Chapter 8 the Company Audit II 2(1)

8/19/2019 Chapter 8 the Company Audit II 2(1)

1/50

LEARNING OBJECTIVES

After studying this chapter, you will be able to understanding The general considerations in a company audit. The procedure of auditing of share capital, debentures, dividends and verication of

The presentation of nancial statement, such as, balance sheet and prot an

© The Institute of Chartered Accountants of India

8The Company Audit – II

The previous chapter basically dealt with provisions relating to company auditor i.e. hisqualifications, disqualifications, rights, duties, etc. In this Chapter, we shall concentrate

on provisions relating to company accounts, some specific items of financial statementsrelating to companies and audit thereof. Students are also expected to know in detail therequirements of evised Schedule !I "as applicable from #.$.%# for financial year %#'%% and onwards( to the )ct, while auditing different items contained in financialstatements.

8.1 General Considerations in Compan Audit

These have to be determined on a consideration of *

"a( ob+ectives of audit

"b( various provisions in the Companies )ct, #-/, especially those concerning accounts and audit and

"c( the scope of the report that the auditor of a company is required to make in

pursuance of the provisions contained in section %%0 of the )ct.

The ob+ectives of an audit are *

"i( !erification of statements of account so as to express an opinion

"ii( 1etection of errors and frauds and

"iii( 2revention of occurrence of errors and frauds.

1etection and prevention of frauds and errors were originally regarded as the main ob+ectives


2/50

8.2 Auditing and Assurance

of an audit. It was because the auditor, at that time, was looked upon as the watchdogover the assets that the business possessed as well as over its functioning in general.Such a concept of duties of auditors has its origin in the natural distrust that existsamong human beings, especially where the course of business dealings involve severalpersons entrusting their monies or properties to others. So deep rooted is this belief that whenever, on a company being wound up, a fraud or error is discovered, eventoday there is a public outcry that the auditors should be held responsible for it.

Though the broad ob+ectives of an audit, to this day, continue to be the same asaforementioned, the emphasis has shifted from the detection of frauds and preventionof occurrence of errors to the verification of the statements of account. It is because in

the context of present system of management of companies, it is of greater importancethat the annual statement of account should exhibit a true and fair state of affairs of their working instead of auditor3s time and energy being devoted to tracking down pettyfrauds and error in accounts, which the internal staff of the company can be entrustedto detect or guard against. The function of an audit primarily, therefore, has come to beregarded as verification of statements of account and expressing an opinion thereon.The expression of opinion lends credibility to financial statements.

4owever, while conducting the audit, the auditor is expected to bear in mind thepossibility of existence of a fraud or other irregularity in accounts. 5onetheless, he isnot expected to conduct the audit with the ob+ective of discovering all frauds or irregularities, for if that is to be done, the audit would take an unduly long time and the

cost of it would be quite out of proportion to its benefit.5evertheless, it is expected that the auditor would be vigilant and watchful andwhenever he comes across a circumstance which arouses his suspicion, he should find outwhether a fraud, or irregularity, in fact does exist and, if so, whether it is sufficientlymaterial to necessitate qualifications of the audit report.

It is generally accepted that the auditor is not an insurer and does not guarantee thatthe books of account truly reflect the company3s affairs. Such a view is based on thedecision in the famous case, London and General Bank.

The auditor, thus, is principally responsible for carrying out his duties by exercising duecare and skill in consonance with the professional standards. If, despite the fact, any fraudor irreg' ularity in accounts remains undetected, he cannot be held liable for the failureto detect it. 6oreover, since the management is primarily responsible for safeguardingthe assets and property of the company, the auditor, while framing his auditprogramme, is entitled to rely upon the internal controls in this regard instituted by themanagement based on a proper evaluation.

It would be observed that Companies )ct, #-/ also does not contemplate that anauditor is responsible for the detection of errors and frauds, except when they are somaterial as to vitiate the opinion expressed by him that statements of account exhibit atrue and fair state of affairs.


3/50

The Company Audit-II 8.3

The aforementioned shift of emphasis in the ob+ectives of audit which also has the tacitacceptance of law has come about primarily due to the extraordinary increase that hastaken place in the si7e of corporate organisations as well as in the volume, complexityand variety of transactions handled by them. 8n this account, it has become impracticablefor the statutory auditor to frame a programme for carrying on a detailed audit for thedetection of all frauds and irregularities. 4e is increasingly obliged to rely on the internalcontrol measures. )s such, he is not in a position to give a categorical assurance to theshareholders that there does not exist a fraud or irregularity in the books of accountexcept to the limited extent that the fraud, if any, is not sufficiently material to affect trueand fair position exhibited by the statements of account.

The auditor, nonetheless, is required to verify the final statements of account also to checkor verify all the matters affecting them so as to ensure fully that they exhibit a true andfair state of affairs of the business of the company. 9or the purpose, he may either carryout a detailed examination of the books or relying on the internal control measures inoperation, after testing their strength, merely test the accuracy of transaction recordedtherein.

It is permissible for an auditor to verify the accuracy of transactions recorded in thebooks of account by the application of test checks, if he is satisfied that the system of internal control, in operation, is adequate and satisfactory.

8ne of the refined forms that test checks can take is selection of a representativesample statistically from the area of accounts which is to be test checked and checking

in depth the transactions comprised in the sample. 8ther forms that test checks take areprocedural tests. These are applied to a variety of transactions selected from areas of account provided such areas, as selected for test checking, contain a representativesample of the transactions entered into by the concern and the transactions are checkedexhaustively.

8n this consideration, the practice of verification of transactions by application of test'checkshas come to be recognised universally. )s against test checking, a detailed checking of #&&: of transactions would only reveal arithmetical mistakes but still fail to ensure trueand fair view. In any case, detailed checking would be very time consuming and almostimpracticable having regard to si7e of organisation spread across the globe. 4owever, theconditions under which test checks can be substituted for detailed checking, and the

extent of test checks that must be applied in each case, are matters which the auditor must decide having regard to the circumstances of each case.

8n this consideration, while conducting the audit of a large business house which hason its staff a qualified accountant, as internal auditor, it is nowadays sometimespossible for the statutory auditor to somewhat reduce the scope and extent of hisroutine checking. 4e, instead of going over the facts and figures as have already beenexamined by a competent and trustworthy internal staff, may limit his checking only toapplication of test'checks if however, any significant mistakes are observed in the testperiod, the scope of the audit is suitably extended.

) consciousness is growing in the profession that a greater co'ordination is possible between


4/50


the work of the internal auditor and the statutory auditor which, if brought about, wouldenable the statutory auditor to make use of, to a greater extent, the detailed checkingcarried on by the internal auditor in the discharge of his duties and responsibilities.

8.2 peci!ic "ro#isions as $egards Accounts in the CompaniesAct% 1&'(

The provisions in the matter of books of account which a company is required to maintain arecontained in section %&- of the Companies )ct, #-/. They are briefly summarised below*

"#( ;very company shall maintain at its registered office proper books of account with

regard to *

"a( all sums of money received and expended by the company and the matters in

respect of which the receipts and expenditure take place

"b( all sales and purchases of goods by the company

"c( the assets and liabilities of the company and

"d( in case, it is a company engaged in production, processing, manufacturing or mining activities, particulars relating to utilisation of material or labour or other items of cost, provided there is such a requirement by the Central


5/50

The Company Audit-II 8.'

"$)( The books of account together with vouchers relevant to any entry made therein for a period of not less than eight years immediately preceding the current year shallbe preserved by the company in goodorder.

"( If any of the persons referred to in sub'section "/(, fails to take reasonable steps tosecure compliance with the requirements of law aforementioned or by a wilful actcauses any default by the company, he shall be punishable for each offence withimprisonment for a term which may extend to six months or a fine which mayextend to @ #&&&& or with both. =ut he may be relieved from such a liability if hecan show that he has reasonable ground to believe that a competent and responsibleperson was charged with the duty of seeing that these requirements were complied

with and he was in a position to discharge that duty."/( >here the company has a managing director or manager, such managing director

or manager and all officers and other employees of the company and where thecompany has neither a managing director nor manager, every director of the company.

