1. INTRODUCTION

The Companies Act, 1956, under Section 227(4-A) stipulates that the “The Central

Government may, by general or Special Order, direct that, in the case of such class of

companies as may be specified in the order, the auditor’s report shall also include a

statement on such matters as specified therein”.

In exercise of this provision the Central Government vide GSR no: 480(E) has issued

the Companies (Auditor’s Report) Order, 2003. The matters referred to in this order

are to be commented upon by the Statutory Auditors and hence assumes importance

that the company ensures adherence to the issues that are referred to in this order to

escape adverse comment in the Auditors Report. It is in this regard that this

questionnaire has been drafted to act as guidance document to ensure that the

company complies with the CARO issues.

The existing Companies Act was enacted in 1956 with the object to consolidate the

law relating to corporate sector and to regulate its activities. This Act is in force for

the last over 56 years and has been amended several times. In view of changes in

national and international economic environment and growth of our economy, the

Government has decided to replace the Companies Act, 1956, by a new legislation.

Originally Companies Bill, 2009 was introduced in the Lok Sabha in August, 2009

and was referred to Parliamentary Standing Committee. The Government received

several suggestions from various stakeholders. After due consideration of various

recommendations, a fresh Companies Bill, 2011 was introduced in the Lok Sabha and

again referred to the Parliamentary Standing Committee. Lok Sabha has passed this

Bill as Companies Bill, 2012 on 18th December, 2012. Now the Rajya Sabha has also

passed the Bill in August,

1

2013. The President has given his assent on 29th august, 2013. Thus the Companies

Act, 2013, has now been enacted and will come into force from the date to be notified

by the Government. It may be noted that out of 470 Sections, 98 Sections have come

into force with effect from 12-09-2013 by a notification issued by the Government.

Sections 128 to 133 and 138 to 148 of this Act deal with Accounts, Audit and

Auditors. These provisions will have far reaching implications for the Audit

Profession. In this article some important provisions contained in the Companies Act,

2013 are discussed.

2

2. APPOINTMENT AND RE-APPOINTMENT OF

AUDITOR

Every company has to appoint an auditor for auditing their accounts. Following

provisions have been made regarding appointment of an auditor according to section-

224 of the Companies Act in different circumstances.

I) FIRST APPOINTMENT:

The board of directors appoints the first auditor of the company within one month of

the registration of the company, which continues till the end of the first annual general

meeting of the company. If the board of directors does not appoint the first auditor of

the company in this way, the first auditor of the company is appointed in the annual

general meeting of the company.

II) APPOINTMENT EVERY YEAR:

Every year, Company appoints the auditor in the annual general meeting by share

holders. The auditor appointed this way holds office till the completion of next annual

general meeting.

The auditor has to be intimated about his appointment within seven days after the

resolution about the appointment has been passed in the annual general meeting. And

after getting this information the auditor has to inform the registrar of companies in

writing in a prescribed form whether he has accepted or refused the appointment

within thirty days. This provision is also applicable in the case of reappointment of an

auditor according to the amendment of 1974 in the Companies Act.

3

III) RE-APPOINTMENT:

Only the auditor who has been appointed by the company should be reappointed in

the annual general meeting. Of course, reappointment is not done under following

circumstances:

(1) If auditor is not qualified for reappointment.

(2) If a resolution has been passed to appoint another person instead of him or

resolution has been passed that the same auditor should not be reappointed.

(3) If the notice about the resolution of other auditor’s appointment instead of the

current auditor has been received by the company but because of death, insanity,

inability or disqualification of such person, the resolution cannot be proceeded with.

IV) APPOINTMENT BY THE CENTRAL GOVERNMENT:

When the appointment of re- appointment of an auditor is not possible at annual

general meeting of the company, the Central Government appoints the auditor. In this

case, the company has to inform the Central Government within the seven days of

completion of annual general meeting of the company that the auditor is not appointed

orre- appointed.

V) APPOINTMENT OF AN AUDITOR OF GOVERNMENT COMPANY

In the Corporation, government companies which are established by the laws of State

Government or Central Government in which the government has the right for more

than 50%, the appointment of an auditor of such companies is done by the Central

Government on the advice of the Comptroller and Auditor General of India. e.g. Life

Insurance Corporation, General Insurance Corporation etc.

