During an audit of a company’s equity accounts, the auditor determines whether restrictions have been imposed on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify relevant assertion about
Classification and understandability.
The presentation and disclosure assertions include assertions about classification and understandability. Financial information should be properly presented and disclosed, and disclosures should be clear (AU-C 315 and AS No. 15). Hence, when restrictions have been placed on retained earnings, the auditor should determine that they are properly disclosed in the notes to the financial statements.