"0( If a person, not being a person referred to in the foregoing paragraph, who has

been charged with the duty of seeing that requirements of law in regard to thebooks of account is complied with, makes a default in doing so, he shall, in

respect of each offence, be punishable with a fine which may extend to @ #&,&&&.

Section $#"%( "applicable to a company in the course of winding up( is also relevant.

It has )een pro#ided in ection '41*2+ that proper )oo,s o! account shall constitute

(a) such )oo,s or accounts as are necessary to ehi)it and eplain thetransactions and !inancial position o! the )usiness o! the company% including

)oo,s containing entries made !rom day to day in su!!icient detail o! all cash

recei#ed and all cash paid and

(b) /here the )usiness o! the company has in#ol#ed dealings in goods%

statements o! the annual stoc, ta,ings and *ecept in the case o! goods sold)y /ay o! ordinary retail trade+ o! all goods sold and purchased% sho/ing the

goods and the )uyers and sellers thereo! in su!!icient detail to ena)le thosegoods and those )uyers and sellers to )e identi!ied.

Although ection '41 relates to /inding up o! a company yet it has the e!!ect o! !urther

ela)orating the re0uirements as regards maintenance o! )oo,s o! accounts and should)e considered as a general re0uirement !rom the point o! #ie/ o! the company. Toconclude% it can )e said that its application should not )e con!ined to /inding up

process only.

Inspection of Books of Account, etc. of Companies ' Section %&- ) provides that the

books of account and other books and papers of every company shall be opened toinspection during business hours* "i ( by the registrar, or "ii ( by such officer authorised bythe Central


6/50

8.( Auditing and Assurance

Such inspection may be made without giving any previous notice to the company or anyofficer thereof.

It shall be the duty of every director, other officer or employee of the company toproduce to the person making inspection of such books of account and other books andpapers of the company in his custody or control and to furnish him with any statement,information or explanation relating to the affairs of the company as the said person mayrequire to him within such time and at such place as he may specify. 9urther it shallalso be the duty of every director, other officer or employee of the company to give tothe person making inspection under this section all assistance in connection with theinspection which the company may be reasonably expected to give.

The person making the inspection is also empowered to make copies of books of accountand other books and papers and put any marks of identification in token of theinspection have been made.

The person making the inspection under this section shall make a report to the Central


7/50

The Company Audit-II 8.

class of companies under this )ct. ) notification constituting the said committee was issuedin uly %& by the Central


8/50


constituted under the Chartered )ccountants )ct, #-$- "?F of #-$-(, as may bepre' scribed by the Central


9/50

The Company Audit-II 8.&

with the duty of seeing that the provisions of this section and the other

requirements aforesaid were complied with and was in a position to discharge thatduty.

"ro#ided !urther% that no person shall be sentenced to imprisonment for any such

offence unless it was committed willfully.

"F( If any person, not being a person referred to in sub'section "/( of section %&-,having been charged by the managing director or manager, or =oard of directors,as the case may be, with the duty of seeing that the provisions of this sectionand the other requirements aforesaid are complied with, makes default in doing so, heshall, in respect of each offence, be punishable with imprisonment for a term which

may extend to six months or with fine which may extend to ten thousand rupees, or with both.

"ro#ided that no person shall be sentenced to imprisonment for any such of offenceunless it was committed willfully.

Students may note that sub'section "?)(, "?=( and "?C( were added in section %##making it mandatory on the part of the management of the company to comply withthe accounting standards as specified in sub'section "?C(. 4ence, statutoryrecognition has been given to the accounting standards by the legislation. It isincumbent on the company, in case of non'compliance, to mention the fact of deviation, reason for deviation and the financial effect, if any, as well.

H 5ote * ecently the 6inistry of Corporate )ffairs through 5otification 5o. S.8.?";( dated Fth 9eb, %# issued a notification on


10/50


)bovementioned notif ication along with table is given for knowledge of the StudentsJ

Balance sheet of holding company to include certain particulars as to its subsidiaries *Section %#% requires that there shall be attached to the balance sheet of aholding company having a subsidiary or subsidiaries at the end of the financialyear as at which the holding company3s balance sheet is made out.

The Central


11/50


subsidiary company are required to be attached to balance sheet of holdingcompany, the same shall not be covered by auditor3s report. )lso refer to section%%% which deals with construction of references to documents annexed to accounts.The =oard3s eport under section %#0 is also attached to every balance sheet of acompany.

rofit and loss account to be annexed and auditor!s report to be attached to balance

sheet ' The profit and loss account shall be annexed to the balance sheet andthe auditors3 report including the auditors3 separate, special or supplementary report, if any shall be attached thereto.

Board’s report Section 21!":

"#( There shall be attached to every balance sheet laid before a company in general

meeting, a report by its =oard of directors, with respect toA

"a( the state of company3s affairs

"b( the amounts, if any, which it proposes to carry to any reserves in such balancesheet

"c( the amount, if any, which it recommends should be paid by way of dividend

"d( material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of thecompany to which the balance sheet relates and the date of the report

"e( the conservation of energy, technology absorption, foreign exchange earnings andoutgo, in such manner as may be prescribed.

"%( The =oard3s report shall, so far as is material for the appreciation of the state of thecompany3s affairs by its members and will not in the =oard3s opinion be harmful to

the business of the company or of any of its subsidiaries, deal with any changeswhich have occurred during the financial yearA

"a( in the nature of the company3s business

"b( in the company3s subsidiaries or in the nature of the business carried on by

them and

"c( generally in the classes of business in which the company has as an interest.

"%)( "a( The =oard3s report shall also include a statement showing the name of every employee of the company whoA

"i( if employed throughout the financial year, was in receipt of remunerationfor that year which, in the aggregate, was not less than such sum as maybe prescribed or

"ii( if employed for a part of the financial year, was in receipt of remunerationfor any part of that year, at a rate which, in the aggregate, was not less

than such sum per month as may be prescribed or


12/50


"iii( if employed throughout the financial year or part thereof, was in receipt of remuneration in that year which, in the aggregate, or as the case may be,at a rate which, in the aggregate, is in excess of that drawn by themanaging director or whole'time director or manager and holds byhimself or along with his spouse and dependent children, not less thantwo per cent, of the equity shares of the company.

"b( The statement referred to in clause "a( shall also indicate,A

"i( whether any such employee is a relative of any director or manager of the

company and if so, the name of such director, and

"ii( such other particulars as may be prescribed.

"xplanation* emuneration has the meaning assigned to it in the "xplanation to section

#-F.

"%))(The board3s report shall also include a 1irectors3 esponsibility Statement, indicatingtherein, '

"i( that in the preparation of the annual accounts, the applicable accounting standardshad been followed along with proper explanation relating to material departures

"ii( that the directors had selected such accounting policies and applied themconsistently and made +udgements and estimates that are reasonable and prudentso as to give a true and fair view of the state of affairs of the company at the

end of the financial year and of the profit or loss of the company for that period

"iii( that the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this )ct for safeguarding the assets of the company and for preventing and detecting fraudand other irregularities

"iv( that the directors had prepared the annual accounts on a going concern basis.

"%=( The =oard3s report shall also specify the reasons for the failure, if any, to complete

the buy back within the time specified in sub'section "$( of section 00).

"?( The =oard shall also be bound to give the fullest information and explanations in itsreport aforesaid, or, in cases falling under the proviso to section %%%, in anaddendum to that report, on every reservation, qualification or adverse remarkcontained in the auditors3 report.

"$( The =oard3s report and any addendum thereto shall be signed by its chairman if heis authorised in that behalf by the =oard and where he is not so authorised, shallbe signed by such number of directors as are required to sign the balance sheetand the profit and loss account of the company by virtue of sub'sections "#( and "%( of section %#.

"( If any person, being a director of a company, fails to take all reasonable steps tocomply with the provisions of sub'sections "#( to "?(, or being, the chairman, signsthe =oard3s


13/50


report otherwise than in conformity with the provisions of sub'section "$(, he shall,in respect of each offence, be punishable with imprisonment for a term which mayextend to six months, or with fine which may extend to twenty thousand rupees, or withboth *

"ro#ided that no person shall be sentenced to imprisonment for any such offenceunless it was committed willfully*

"ro#ided% !urther that in any proceedings against a person in respect of an offenceunder sub'section "#(, it shall be a defence to prove that a competent and reliableperson was charged with the duty of seeing that the provisions of that sub'section werecomplied with and was in a position to discharge that duty.