4

3. POWERS AND DUTIES OF AUDITORS

Right to access the books of holding as well as subsidiary in relation to

consolidation. Auditor can inquire the following matters:-

Whether loans and advances made by the company on the basis of security have

been properly secured and whether the terms on which they have been made are

prejudicial to the interests of the company or its members

Whether transactions of the company which are represented merely by book

entries are prejudicial to the interests of the company

Where the company not being an investment company or a banking company,

whether so much of the assets of the company as consist of shares, debentures and

other securities have been sold at a price less than that at which they were

purchased by the company

Whether loans and advances made by the company have been shown as deposits;

Whether personal expenses have been charged to revenue account

Where it is stated in the books and documents of the company that any shares

have been allotted for cash, whether cash has actually been received in respect of

such allotment, and if no cash has actually been so received, whether the position

as stated in the account books and the balance sheet is correct, regular and not

misleading.

5

4. QUALIFICATION OF A COMPANY AUDITOR

According to Section 226(1) and 226(2) of the Companies Act, the prescribed

qualifications of an auditor are as follows:

A person who is a chartered accountant within the meaning of the Chartered

Accountant’s Act 1949.(Section 26(1)]

A person who holds a certificate under the Restriction Auditors Certificate Rules

1956 is also qualified to act as an auditor of a company. Such persons are also

known as certified auditors and are always subject to rules made in this behalf by

the central government [section 226(2)].

The central government in empowered to frame rules relating to granting

renewals, suspension or cancellation of such certificates.

6

5. DISQUALIFICATION OF A COMPANY AUDITOR

According to section 226(3) of the Companies Act, the following persons shall not

be appointed as auditors of a company.

A body corporate.

An officer or an employee of the company.

A person who is a partner in the business.

A person who is indebted to the company for an amount exceeding more than

Rs.1000/-or who has given any guarantee or provided any security in connection

with the indebtedness of any third person to the company for an amount exceeding

Rs.1000/-.

If an auditor, after his appointment becomes a subject of any of the above

mentioned disqualifications, he shall be deemed to have vacated his office

forthwith.

7

6. LIABILITIES OF AN AUDITOR

Auditor of a private institute is not appointed under any Law. He is appointed by an

agreement with the client. So, his liabilities are decided on the basis of instructions

given by the client. It is advisable for the auditor of private institute to get instructions

of the client in writing so that there will be no confusion regarding the work done by

him in future. Company auditing is different from this. He is appointed according to

the Indian Companies Act of 1956 and his liabilities are showed in the law. His

liabilities can be described under two heads:

Auditor’s Liability to the third party:

Generally, the auditor is appointed by the company. So, the relationship between the

company and auditor is established according to the agreement. Therefore, auditor is

aware of the fact, that if he fails to do his duty, he is liable to pay for the loss suffered

by the client; but the question arises here is that, whether other persons of the society

connected with the financial interest of the company like creditors, debenture holders

etc. can consider the auditor liable for his work or not?

In binary circumstances, the answers to these questions are into negative because

auditor’s appointment, remuneration, removal etc. are not decided by the third party.

Generally, an agreement is made between the company and the auditor. Company

appoints the auditor. It pays remuneration. Therefore, auditor is accountable to the

company and not the third party. Yet it is not totally true. In certain situations, auditor

is liable to even the third party. Let us clarify this matter by referring to various

judgments.

In case of Calendar vs. Crane Christmas and Co. Ltd., the justice had stated in his

judgment that auditor is not responsible for any loss suffered by third parties through

reliance on accounts already audited by him even if the negligence is proved. This is

8

because there is no relation of any kind between the auditor and the third party

through agreement.

Following recommendations have been mode:

(1) If the auditor has prepared accounts, registers, reports with negligence and if they

are prepared keeping in view certain transactions with the third party and if actions

are to be taken on the basis of it by the third party, then the third party can get the

compensation for the losses shown by the auditor.

(2) If any shareholder decides individually to invest in the company on the basis of

certified accounts or auditor’s reports, auditor is not liable to that shareholder

individually.

(3) If the accountant knows that his accounts will be based for the estimation of taxes

and yet if any negligence is showed, the auditor is not liable for it.

According to Indian Companies Act, if there is any misguiding statement in the

magazine and auditor has given his permission, auditor is liable to pay for the damage

suffered by the person who has invested money depending on it.

