid for the entire year in a comparatively short time.
REQUIRED
a. Evaluate the usefulness of the approach followed by the auditor in verifying dividends in this situation. Include both the strengths and the weaknesses of the approach.
b. List other audit procedures that should be performed in verifying dividends in this situation. Explain the purpose of each procedure.