"/( If any person, not being a director, having been charged by the =oard of directorswith the duty of seeing that the provisions of sub'sections "#( to "?( are compliedwith, makes default in doing so, he shall, in respect of each offence, be punishablewith imprisonment for a term which may extend to six months, or with fine whichmay extend to twenty thousand rupees, or with both*

"ro#ided% that no person shall be sentenced to imprisonment for any such offence

unless it was committed willfully.

8.3 "ayment o! Interest out o! Capital during Construction

Lnder the provisions of section %&F, a company which has raised money by issue of shares to meet the cost of construction of any work or building or provision of any plantwhich cannot be made profitable for a long time, can pay interest on paid'up capital for a period and sub+ect to conditions specified in sub'sections "%( to "0( of section %&F.

)ccordingly, the payment of interest should be verified as follows*A

"a( )scertain that the payment is authorised by the )rtic les or by a special resolution.

"b( !erify that the previous sanction of the Central


14/50


8.4 pecial $e0uirements o! Company Audit

"i( #erification of the constitution and po$ers ' ) company can function within the limitsprescribed by the documents on the basis of which it has been registered. It raises itscapital from the public on certain conditions, specified in the 2rospectus. =eforecommencing business, to purchase a property or to have subscription to its capitalunderwritten on this account, it is essential that the auditor, prior to starting the audit of acompany, shall examine*

"a( The 6emorandum of )ssociation.

"b( The )rticles of )ssociation.

"c( Contracts entered into with vendors and other persons relating to purchase of property, payment of commission, etc.

) company cannot enter into a contract before it has been registered. >hat is more, apublic company cannot commence business until the certificate of commencement of business has been granted to it by the egistrar of Companies. It is, therefore, the dutyof the auditor to take into account, while examining the transaction entered into by thecompany, the dates when these were entered into for confirming the validity.

>ith a view to carrying out the audit effectively, it is necessary that the auditor shouldknow the authority structure of the company. Lnder Section %-# of the )ct, the =oard of 1irectors of a company are entitled to exercise all such powers, and to do all such actsand things, as the company is authorised to do. 4owever, the =oard shall not exerciseany power or do any act or thing which is directed or required by any legislation"including the Companies )ct( or by the memorandum or articles of the company, to beexercised or done by the company, in general meeting.

Section %-% specifies six types of decisions that can be taken by the =oard of 1irectors onlyin =oard3s meetings. These relate to *

"i( making calls on partly paid shares.

"ii( issue of debentures,

"iii( borrowing monies otherwise than on debentures,

"iv( investing the funds of the company, and

"v( making loans.

The transaction barring the first three can be delegated to any of the following*

"a( a committee of directors,

"b( managing director,

"c( manager,

"d( any other principal officer of the company, or

"e( principal officer of the branch office, in relation to the branch.


15/50

The Company Audit-II 8.1'

)part from the above, a number of other functions are also carried out by the =oard. )

few of such functions are stated herein by way of examples *

"a( )dopting of accounts before the same submitted to the auditor for their report'Sect ion%#.

"b( )ppointment of the f irst auditors and filling of casual vacancy ' Section %%$.

"c( Investment in shares of companies within the limits specified in Section ?0%).

"d( ;ntering into contracts with persons who are directors of the company or related to

or associated with the directors as are specified in Section %-0 of the )ct.

Some of the matters #hich onl$ the shareholders can sanction at a %eneral meetin% :"a( )ppointment and fixation of remuneration of auditors in the annual general meeting

' Section %%$.

"b( 1eclaration of dividends ' egulation F, Table ).

"c( )ppointment of relatives of directors etc. to an office or place of profit in thecompany under Section ?#$ of the )ct.

"d( Sale, lease or a disposal of the whole of the company3s undertaking or a substantial partof it and donations above a certain limits HSection %-?"#(J.

"ii( 6atters which require sanction of the Central


16/50

8.1( Auditing and Assurance

"+( estriction on a 1irector or his relative, a firm in which a director or relative isa partner or any other partner of the firm or a private company of which sucha director is a member or director to enter into a contract of sale or purchaseof goods except with the sanction of the =oard of 1irectors "Section %-0(.

"k( estriction on an interested director in participating in or voting at =oard3sproceedings "Section ?&&(.

"l( 1isclosure of interest by directors "Section %--(.

"m( egister of contracts, Companies or firms in which directors are inspected "Section?(

"n( emuneration of directors "Section ?&-(.

"o( estraint on a director3s holding offices or places of profit "Section ?#$(.

"p( estraint on payment of compensation for loss of office to a director "Sections?#F to ?%#(.

"q( estriction on loans, etc., to companies under the same management "Section ?0&(.

"r( egulation of inter'corporate loans and investments "Section ?0%)(.

(iii) Special considerations involved in the examination of certain documents

"a( %emorandum of Association ' It is a charter containing particulars of business

activities that the company can undertake and the powers it can exercise inregard thereto. 8nly on a consideration thereof it is possible for the auditor todetermine whether a transaction which has been entered into by the companyis intra vires& i.e. the company is authorised to enter into it. If a company entersinto a transaction which is ultra vires& the shareholders, though entitled to claimthe profit arising on such a transaction, may restrain the management fromcharging the loss, if any, has been suffered thereon, to the company. If theauditor fails to detect and report the transactions which are ultra vires thecompany, he would be guilty of negligence.


17/50


have relevance to the examination of transaction, that the auditor is requiredto carry out. 4e should, therefore, study the )rticles and include extracts fromthem in his permanent audit file. The auditor, who fails to take note of theprovisions in the )rticles in the verif ication of statements of accounts, would beguilty of professional negligence. >hile delivering +udgment in the case,Leeds "state Building and 'nvestment Co. v. Shepherd& Starling (. said, DIt is the duty of

the auditor to see that the balance sheet is a true and correct representationof the company3s affairs. It was no excuse that the auditor had not seen thearticles when he knew of their existence.E

The auditor must, therefore, acquaint himself with the provision of the )rticles of

the company and should apply this knowledge in the verification of thetransactions of the company.

"c( rospectus ' It is a formal document which a public company must issue beforeit makes the allotment of shares under section /. It must contain all the termsand conditions on which subscription to the shares is sought to be obtainedfrom the public e.g. the company may stipulate, that it would obtain a quotationfor its shares at a Stock ;xchange or that it shall purchase a property whichis considered valuable for the company or that it has obtained the services of technical experts whose services will be valuable for setting up the factory. Incase the company fails to carry out any of these undertakings or if anystatement made by it ultimately is proven to be false, the shareholder has the

option to claim refund of the amount paid by him. The auditor should,therefore, study carefully all the conditions and stipulations made in theprospectus and, in case any of them has not been carried out, to draw theattention of shareholders thereto. It may be noted that the right to claim refundis restricted to such of the shareholders who subscribed for shares on thebasis of prospectus. ) shareholder who has purchased the shares from stockexchange or otherwise cannot claim refund.

Section /&) inserted by the Companies ")mendment( )ct, %&&& has introducedthe concept of DShelf 2rospectusE. Such prospectus would enable companiesengaged in financial activities to raise money by way of offer of securitiesmore than once during its validity and, in such case, only an information

memorandum stating certain material particulars. Section /&= has introducedthe concept of Dred'herringE prospectus. )ccordingly, section /&= involvesconcept of information memorandum also.

8.' Audit o! hare Capital

)lmost the first function of a company is to raise capital. ;xcepting a private company,every other company issues a prospectus, which may be in the abridged form, or aStatement in lieu of 2rospectus, before it proceeds to allotment, share capital. Theob+ect is to publicly announce the conditions on which allotment will be made, to specifythe pro+ects on which the


18/50


amount raised will be spent "when these have been decided upon in advance( and tospecify limits on certain expenses incidental to raising of capital. The receipt of applicationsfor shares and allotment of shares in pursuance thereto are two important aspects of every issue of capital in so far as these constitute the legal basis of the transactionsin the matter of purchase of shares. These, therefore, should receive a careful attention of the auditor. 4e also must verify that each party, has performed his part of the contract, withinthe allotted time.