9

7. COMPANIES AUDITOR REPORT ORDER, 2003

{after incorporating the amendments made by the Companies (Auditor’s Report) (Amendment)

Order, 200416 dated 25th November, 2004}

Matters to be included in the auditor’s report. – The auditor’s report on the account of a

company to which this Order applies shall include a statement on the following matters,

namely:

(A)FIXED ASSETS:

(a) whether the company is maintaining proper records showing full particulars,

including quantitative details and situation of fixed assets;

(b) whether these fixed assets have been physically verified by the management at

reasonable intervals; whether any material discrepancies were noticed on such

verification and if so, whether the same have been properly dealt with in the books of

account;

(c) if a substantial part of fixed assets have been disposed off during the year, whether it

has affected the going concern;

(B) INVENTORY:

(a) whether physical verification of inventory has been conducted at reasonable intervals

by the management;

(b) are the procedures of physical verification of inventory followed by the management

reasonable and adequate in relation to the size of the company and the nature of its

business. If not, the inadequacies in such procedures should be reported;

10

(c) whether the company is maintaining proper records of inventory and whether any

material discrepancies were noticed on physical verification and if so, whether the same

have been properly dealt with in the books of account;

(C)LOANS:

(a) has the company granted any loans, secured or unsecured to companies, firms or

other parties covered in the register maintained under section 301 of the Act. If so, give

the number of parties and amount involved in the transactions; and

(b) whether the rate of interest and other terms and conditions of loans given by the

company, secured or unsecured, are prima facie prejudicial to the interest of the

company; and

(c) whether receipt of the principal amount and interest are also regular; and

(d) if overdue amount is more than rupees one lakh, whether reasonable steps have been

taken by the company for recovery of the principal and interest;

(e) has the company taken any loans, secured or unsecured from companies, firms or

other parties covered in the register maintained under section 301 of the Act. If so, give

the number of parties and the amount involved in the transactions; and 16 DCA

Notification No. GSR 766(E).Statement on the Companies (Auditor’s Report) Order,

2003 CARO, 2003 92

(f) whether the rate of interest and other terms and conditions of loans taken by the

company, secured or unsecured, are prima facie prejudicial to the interest of the

company; and

(g) whether payment of the principal amount and interest are also regular.

11

(iv) is there an adequate internal control system commensurate with the size of the

company and the nature of its business, for the purchase of inventory and fixed assets and

for the sale of goods and services. Whether there is a continuing failure to correct major

weaknesses in internal control system.

(v) (a) whether the particulars of contracts or arrangements referred to in section 301 of

the Act have been entered in the register required to be maintained under that section;

and

(b) whether transactions made in pursuance of such contracts or arrangements have been

made at prices which are reasonable having regard to the prevailing market prices at the

relevant time;

(This information is required only in case of transactions exceeding the value of five lakh

rupees in respect of any party and in any one financial year).

(vi) in case the company has accepted deposits from the public, whether the directives

issued by the Reserve Bank of India and the provisions of sections 58A, 58AA or any

other relevant provisions of the Act and the rules framed there under, where applicable,

have been complied with. If not, the nature of contraventions should be stated; If an order

has been passed by Company Law Board or National Company Law Tribunal or Reserve

Bank of India or any Court or any other Tribunal whether the same has been complied

with or not?

(vii) in the case of listed companies and/or other companies having a paid-up capital and

reserves exceeding Rs.50 lakhs as at the commencement of the financial year concerned,

or having an average annual turnover exceeding five crore rupees for a period of three

consecutive financial years immediately preceding the financial year concerned, whether

12

the company has an internal audit system commensurate with its size and nature of its

business;

(viii) where maintenance of cost records has been prescribed by the Central Government

under

clause (d) of sub-section (1) of section 209 of the Act, whether such accounts and records

have been made and maintained;

(ix) (a) is the company regular in depositing undisputed statutory dues including

Provident Fund, Investor Education and Protection Fund, Employees’ State Insurance,

Income-tax, Sales-tax, Wealth Tax, Service Tax, Custom Duty, Excise Duty, cess and

any other statutory dues with the appropriate authorities and if not, the extent of the

arrears of outstanding statutory dues as at the last day of the financial year concerned for

a period of more than six months from the date they became payable, shall be indicated

by the auditor. Statement on the Companies (Auditor’s Report) Order, 2003 93 CARO,

2003

(b) in case dues of Income tax/ Sales tax /Wealth tax/ Service tax/ Custom duty/ Excise

duty/ cess have not been deposited on account of any dispute, then the amounts involved

and the forum where dispute is pending shall be mentioned (A mere representation to the

Department shall not constitute a dispute).

(x) whether in case of a company which has been registered for a period not less than five

years, its accumulated losses at the end of the financial year are not less than fifty per

cent of its net worth and whether it has incurred cash losses in such financial year and in

the immediately preceding financial year;

13

(xi) whether the company has defaulted in repayment of dues to a financial institution or

bank or

debenture holders? If yes, the period and amount of default to be reported;

(xii) whether adequate documents and records are maintained in cases where the

company has

granted loans and advances on the basis of security by way of pledge of shares,

debentures and other securities; If not, the deficiencies to be pointed out.

