Audit of Share Capital:
The auditor should examine the following books and documents for the purpose of auditing Share Capital newly issued:
(i) Memorandum of Association,
ADVERTISEMENTS:
(ii) Articles of Association,
(iii) Prospectus,
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(iv) Directors’ Minute Book,
ADVERTISEMENTS:
(v) Application for Shares,
(vi) Application and Allotment Book,
(vii) Copies of Letters of Allotment,
(viii) Copies of Letters of Regret,
ADVERTISEMENTS:
(ix) Letters of Calls,
(x) Calls Book,
(xi) Share Register,
(xii) Cash Book,
(xiii) Pass Book.
For the purpose of audit, the Share Capital of a company may be put under two heads:
I. Shares issued for cash.
II. Shares issued for consideration other than cash.
I. Shares Issued for Cash: The entire procedure may be divided into three stages:
(1) Receipts of applications along with the application money, i.e., Application Stage.
(2) Allotment of shares, issuing letters of allotment and receipt of the allotment money, i.e., Allotment Stage.
(3) Calls made and money due thereon received, i.e., Call Stage.
1. Application Stage:
The auditor should proceed in the following manner:
(i) He should check original applications, and entries in the Application and Allotment Book should be vouched with these applications.
(ii) Then he should compare the entries in the Application and Allotment Book with those in the Cash Book.
(iii) He should ensure that the application moneys were deposited into a Scheduled Bank until the certificate to commence business is obtained or they are returned in accordance with the provisions of section 69(5).
(iv) Entries of the amount passed in the Cash Book returned to the unsuccessful applicants should be vouched with the copies of letters of regret and compared with those in the Application and Allotment Book.
(v) The totals of the Application and Allotment Book should be checked and it should be seen that the Journal Entry debiting the Share Application Account and crediting Share Capital Account has been passed.
2. Allotment Stage:
The auditor should examine the Directors’ Minute Book to verify approvals for allotment.
He should compare the entries in the Application and Allotment Book with the copies of letters of regret.
For receipt of moneys on allotment, he should check the Cash Book and compare it with the Application and Allotment Book.
Posting of the receipts on application and allotment into the Share Register should be checked.
It should be confirmed that the totals are correct and allotment has been duly recorded in the journal.
3. Call Stage:
(j) The auditor should examine the Directors’ Minute Book for making calls.
(ii) Entries in the Calls Book should be checked with the help of the copies of letters of calls.
(iii) Postings from the Calls Book and the Cash Book into the Share Register should be checked.
(iv) He should compare the Application and Allotment Book with the schedule of calls in arrear and confirm that the amount is correct.
(v) Calls in advance should be verified.
(vi) The totals of the Calls Book should be checked and the entries passed in this connection shall be vouched.
Other General Duties:
(i) The auditor should confirm that the nominal value of shares allotted does not exceed the authorized and issued capital and conditions mentioned in the prospectus have been duly complied with.
(ii) The total of the balances of Shareholders’ Account should be tallied with balances of Share Capital Account.
(iii) If the issue is underwritten, the contract with the underwriters should be examined and it should be confirmed whether the terms laid down in the contract have been complied with.
(iv) Payment of commission, brokerage, etc., should be vouched by reference to the relevant documentary evidence.
The above cited procedure can be well applied to the checking of accounts of a company in the first year of existence. In subsequent years, however, an auditor can apply test checking unless there is further issue of shares in these years.
II. Shares Issued for consideration other than Cash:
Shares for consideration other than cash are issued to those persons or institutions from which either property has been acquired or which have rendered some services to the company. Such cases may be as follows:
1. Issue of Shares to a Vendor,
2. Issue of Shares to Underwriters of Shares, and
3. Issue of Shares to Promoters.
1. Issue of Shares to a Vendor:
The auditor should proceed in the following manner:
(i) Contract:
He should examine the contract entered into by the company with the vendors so as to know the exact amount of the purchase consideration. This is the basic document to be consulted by the auditor.
(ii) Prospectus:
He should examine the Prospectus to enquire the mode of payment of the purchase consideration.
(iii) Directors’ Minute Book:
The Directors’ Minutes should be referred to confirm the allotment of shares to the vendor.
(iv) Vendor’s Authority in the name of Nominees:
If shares have been allotted to the nominees of the vendor, he should examine the authority of the vendor given to them in their favour.
2. Issue of Shares to Underwriters of Shares:
(i) Contract:
If the shares are issued to the underwriters as remuneration for underwriting shares or debentures, the contract with the underwriters should be inspected. This is necessary to have knowledge of the terms and conditions given in the contract.
(ii) Directors’ Minute Book:
Next, he should examine the resolution of the Directors by reference to the minutes of the Board of Directors. It is to be seen whether the allotment of shares to the underwriters is in order.
(iii) Articles of Association:
He may also confirm from the Articles of Association the amount of the underwriting commission and the procedure to be followed for its payment.
(iv) Prospectus:
The Prospectus of the company has to be seen to verify whether the rights for the payment of commission have been mentioned in it or not.
3. Issue of Shares to Promoters:
(1) Contract:
For this, again, the auditor should examine the contract with the promoters.
(ii) Directors’ Minute Book:
Then, the Minutes of the Board of Directors should be inspected to verify the allotment of shares.
Besides taking the steps as given above in individual cases, the auditor should also note that:
(i) The copies of contracts as required by section 75(1) (b) of the Companies Act have been filed with the Registrar of Joint Stock Companies within thirty days of the date of allotment along with a return stating the number and nominal amount of shares so allotted, the extent to which they are to be treated as paid up, and the consideration for which they have been allotted.
(ii) He should vouch the entries passed into the Journal to ensure that the issue of shares for consideration other than cash has been properly recorded.
(iii) It is also to be seen that such shares have been separately shown in the liabilities side of the Balance Sheet.
Issue of Shares at a Premium:
Section 78 of the Companies Act prescribes that:
(1) When a company issues shares at a premium, whether for cash or otherwise, a sum equal to the amount of the premium collected should be transferred to an account called ‘Share Premium Account’.
(2) The Share Premium Account may be applied by the company:
(a) In paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares;
(b) In writing off the preliminary expenses of the company;
(c) In writing off the expenses of or the commission paid or discount allowed on any issue of shares or debentures of the company; or
(d) In providing for the premium payable on the redemption of any redeemable preference shares or debentures of the company.
(3) If a company has issued any shares at a premium before the commencement of the Act, these provisions will apply as if the shares had been issued after the commencement of the Act.
Thus, the amount of premium should be considered as a part of the Share Capital and it should not be utilized for the distribution as dividends. Whenever shares are forfeited, the amount of share premium in respect thereof cannot be forfeited. This should be utilized to write off capital losses.
Auditor’s Duty:
(i) The auditor should examine the Prospectus, the Articles and the Minutes of the Directors to see whether the issue of shares at a premium is duly authorized or not. He should confirm the rate of premium.
(ii) The receipt of the premium is vouched with the entries in the Cash Book and the supporting documents.
(iii) He should see that the provisions of section 78 have been complied with.
(iv) The auditor should not have any objection so far as the utilization of the amount of premium is concerned. However, he should see that the sum available has been utilized in the manner as laid down by the Articles.