The audit of share capital is necessary both on incorporation and afterwards whenever the directors decide to increase the subscribed share capital. 4owever, except when freshcapital has been issued during the year under audit, for verification of capital it is

enough if transfers of shares registered during the year are verified and the total number and value of shares held by different shareholders are reconciled with the total paid'upcapital of the company.

8.5.1 General "rogramme !or 7eri!ication o! hare Capital

Authorised capital ' The authorised capital may be verified with reference to the amount

shown in the 6emorandum of )ssociations. 2revious year audited balance sheet may alsobe seen.

'ssued capital ' !erify the amount of issued capital with reference to last year auditedbalance sheet. )lso see whether the Central


19/50

The Company Audit-II 8.1&

")mendment( )ct, #-FF. Section 0? provides that allotment made by a companywould be void if the permission is not granted by stock exchange before the expiryof ten weeks from the date of the closing of the subscription list.

"0( Confirm that the guidelines issued by the Securities and ;xchange =oard of India"S;=I( have been followed. Compliance reports submitted by lead managers andreports submitted to S;=I may be examined in this regard.

"F( )scertain that there exists an internal check on receipt of amounts alongwith theapplication and that the same throughout has continued to function satisfactorily.

"-( !erify compliance with legal provision relating to issue of shares at premium

"section 0F(, issue of shares at discount "section 0-(, and issue of sweat equityshares "section 0-)(

8.5.2 7eri!ication o! hares Issued !or Cash Lsually, there are three stages inthe issue of shares for cash, vi*. *

"i( eceipt of applications for shares alongwith application money

"ii( )llotment of shares and receipt of allotment and

"iii( 6aking calls and receipt of call money.

The programme of work to be carried out in respect of each of the above mentionedthree stages is stated below*

"#( Applications ' !erify the amount received alongwith the applications for shares in thefollowing manner*

"i( Check entries in the )pplication and )llotment =ook "or Sheets( with the

original applications

"ii( Check entries in the )pplication and the )llotment =ook as regards depositsof money, received with the applications, with those in the Cash =ook

"iii( !ouch amounts refunded to the unsuccessful applicants with copies of Ketters

of egret

"iv( Check the totals columns in the )pplication and )llotment =ook and confirmthe +ournal entry debiting Share )pplication )ccount and crediting ShareCapital )ccount.

(2) Allotment

"i( ;xamine 1irector3s 6inutes =ook to verify approval of allotments.

"ii( Compare copies of letters of allotment with entries in the )pplication and )llotment=ook.

"iii( Trace entries in the Cash book into the )pplication and )llotment =ook for theverification of amounts collected on allotment.


20/50


"iv( Trace the amount collected on application as well as those on allotment from

the )pplication and )llotment =ook into the Share egister.

"v( Check totals of amounts payable on allotment and verify the +ournal entry debiting Share )llotment )ccount and crediting Share Capital )ccount.

(3) Calls

"i( ;xamine the 1irector3s resolution making the call.

"ii( !ouch amounts received with the counterfoils of receipts.

"iii( Trace postings of the amounts received from the Calls =ook "for calls due(

and the Cash =ook "for calls collected( into the Share egister."iv( !erify the +ournal entry, debiting the Call )ccount and crediting Share Capital

with totals of the amounts due.

"v( 5ote the calls in arrears.

(4) General

"i( )scertain that the nominal value of shares allotted does not, exceed the author isedand issued capital and that allotments were made in accordance withconditions contained in the 2rospectus.

"ii( See the returns of allotment have been filed with the egistrar of Companies.

"iii( ;xtract balances of shareholders3 accounts contained in the Share egister and tally their total with the balance in the Share Capital )ccount.

"iv( If the issue was underwritten, examine the contract with the underwriters to ensurethat all obligations under the contracts have been fully satisfied.

"v( !ouch payment of commission and brokerage, the first by reference to the

underwriting contract and the second by reference to stamps of brokers onapplication forms.

"vi( See that the company has delivered share certificates within three months after theallotment of any of its shares in accordance with the procedure laid downunder Section ?.

ote The signatories to the 6emorandum of )ssociation being the first shareholder of the company, it is usual to make allotment in their favour.

8.5.3 hares Issued !or Consideration other than Cash The contract, on the basis

of which the shares have been allotted, should be referred to and the allotment

confirmed by reference to the 6inutes of the =oard of 1irectors. It should also be

verified that a copy of the contract as required by Section 0"#("b( of the )ct has been

filed with the egister of Companies within one month of the date of allotment and

in the absence thereof, a memorandum in writing stating particulars of the contract has

been filed.


21/50


Sometimes, in view of the nature of the transaction, it may be difficult to know whether an allotment is for cash or for a consideration, other than cash, for instance, allotmentof shares in ad+ustment of a debt owed by the company. In such a case, if the allotmentis made in ad+ustment of a bonafide debt payable in money at once, the allotment shouldbe considered as against cash. "Spargo3s Case #F0?, ? Ch. ) $&0(. This positionshould be kept in view when inquiring into matters stated in Section %%0"#)(. )gain if the shares are allotted on a cash basis, though the amount is actually paid later, itshould constitute an allotment against cash.

8.5.4 hares Issued at a "remium >here a company has issued shares at a premium,

that is, at amount in excess of the nominal value of the shares, whether for cash or

otherwise, Section 0F prescribes that a sum equal to the amount of the premiumcollected should be transferred to the Securities 2remium )ccount. Since the )ct

provides that the amount of premium will be considered a part of the share capital and

that the amount of premium collected on shares can only be reduced in the manner

prescribed for the reduction of capital, the amount of share premium received cannot be

forfeited when the shares in respect thereof are forfeited. The auditor should also see

compliance with S;=I


22/50


section 0-), the expression Dsweat equity sharesE means equity shares issued by the

company to employees or directors at a discount or for consideration other than cash for

providing know'how or making available right in the nature of intellectual property rights

or value additions, by whatever name called. The auditor may see that the sweat equity

shares issued by the company are of a class of shares already issued and following

conditions are fulfilled*

"a( The issue of sweat equity shares is authorised by a special resolution passed bythe company in the general meeting

"b( The resolution specifies the number of shares, current market price, consideration, if

any, and the class or classes of directors or employees to whom such equityshares are to be issued

"c( 5ot less than one year has, at the date of the issue elapsed since the date onwhich the company was entitled to commence business

"d( The sweat equity shares of a company whose equity shares are listed on arecognised stock exchange are issued in accordance with the regulations made bythe Securities ;xchange =oard of India in this behalf*

"ro#ided that in the case of a company whose equity shares are not listed on any

recognised stock exchange, the sweat equity shares are issued in accordance with theguidelines as may be prescribed.

9or the purposes of this sub'section, the expression Da companyE means the companyincorporated, formed and registered under this )ct and includes its subsidiary company

incorporated in a country outside India.

8.'. "o/er o! Company to "urchase its :/n ecurities The Companies

")mendment( )ct, #--- contains elaborate provisions enabling a company to buy'back its

own securities. The word security here includes employee stock option, i.e.& sweat equity

share or any other security notified by the government. The word security includes both

equity and preference share. =ut preference share can be redeemed, perhaps the reform is

intended to equity share only. )s per section 00), a company may purchase its own

shares or other specified securities "hereinafter referred to as Dbuy'backE( out ofA

"i( its free reserves or "ii( the securities premium account or

"iii( the proceeds of any earlier issue other than from issue of shares made specificallyfor buy'back purposes.

"#( 5o company shall purchase its own shares or other specified securities unlessA

"a( the buy'back is authorised by its articles


23/50


"b( a special resolution has been passed in general meeting of the companyauthorising the buy'back

"ro#ided that nothing contained in this clause shall apply in any case where "i(the buy'back is or less than #& percent of the total paid'up equity capital andfree reserve of the company and "ii( such buy'back has been authori7ed by the=oard by means of a resolution passed at its meeting.

