Procedures involved in audit of share capital may be discussed under two heads:
- Audit of shares issued for cash
- Audit of shares issued for consideration other than cash
Audit of Shares
The audit of shares issued for cash may be divided into three stages application, allotment and call. The process of raising initial capital may be divided into two stages, receiving application for shares and allotment of shares.
Application Stage
At the application stage, application money is received along with application. The auditor should:
1. Check the original application sent by the investors and vouch the entries with application and allotment sheets.
2. Vouch the amount received on applications with cash or bank book and application allotment register.
3. Also check the bank reconciliation statement in this regard.
4. Vouch repayment of application money with the application and allotment sheets and verify with the bank book.
5. Check the total columns of application and allotment register and see that proper journal entries have been passed in the books.
6. Verify that the issue is within the limits as authorized by the memorandum and articles of association of the company.
7. Ensure that the application moneys received were deposited in a scheduled bank until the certificate of commencement of business is obtained or application money returned as per provisions of section 69(5).
8. See whether the amount received on application is not less than five per cent of the nominal value of shares issued.
Allotment Stage
At the allotment stage, the auditor should
1. Examine the directors’ minutes to see that all the allotments have been approved by the Board.
2. Compare copies of letters of allotment with entries made in the application and allotment registers.
3. Check the moneys received on allotment by comparing the entries in the application and allotment registers with cash book and bank statement.
4. Check the postings made as to the amount received on application and allotment in the share register.
5. See that relevant requirements of RBI and Foreign Exchange Management Act. 1999 in case of allotment to non-residents.
6. Check whether the returns of allotment have been filed with the Registrar of Companies.
7. See that the provisions of section 70 are complied with in relation to allotment of shares. A valid allotment must be made in accordance with provisions of Companies Act. 2013 and the Indian Contract Act. 1972.
Call Stage
The auditor at the call stage should
1. Examine the board of directors resolution for making calls.
2. Examine the total amount due on calls and compare with the amount collected and entered into cash book or bank book.
3. Trace out the figures of calls-in-arrears and vouch the entries made in this regard.
4. See that calls received in advance are duly accounted for.
5. Verily the amount received with the counterfoils of receipts.
6. Verify the journal entries passed in respect of calls made and money received thereon. Besides the above, the auditor should perform the following duties also.
- The auditor should verily that proper entries passed for premium on shares if any.
- The auditor should check the amount of forfeiture of shares and corresponding entries in this regard.
- If issues were underwritten, underwriting agreement should be examined.
- The auditor should vouch the payment of commission and brokerage to the underwriter.
Shares may be allotted for consideration other than cash. Vendors, promoters, underwriters etc., may be allotted shares instead of making payments to them. The auditor in this regard should verify the following documents.
1. Minutes of board of directors to ensure that the allotment is authorized by the Board.
2. Copy of the contract entered into with vendors, promoters, underwriters etc., to ensure that the allotment is made as per the agreements.
3. Articles of association to ensure that articles authorize allotment of shares for consideration.
4. Prospectus to ensure that conditions laid down therein are complied with.
5. Return filed with the Registrar of Companies to ensure that return is filed in time regarding allotment.
6. Share capital account as shown in the ledger to ascertain that share allotments are posted in the ledger accounts.
7. Balance sheet to ensure that shares allotted for consideration other than cash are properly disclosed.
The auditor should ensure that an amount equal to the amount of premium has been transferred to the share premium account where shares were issued at a premium for consideration other than cash.