Final answer:
An auditor audits retained earnings to ensure the figure accurately reflects historical profitability, any adjustments, and dividend declarations. This process is vital to discover misstatements and ensure the financial integrity of the company's reported earnings.
Step-by-step explanation:
The question as to why an auditor would still audit retained earnings despite it appearing as a balancing figure stems from the fact that retained earnings encompass the accumulation of a company's earnings or losses over its entire history after dividends are paid. Auditing retained earnings is essential because it can reveal issues such as misstatements due to errors or fraud. Retained earnings are not merely a residual figure; they reflect the company's historical profitability and are subject to change through adjustments from prior periods, profit or loss from the current period, and dividends declared.
An auditor must verify that the retained earnings balance reflects these changes accurately. This includes reviewing the retained earnings reconciliation, examining board minutes for dividend declarations, and ensuring that all adjustments, including those for prior period errors, have been properly authorized and recorded. Through such procedures, the auditor assesses the overall financial integrity of the retained earnings figure.
Why is the Audit of Retained Earnings Important?
- Ensures accuracy of historical profit or loss records
- Verifies dividend declarations and payments are properly recorded
- Detects any unauthorized or fraudulent changes to retained earnings