"c( the buy'back is or less than twenty'five per cent, of the total paid'up capital "equityshares and preference shares( and free reserves of the company

"d( The debt'equity ratio is not more than % * # after such buy'back *

"xplanation.A9or the purposes of this clause, the expression DdebtE includes allamounts of unsecured and secured debts

"e( all the shares or other specified securities are fully paid'up

"f( the buy'back of the shares or other specified securities listed on anyrecognised stock exchange is in accordance with the regulations made by the

Securities and ;xchange =oard of India

"g( the buy'back in respect of shares or other specified securities other than

those specified in clause "f ( is in accordance with the guidelines as may beprescribed.

"%( The notice of the meeting at which special resolution is proposed to be passed

shall be accompanied by an explanatory statement statingA

"a( a full and complete disclosure of all material facts

"b( the necessity for the buy'back

"c( the class of security intended to be purchased

"d( the amount to be invested and

"e( the time limit for completion of buy'back.

"?( ;very buy'back shall be completed within twelve months from the date of passingthe special resolution.

"$( The buy'back under sub'section "#( may beA

"a( from the existing security holders on a proportionate basis or

"b( from the open market or

"c( from odd lots,

"d( by purchasing the securities issued to employees of the company pursuant toa scheme of stock option or sweat equity.

"( ) solvency certi ficate to be f iled before making buy'back.


24/50


"/( ) company buy'back its own securit ies, it shall extinguish and physically destroy

the securities so bought'back within seven days of the last date of completion of buy'back.

"0( ) company shall not make further issue of same kind of shares "including allotmentof further shares under clause "a( of sub'section "#( of section F#( or other specified securities within a period of six months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stockoption schemes, sweat equity or conversion of preference shares or debentures intoequity shares.

"F( ) company maintains a register of the securities so bought, the consideration paid for

the securities bought'back, the date of cancellation of securities, the date of existing and physically destroying of securities and such other particulars as may beprescribed.

"-( ) company shall, after completion of the buy'back under this section, file with theegistrar and the Securities and ;xchange =oard of India, a return containing suchparticulars relating to the buy'back within thirty days of such completion, as may beprescribed*

"ro#ided that no return shall be filed with the Securities and ;xchange =oard of India bya company whose shares are not listed on any recognised stock exchange.

The auditor should ensure that the proper accounting entries have been passed immediately

after the buy'back. 9urther prohibition to buy'back shares is contained in section 00=.

8.5.8 Calls "aid in Ad#ance ) company, if permitted by the articles, may accept from

members, either the whole or part of the amount remaining unpaid on any shares held

by him as calls in advance but the amount so received cannot be treated as a part of

the capital for the purpose of any voting rights until the same becomes presently

payable and duly appropriated. ) company, if so authorised by its )rticles, may pay

dividend in proportion to the amount paid upon each share, where a larger amount is

paid up on some shares than that on other "Section -?(. It may be noted that Clause

FF"%( of Table ) does not permit calls in advance being treated as amounts paid up on

shares for the purpose of payment of dividends.

Lnless the company exercises the right as aforementioned, the shareholders who have paidcalls in advance would be entitled to receive interest at the rate specified in the )rticles.The interest on calls in advance, though chargeable against profits, also can be paid out of capital when profits are not available for such a payment. In the event of a winding up,calls in advance repayable alongwith interest accrued thereon before any part of thecapital is returned to shareholders.

8.5.9 Calls in Arrears The amounts due from shareholders in respect of calls in arrears

should be verified by reference to the Share register. If any calls are due from 1irectors,

they should be shown separately in the balance sheet. 8ften the )rticles provide that

interest be charged on calls in arrears. The ad+ustment of interest in such a case should be

verified.


25/50


8.'.15 Issue and $edemption o! "re!erence hares

"a( o$er to issue redeemable preference shares+ ) company limited by shares, if authorised by its articles, may issue preference shares which are liable to beredeemed at the option of the company before or on an appointed date.4owever, after the commencement of the Companies ")mendment( )ct, #--/ nocompany limited by shares shall issue any preference share which is irredeemable or is redeemable after the expiry of a period of %& years from the date of its issue.So long as the shares are not redeemed, the terms of redemption or conversionmust be stated in the balance sheet together with the earliest date of redemption or conversion.

In the matter of redemption of shares the auditor should confirm that the requirementsof Section F& have been complied with, vi*.*

"i( that the shares redeemed were fully paid up

"ii( that the shares were redeemed out of profit available for distribution asdividend or out of proceeds of a fresh issue made for purpose of redemption

"iii( that the premium if any, on redemption, was provided for either out of the

Securities 2remium )ccount or out of divisible profits of the company and

"iv( that if the shares were redeemed out of profits, otherwise available for

dividend, an amount equal to nominal amount of shares redeemed has been

transferred to the Capital edemption eserve )ccount.The Capital edemption eserve )ccount is treated as part of capital in the same wayas Securities 2remium )ccount. It cannot, therefore, be applied except for payingup unissued share capital of the company to be issued to members as fully paid up

bonus shares.

"b( ,edemption of irredeemable preference shares + Section F&') inserted by theCompanies ")mendment( )ct, #-FF requires that irrespective of the fact anything

contained in the terms of issue of any preference shares, every preference share issuedbefore the commencement of this said )ct, which is irredeemable shall be redeemed bythe company within a period not exceeding years from the date of due thereon inaccordance with the terms of its issue and which had not been redeemed before

such commencement be redeemed by the company on the date of which such share isdue for redemption or within a period not exceeding #& years from suchcommencement whichever is earlier.

2rovided that where a company is not in a position to redeem any such sharewithin the period aforesaid and to pay the dividend, if any, due thereon "suchshares being hereinafter refer to as unredeemed preference shares(, the companymay with the consent of the Tribunal on a petition made by it in this behalf and notwithstanding anything contained in this )ct, issue further redeemable preferenceshares equal to the amounts due to "including the dividend due thereon( in respectof the unredeemed


26/50


preference shares and on the issue of such further redeemable preference shares, theunredeemed shares shall be deemed to have been redeemed.

8.5.11 Alteration o! hare Capital ) company, having a share capital, if so authorised

by its )rticles, may alter its share capital by an ordinary resolution without confirmation

of the Court, in any of the manners authorised by Section -$. ;ach alteration made

should be noted in every copy of the 6emorandum and )rticles issued subsequent to

date of the alteration "Section $&(. The auditor3s duties in the circumstances shall be*

"i( to verify that the alteration of capital is authorised by the )rticles

"ii( to inspect the minutes of the shareholders authorising the alteration

"iii( to obtain )llotment Kists containing details of the new holdings of share or stock by

each member and to verify the same with the entries.

"iv( to inspect the directors3 resolution in regard to allotment, consolidation, conversionor sub'division passed pursuant to the resolution of the members

"v( to examine the cancelled share certificates, if any, and agree the same with the

counterfoils of new certificates issued

"iv( to see that the procedure, prescribed by the )rticles in this regard, has beencomplied with

"vii( to verify that the share capital account is correctly shown in the =alance Sheet and

"viii(to see that the necessary intimation to the egistrar contemplated by Section -

has been sent.

8.5.12 $eduction o! Capital *ection 155+ The duties of the auditor in this regard arefollowing*

"i( !erifying that the meeting of the shareholder held to pass the special resolution

was properly convened also that the proposal was circularised in advanceamong the members.

"ii( Confirming that the )rticles of )ssociation authorise reduction of capital.

"iii( ;xamining the order of the Tribunal confirming the reduction and seeing that a

copy of the order and the minutes have been registered and filed with theegistrar of Companies.

"iv( Inspecting the egistrar3s Certificate as regards reduction of capital.

"v( !ouching the +ournal entries recorded to reduce the capital and to write down the

assets by reference to the resolution of shareholders and other documentaryevidence also seeing that the requirements of evised Schedule !I, 2art I, have beencomplied with.

"vi( Confirming that the revaluation of assets have been properly disclosed in the

=alance Sheet.


27/50


"vii( !erifying the ad+ustment made in the members3 accounts in the egister of 6embersand confirming that either the paid up amount shown on the old share certificateshave been altered or new certificates have been issued in lieu of the old, and theold ones have been cancelled.

"viii(Confirming that the words Dand reducedE, if required by the order of the Tribunal,have been added to the name of the company in the =alance Sheet.

"ix( !erifying that the 6emorandum of )ssociation of the company has been suitably altered.

