Audit Procedures for Dividend Income: Risks, Procedure, and Assertion

Dividend income is recognized in the financial statements when the right to receive payment is established. The right to receive payment is established when the company has declared the dividend and the shareholders have the right to receive payment.

The amount of the dividend income is usually determined by the number of shares held by the company.

Audit Risks:

  1. Misclassification of dividend income as some other type of income.
  2. Overstatement of dividend income due to the incorrect recording of dividends received.
  3. Underestimation of dividend income due to failure to recognize all declared dividends.
  4. Misstatement of the amount of dividends received due to incorrect calculation.
  5. Unrecorded dividends received.
  6. Misstatement of dividend income due to fraud or misappropriation.
  7. Failure to properly account for foreign currency translations.
  8. Misstatement of the timing of the recognition of dividend income.
  9. Failure to consider the tax implications of dividend income.
  10. Misstatement of the carrying value of investments in companies that pay dividends.

Audit Assertions:

  1. Existence – The company has the right to receive dividend income.
  2. Completeness – All dividends declared and received have been recorded.
  3. Valuation and Allocation – The amount of dividend income recorded is accurate and properly allocated.
  4. Rights and Obligations – The company has the right to receive dividend income and the obligation to pay the dividend.
  5. Presentation and Disclosure – The presentation and disclosure of dividend income in the financial statements is appropriate.

Walkthrough Testing:

A walkthrough test involves tracing transactions through the system to ensure that the transactions are recorded properly. This can be done for dividend income by following the process from the declaration of the dividend to the recognition of the income in the financial statements.

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Test of Control:

The test of control is performed to ensure that the internal controls over the dividend income are functioning properly. This may involve testing the procedures for the declaration and payment of dividends and the accuracy of the calculation of the amount of dividend income.

Substantive Audit Procedures:

  1. Review of minutes of shareholder meetings to confirm the declaration of dividends.
  2. Examination of dividend checks and supporting documentation.
  3. Review of the general ledger and sub-ledgers for completeness and accuracy of the dividend income transactions.
  4. Confirmation of dividend income with the companies that declared and paid the dividends.
  5. Testing of the calculations used to determine the amount of dividend income recorded.
  6. Comparison of the dividend income recorded to the amount of dividends declared by the companies.
  7. Review of the company’s policy for the recognition of dividend income to ensure compliance.
  8. Evaluation of the tax implications of the dividend income.
  9. Review of the company’s investments in companies that pay dividends to ensure the accuracy of the carrying value.
  10. Comparison of the dividend income recorded in the current year to the prior year to identify any unusual changes.
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