8.5.13 *a+ 7eri!ication o! =or!eiture o! hares

The auditor should *

"i( ascertain that the )rticles authorise the =oard of 1irectors to forfeit shares and that

the power has been exercised by the =oard in the best interest of the company

"ii( verify the amount of call or instalment of calls which was outstanding in respect of each of the share forfeited

"iii( ascertain that the procedure in the )rticles has been followed, vi7., the notice given"#$ days, according to Table )( to the defaulting shareholders, warning them thatin the event of non'payment, by a specified date, of the amount of call alreadymade on the shares standing in their names, together with interest, if any, theshares shall be forfeited see that the proper resolutions of 1irectors, first asregards issuance of notice and afterwards in respect of forfeiture of shares and

"iv( verify the entries recorded in the books of account consequent upon forfeiture of sharesto confirm that the premium, if any, received on the issue of shares has not been

transferred to the 9orfeited Shares )ccount.

*)+ $e-issue o! =or!eited hares The auditor should*

"i( ascertain that the =oard of 1irectors has the authority under the )rticles to re'issueforfeited shares

"ii( refer to the resolution of the =oard of 1irectors, reallotting forfeited shares

"iii( vouch the amounts collected from person to whom the shares have been allotted

and verify the entries recorded from reallotment and see that the total amount received

on the share, including that received prior to forfeiture, is not less than the par valueand

"iv( verify that computation of the amount of surplus resulting on the reissue of shares

credited to the Capital eserve )ccount and

"v( where partly paid shares are forfeited for non'payment of call, and are re'issued asfully paid, the re'issue is treated as an allotment at a discount Biochemical and Synthetic roducts Ltd. v. ,egistrar of Companies H"#-/%( ?% Comp. Case /$J. In such a

case the provisions of Section 0- would require compliance.


28/50


8.( :ption on hare Capital

evised Schedule !I, 2art I, requires disclosure of the particulars of any option on

unissued share capital. )n option on shares arises when a person has acquired a rightunder an agreement with the company to subscribe for share in the company if he so

chooses. Such options generally arise under the following circumstances*

"i( Lnder the promoter3s agreements, subsequently ratified by the company

"ii( Collaboration agreement

"iii( Koan agreements, debenture deeds "efer to Section F# of the Companies )ct(

"iv( )greements to convert preference shares into equity shares and

"v( 8ther contracts, such as for supply of capital goods andor merchandise.

8. hares Trans!er Audit

9requently, big companies require auditors to undertake audit of share transfer recorded bythe company during the previous year. The ob+ect of such an audit is detection of mistakes in the registration of transfers which may have the effect of saddling thecompany with the liability for damages claimed by a shareholder on account of lossessuffered in consequence thereof. The various steps which are considered necessary for

carrying out such an audit are given below*#. )scertain whether notices were sent in every case to the transferors and, in case of

+oint' holders, to each of the holders and the ob+ections, if any, raised by them weretaken into consideration before the transfers were registered.

%. !erify that in the case of partly paid shares, where the application for registration

was made by the transferor, a notice invariably was sent to the transferee and thetransfer was registered only when Dno ob+ectionE had been received from him,

within two weeks from service of notice on him HSection ##&"%(J.

?. Scrutinise Transfer forms, noting specially*

"a( that in every case, the application for transfer was made in the prescribed form

and the prescribed authority "contemplated in Clause #) of Section #&F( hadstamped the data on which it was presented to it also that it was delivered tothe company *

"i( in case of Bquoted3 shares before the egister of members were closedfor the first time subsequent to the transfer within twelve months from thedate of presentation of the application to the prescribed authority whichever is later

"ii( in any other case within two months from the date of such presentation

"b( that each transfer form is properly executed and bears the appropriate stamp duty

"c( that the name of the company is correctly stated on the form


29/50


"d( that where the consideration for transfer appears to be inadequate, an enquiry wasmade by the company for ascertaining the reasons therefore. "This is notnecessary if the Transfer 9orm bears the seal of the Collector of Stamps(

"e( that the alterations, if any, have been suitably initialed and

"f( that the name and address of the transferee have been recorded completely

and fully for purposes of correspondence.

$. Compare the signature of each transferor 9orm with his signature on the originalapplication for shares or on the Transfer 9orm "when shares were acquired on a

transfer(.

. )scertain that none of the transferees is disquali fied from holding shares in the company.

/. !ouch the entries in the Share Transfer ournal by reference to the transfer forms,noting in each case*

"a( the name of transferor

"b( the name and address of the transferee

"c( the number and class of shares transferred and

"d( the distinctive number, if any, of the Share Transfer.

The Transfer 9orms, after they have been checked, should be marked and the

transferor3s share certificate cancelled to prevent the same being presented once againin support of another transfer. The distinctive number of shares, if any, on theshares certificate surrendered, should be verified by reference to the distinctivenumbers recorded in the member3s egister.

In the case of a transfer registered in the absence of share certificate, the Ketter of Indemnity or any other documentary evidence on the basis of which the transfer has been registered should be inspected.

0. !erify by reference to the 6inute =ook of the =oard of 1irectors that all the transfer

recorded in the Transfer ournal have been approved by the =oard.

F. Confirm that every clerk who was entrusted with certain duties as regards the

registration of transfers has initialed the documents verified by him.-. Check the postings of distinctive numbers of shares transferred and the name of

transferors and transferees into the egister of 6embers from the Share Transfer ournal.

#&. !erify the particulars entered on counterfoils of shares certificate issued to thetransferees in pursuance of the transfers registered by reference to 1irectors36inute =ook.


30/50


In case where only a part of the shares have been transferred out of thosementioned in a Share Certificate, verify the issue of =alance Certificates to thetransferor and confirm that the distinctive numbers of shares are correctly stated.

##. !erify that every duplicate Shares Certificate in lieu of the one lost or destroyed hasbeen issued under the consent of the =oard and on the conditions prescribed bythe =oard as regards production of evidence or execution of a =ond of Indemnity.

#%. )scertain, in cases where share certificates have been issued in replacement of old certificates, whether such a fact was entered on the face of the Certificate andalso whether such a fact was entered on the stub of the counterfoil. 9urther, that incase of duplicate issued in lieu of the one lost or destroyed the under mentioned

statement was entered on the duplicate Share Certificates and also stated on the stubof the counterfoil

D1uplicate issued in lieu of Share Certificate 5o. ......E

#?. Confirm that in either of the above mentioned two cases, the word D1uplicateE was

punched or stamped in bold letters across the face of the Share Certificate.

#$. Trace the essential particulars from the counterfoils of the Share Certificate issued inlieu of those lost or destroyed into both the egister of 6embers and in theegister of enewed or 1uplicate Certificates.

#. Confirm that the forms of share certificates are printed only under the authority of

the =oard and that a person, appointed by the =oard, is in custody of all theunused stock of Share Certificates, as well as, the blocks and other equipmentemployed for their printing and that the person appointed is responsible for renderingan account thereof.

ote The 1epositories )ct, #--/ requires that nothing contained in section #&F relatingto transfer shall apply to transfer of security effected by the transferor and transferee

both of whom are entered as beneficial owners in the records of a depository.

-ransmission ' In the case of transmission of shares registered on the death or insolvencyof a shareholder, the auditor should see*

"a( that the procedure prescribed by the )rticles in this regard has been strictly followed.

"b( that in case of transmission on death of any executor the under mentioneddocuments relating to his authority for such a transfer were examined by the company*

"i( the grant of probate or succession certificate of 2ower of )ttorney and

"ii( a request from the executor that the shares be entered in his name. )scertain

that particulars of those documents are entered in a register specially maintainedfor the purpose and

"c( that in the case of a transmission on insolvency, the order of the Court and anyother document relevant thereto was examined also refer to the 6inutes of the

=oard of 1irectors approving the transmission.

Transmission of shares is generally governed by the provision contained in the )rticles of


31/50


)ssociation. Section #&-) inserted by the Companies ")mendment( )ct, #--- provides for the facility of nomination. The nominee can either be individual or a company. Section#&-= accordingly deals with registration of nominee shareholder, his rights and duties.

General +

"i( econcile the amount of transfer fees collected with total number of transfers lodgedand verify that the amounts of transfer fees have been accounted for.

"ii( econcile the total number of shares of different classes issued by the company withthe total amount of capital issued and its sub'divisions by extracting balance of shares held by different members from the 6ember3s egister.

"iii( Confirm that, in case of transfer registration whereof was refused, the notice of refusal was sent to the transferor and the transferee within a period of two months"Section ###(.

9urther section ###) relating to rectification of register pursuant to the 1epositories )ct,#--/, contains relevant provision enabling the Tribunal to direct rectification ofregisters.

"iv( Confirm that, in case any shares held by 1irectors have been transferred by them,

corresponding entries have been made in the egister of 1irector3s shareholding.

"v( Confirm that if a company has refused to register the transfer of or the transmissionby operation of law the right to any shares within % months from the date on which

the instrument of transfer or the intimation of such transmission was delivered tothe company has sent notice of the refusal to the transferee and the transferor or the person giving intimation of such transmission as the case may be givingreasons for such refusal.

Note ' Students should also refer to study material on Company Kaw for restrictions ontransfer of shares. 9urther, it may be noted that sections #&F) to #&F< which intendedto restrict acquisition and transfer of shares of or by companies shifted to the 6T2

)ct, #-/- have been transferred back to the Companies )ct, #-/.

8.8 7eri!ication o! Issue o! >onus hares

2rimarily, it should be ascertained whether the )rticles permit capitalisation of profitsalso whether the company had a sufficient number of unissued shares for allotment as

bonus shares. In addition, the following steps should be taken*

"a( Inspect the 6inute book of Shareholders for the resolution authorising declaration of the=onus and 1irector3s 6inute for the resolution appropriating profits for being

applied in payment of shares to be allotted to shareholders as bonus shares

"b( Trace the allotment of shares as per particulars contained in the )llotment =ook or

sheets into the egister of 6embers and

"c( Confirm that all statutory requirements relevant to the issue of shares have been

complied with, vi7., the filing of the particulars of the bonus shares allotted with the


32/50


egistrar together with a copy of the resolution pursuant to which allotment has

been made.

"d( Confirm that the issue of fully paid up bonus shares in pursuance of sub'section "?(of Section %& has been kept in abeyance in respect of shares where anyinstrument of transfer of such shares has been delivered to the company for registration and the transfer of such shares has not been registered by thecompany as required by the provisions of section %&/) of the Companies")mendment( )ct, #-FF.

"e( ;nsure that S;=I


33/50


"ii( Check the applications for debentures with the )pplication and )llotment =ook to verifythat the name, address of the applicants and the number of debentures applied for are correctly recorded.

"iii( !erify the allotment of debentures by reference to the 1irectors3 6inute =ook.

"iv( !ouch the amounts collected as are entered in the Cash =ook with the counterfoils

of receipts issued to the applicants also trace the amounts into the )pplicationand )llotment =ook.

"v( Check postings of allotments of debentures and the amounts received in respectthereof from the )pplication and )llotment =ook, into the 1ebentures egister.

"vi( !erify the entries on the counterfoils of debentures issued with the 1ebentures egister.

"vii( ;xtract balances in the 1ebentures egister in respect of amounts paid by thedebenture holders and agree their total with the balance in the 1ebentures )ccountin the


34/50


edemption of 1ebentures )ccount or subsequently, the debit balance in the firstmentioned account should be carried forward till it is written off, while the latter account would be closed on payment of the premium, on redemption of debentures.

"ii( The fact that the debentures will have to be redeemed at a premium may bedisclosed by way of a note in the =alance Sheet along with the date of redemption

and, as and when redemption is made, the amount paid as a premium should bedebited to the 2remium on edemption of 1ebentures )ccounts.

It may be noted that the second method is only a slight variation of the first in so far that,

in the latter case, the premium paid on debentures is written off subsequent to theredemption.

8.9.4 Interest on e)entures The payment of interest should be vouched with the

acknowledgment of the debenture holders, endorsed warrants and in the case of bearer

debentures, with the coupons surrendered. The total amount paid should be reconciled with

the total amount due and payable with the amount of interest outstanding for payment.

Interest on debentures is payable whether or not any profit is made. Therefore, a

provision should be made unless it has been specially agreed with the debenture

holders that interest in such a case would be waived by them. The interest paid on

debentures, like that on other fixed loans, must be disclosed as a separate item in the 2rofit

and Koss )ccount.

8.9.5 $e-issue o! $edeemed e)entures ) company may issue debentures previously

redeemed, either by reissuing the debentures or by issuing others in their place unless

the )rticles or a contract or resolution, recorded at a


35/50


8.15 Audit o! i#idends

8.15.1 7eri!ication o! i#idends In Lnit # of Chapter'% of I2CC study material on

)ccounting, the various conditions sub+ect to which profits earned by a company can be

distributed as a dividend have been discussed. Therefore, only the procedure for the

verification of payment of dividends is stated below*

#. ;xamine the company3s 6emorandum and )rticles of )ssociation to ascertain the

dividend rights of different classes of shares.

%. Confirm that the profits appropriated for payment of dividend are distributable

having regard to the provisions contained in Section %& and that the transfer toreserves is ac' cording to rules framed by the Central


36/50


The expression Ddividend which remains unpaidE means any dividend the warrant

in respect thereof has not been encashed or which has otherwise not been paid orclaimed.

-. In case any money transferred to the unpaid dividend amount of a company remainunpaid or unclaimed for a period of seven years from the date of such transfer shallbe transferred to Investor ;ducation and 2rotection 9und established under section%&C of the )ct.

8.15.2 Interim i#idends ) company may distribute part of its profits during the two

annual general meetings. That means, a company may declare dividends before the close of

the accounting year and finalisation of accounts. egulation F/ of Table B)3 of Schedule

I to the Companies )ct, #-/, provided that the =oard may from time to time pay to the

members such interim dividend as appeared to be +ustified by the company. 4owever,

the definition of DdividendE has been amended by the Companies ")mendment( )ct, %&&&,

whereby the interim dividend is part of dividends. >ith the further amendment of section

%&, the interim dividend has been brought completely at par with DdividendsE declared in the

normal course since it has been specified that provisions contained in sections %&,

%&), %&C, %&/, %&/) and %&0 shall also apply to any interim dividend. The amended

provisions read as under*

"#)( The =oard of directors may declare interim dividend and the amount of dividendincluding interim dividend shall be deposited in a separate bank account within five

days from the date of declaration of such dividend.

"#=( The amount of dividend including interim dividend so deposited under sub'section "#)(shall be used for payment of interim dividend.

"#C( The provisions contained in sections %&, %&), %&C, %&/, %&/) and %&0 shall,as far as may be, also apply to any interim dividend.

Therefore, conditions and procedures laid down in section %&), %&C, %&/, %&/) and

%&0 would have to be complied with while declaring interim dividends.

,ight to dividend& ,ight Shares and Bonus Shares to be held in abeyance pending registrationof transfers of shares ' Section %&/) inserted by the Companies ")mendment( )ct, H#-FFJrequires that where any instrument of transfer of shares has been delivered to any

company for registration and a transfer of such shares has not been registered by thecompany, the company shall transfer the dividend in relation to such shares to thespecial account referred to in section %&). 9urther the company shall also keep inabeyance and offer to right shares and any issue of fully paid up bonus shares inrespect of such shares which have not been registered by the company. 4owever, thecompany may transfer the dividend in case it has been authorised by the registeredholder of such shares in writing to pay such dividend to the transferee specified in suchinstrument of transfer.

2enalty for failure to distribute dividend within the prescribed period, i.e., thirty day, has beenmade quite stiff by prescribing imprisonment for three year. upees one thousand everydayfor which the default continues as also liability to pay simple interest at the rate of #F: p.a.


37/50


8.11 "resentation o! =inancial tatements ?

Section %## provides that every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall,sub+ect to the provisions of the said section, be in the form set out in 2art I of Schedule!I, or as near thereto as circumstances admit or in such other form as may beapproved by the Central


38/50


Koss )ccount and disclosures to be made therein. The revised Schedule !I has been framedas per the existing non'converged Indian )ccounting Standards notified under theCompanies ")ccounting Standards(, ules, %&&/ and has no connection with theconverged Indian )ccounting Standards.

The revised Schedule !I will apply to all the companies uniformly for the financial statementsto be prepared for the financial year %&'## and onwards. ) ready referencer based onSchedule !I "evised( is prepared for reference.

A. General Instructions

#. Compliance with the requirements of the Companies )ct including )ccounting

Standards to have precedence over the requirements of the Schedule !I%. 1isclosure requirements specified in 2art I and 2art II of this Schedule are in addition to

the disclosure requirements of the Companies )ct including )ccounting Standards

?. 5otes to accounts to contain information in addition to that presented in the9inancial Statements and shall provide where required*

"a( narrative descriptions or disaggregation of items recogni7ed in those statements and

"b( information about items that do not qualify for recognition in those statements

$. ;ach item on the face of the =alance Sheet and Statement of 2rofit and Koss shallbe cross referenced to any related information in the notes to accounts

5. &he correspondin% amounts for the immediatel$ precedin% $ear to be sho#n for all

items in financial statements includin% notes e'cept for first financial statements.

6. (oundin% )ff (e*uirements:

1epending upon the turnover of the company, the figures appearing in the9inancial Statements may be rounded off as below*

Turno#er $ounding o!!

"i( @ @ #&& Crore To the nearest hundreds, thousands, lakhs or millions, ordecimals thereof.

"ii( B @ #&&Crore

To the nearest, lakhs, millions or crores, or decimals thereof.

8nce a unit of measurement is used, it should be used uniformly in the

9inancial Statements.

B. >alance heet

I.


39/50


*a+ hare Capital

#. ;ach class of share capital to be shown ' ;quity Share Capital and 2referenceShare Capital "different classes to be treated differently(

2. Follo#in% details to be %i+en for each class of share capital:

' 5umber and )mount of )uthorised share capital

' Issued share capital

' Subscribed and fully paid share capital

' Subscribed share capital but not fully paid

' 2ar value per share shown

?. (econciliation of the 8pening and Closing 8utstanding number of shares to be shown

$. ights, 2references and restrictions attaching to each class of shares to be shown

including restrictions on 1ividends distribution and epayment of Capital

. Shares "in aggregate( of each class held by*

' Its 4olding Company

' Lltimate 4olding Company

' Subsidiaries

' )ssociates of the 4olding Company

' )ssociates of the Lltimate 4olding Company

/. Shareholders ha+in% more than - of the shares to be shown, specifying the number of shares

0. Terms and amount of*

' Shares reserved for issue under option of control

' Commitments for the sale of sharesdisinvestments.

F. For the precedin% fi+e $ears*

' )ggregate number and class of shares allotted as full$ paid up pursuant to

contacts" #ithout pa$ment bein% recei+ed in cash

' )ggregate number and class of shares allotted as fully paid Bonus Shares

' )ggregate number and class of shares bou%ht back

-. &erms of con+ersion of securities into equitypreference share capital with earliestdate of conversion being shown in descending order starting from the farthest suchdate

#&. Calls unpaid shown as*

' by directors and officers


40/50


' by others

##. Forfeited Shares to be shown "with amount originally paid up(

(b) $eser#es and urplus

#. Classification of (eser+es and Surplus into*

' Capital reserves

' Capital edemption eserves

' Securities premium reserves

' 1ebenture edemption eserve

' evaluation eserve

' Share 8ption 8utstanding )ccount

' 8ther reserves, specifying nature, purpose and amount of each

' Surplus, showing allocations and appropriations such as dividend, bonus shares and transfer to from reserves

%. )dditions and 1educt ions since last =alance Sheet date to be shown under each of the specified heads

?. Fund: The word @fundP in connection with reserve is to be used only where such eserve is specifically represented by earmarked investments

$. e%ati+e Balance of /rofit and 0oss Account, if any, to be shown under the

QSurplusQ head as a negative figure.

(c) 6oney $ecei#ed Against hare Earrants

2+ FA$< A""ICATI: 6:


41/50


' Kong Term maturities of finance lease obli%ations

' 8ther Koans and advances, specifying nature, shown

%. Kong term =orrowings to be sub'classified as*

' Secured "nature of the security to be specified(

' Lnsecured

?. )ggregate of loans %uaranteed by the following should be disclosed*

' 1irectors

' 8thers

4. (ate of interest and terms of redemption con+ersion of bonds debentures "to

be stated in descending order of maturity of redemption conversion( )or

Clarification ,efer Note / at the end01

. 2articulars of the redeemed bonds which can be reissued to be shown

/. Terms of repayment of the following to be shown*

' Term loans

' 8ther Koans

0. 2eriod and amount of continuing default in the repayment of loans and interestshown separately in each case

(b) e!erred Ta ia)ilities *et+

*c+ :ther ong-term ia)ilities

#. Classification of other long term liabilities as*

' &rade pa$ables .)or clarification ,efer Note 2 at the end0

' 8thers

(d) ong-Term "ro#isions

#. Classification of /ro+isions as*' 2rovision for emplo$ee benefits

' 8thers "Specifying nature(

4) CH$$IITIorro/ings

#. Classification of borrowings as*

' Koans repayable on demand

a(9rom banks


42/50


b(9rom other parties

' Koans and )dvances from related parties

' 1eposits

' 8ther Koans and )dvances, specifying nature

%. 9urther sub'classification of the borrowings into*

' Secured "nature of the security to be specified(

' Lnsecured

?. )ggregate of loans %uaranteed by the following should be disclosed*

' 1irectors

' 8thers

$. 2eriod and amount of continuing default in the epayment of Koans and

Interest shown separately in each case

(b) Trade "aya)les *=or clari!ication $e!er ote ( at the end+

*c+ :ther Current ia)ilities

#. Classification of other current liabilities into*

' Current maturities of Kong term debt

' Current maturities of finance lease obli%ations

' Interest accrued but not due on borrowings

' Interest accrued and due on borrowings

' Income received in advance

' npaid 3i+idends

' Application mone$ recei+ed for allotment of securities and due for refund

and interest accrued thereon .)or clarification ,efer Note 3 at the end0

' Lnpaid matured deposits and interests accrued thereon

' Lnpaid matured debentures and interest accrued thereon

' 8ther payables, specifying nature

(d) hort- term "ro#isions

#. Classification of short term pro+isions into*

' 2rovision for emplo$ee benefits

' 8thers, specifying nature


43/50


II. Assets

1+ :-CH$$


44/50


' Copyrights and patents and other Intellectual property rights, services

and operating rights

' ecipes, formulae, models, designs and prototypes

' Kicenses and franchises

' 8thers "specifying nature(

%. (econciliation of %ross and net carr$in% amounts of each class of assets at thebeginning and end of the reporting period showing*

' )ddit ions

' 1isposals

' )cquisitions through business combinations

' 8ther )d+ustments

' )morti7ation

' Impairment lossesreversals

?. >here a capital reduction scheme or a revaluation of assets has taken place,every balance sheet subsequent to the reduction or revaluation shall show the

reducedincreased figures, the date of the reductionincrease and the amount of

reduction increase for the first years subsequent to the reduction revaluation.

(iii) Capital Eor, In "rogress

(iv) Intangi)le Assets Hnder e#elopment

*)+ on-Current In#estments

#. Classification of 5on'current Investments into*

' Trade investments

' 8ther Investments

%. 9or each of above "i.e., trade N other investment(, a sub'classification into*

' Investments in 2roperty

' Investments in ;quity instruments

' Investments in 2reference shares

' Investments in


45/50


?. In case of in+estments in bodies corporate, the following additional disclosures shall be made under each classification*

' 5ames of the body corporate "indicating whether they are associates, +ointventures, subsidiaries or controlled special purpose entities(

' 5ature and extent of the investments

' 2artly paid investments to be separately shown.

$. In case of in+estments in partnership firms, the following additional disclosures shall be made under each classification*

' 5ames of the firms and their respective partners

' Total capital and the profit sharing ratio

. In+estments carried at other than costs to be separately shown specifying basisof valuation

/. 9ollowing shall be additionally disclosed*

' )ggregate book value of Muoted Investments and market value thereof

' )ggregate amount of unquoted investments

' )ggregate provision f

Date post:	08-Jul-2018
Category:	Documents
Upload:	anonymous-psuq0rg
View:	216 times
Download:	0 times

Chapter 8 the Company Audit II 2(1)

Documents