(xiii) whether the provisions of any special statute applicable to chit fund have been duly

complied with? In respect of nidhi / mutual benefit fund/societies;

(a) whether the net-owned funds to deposit liability ratio is more than 1:20 as on the date

of balance sheet;

(b) whether the company has complied with the prudential norms on income recognition

and provisioning against sub-standard/doubtful/loss assets;

(c) whether the company has adequate procedures for appraisal of credit

proposals/requests, assessment of credit needs and repayment capacity of the borrower;

(d) whether the repayment schedule of various loans granted by the nidhi is based on the

repayment capacity of the borrower;

(xiv) if the company is dealing or trading in shares, securities, debentures and other

investments, whether proper records have been maintained of the transactions and

contracts and whether timely entries have been made therein; also whether the shares,

14

securities, debentures and other investments have been held by the company, in its own

name except to the extent of the exemption, if any, granted under section 49 of the Act;

(xv) whether the company has given any guarantee for loans taken by others from bank

or financial institutions, the terms and conditions whereof are prejudicial to the interest of

the company;

(xvi) whether term loans were applied for the purpose for which the loans were obtained;

(xvii) whether the funds raised on short-term basis have been used for long term

investment; If yes, the nature and amount is to be indicated;

(xviii) whether the company has made any preferential allotment of shares to parties and

companies covered in the Register maintained under section 301 of the Act and if so

Statement on the Companies (Auditor’s Report) Order, 2003 CARO, 2003 94 whether

the price at which shares have been issued is prejudicial to the interest of the company;

(xix) whether security or charge has been created in respect of debentures issued;

(xx) whether the management has disclosed on the end use of money raised by public

issues and the same has been verified;

(xxi) whether any fraud on or by the company has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated.

15

8. PRESENTATION OF FINANCIAL STATEMENTS

Section 211 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,

subject to the provisions of the said section, be in the form set out in Part I of

Schedule VI, or as near thereto as circumstances admit or in such other form as may

be approved by the Central Government either generally or in any particular case. In

preparing the balance sheet due regard shall be had, as far as may be, to the general

instructions for preparation of balance sheet under the heading “Notes” at the end of

that Part.

The statement of profit and loss of a company shall give a true and fair view of the

profit or loss of the company for the financial year and shall, subject to as aforesaid,

comply with the requirements of Part II of Schedule VI, so far as they are applicable

thereto.

It is further provided that nothing contained in the above provisions shall apply to any

insurance or banking company or any company engaged in the generation or supply

of electricity or to any other class of company for which a form of balance sheet or

profit and loss account, as the case may be, has been specified in or under the Act

governing such class of company.

However, if in the opinion of the Central Government it is necessary to grant

exemption in the public interest, it may, by notification in the Official Gazette,

exempt any class of companies from compliance with any of the requirements of

Schedule VI, either unconditionally or subject to such conditions as may be specified

in the Notification.

The Central Government is also empowered, either on the application of or with the

consent of, the Board of directors of the company, by order, to modify in relation to

16

that company any of the requirements of this Act as to matters to be stated in the

company’s balance sheet or profit and loss account, for the purpose of adapting them

to the circumstances of the company.

For the purposes of section 211, any reference to a balance sheet or profit and loss

account shall include any notes thereon or documents annexed thereto, giving

information required by the Act, and allowed by the Act to be given in the form of

such notes or documents, except where the context otherwise requires.

Schedule VI, which deals with the form of the balance sheet in Part I, with

requirements as to the profit and loss account in Part II is discussed hereunder. Part III

defines and interprets certain lessons while Part IV contains an abstract of the

financial statements and a general business profile of the company.

17

Part I

Form of Balance Sheet

Name of the Company.....................................

Balance Sheet as at......................................... (Rupees in ...............)

Particulars Note

No.

Figures as at

the end of

the current

reporting

period

Figures as at

the end of the

current

reporting

period

(1) (2) (3) (4)

I. EQUITY AND LIABILITIES

(1) Shareholders’ funds

(a) Share capital

(b) Reserves and surplus

(c) Money received against share Warrants

(2) Share application money pending allotment

(3) Non-current liabilities

(a) Long-term borrowings

(b) Deferred tax liabilities (Net)

(c) Other long-term liabilities

(d) Long-term provisions

(4) Current liabilities

(a) Short-term borrowings

(b) Trade payables

(c) Other current liabilities

18

(d) Short-term provisions

TOTAL

II. ASSETS

(1) Non-current assets

(a) Fixed assets

(i) Tangible assets

(ii) Intangible assets

(iii) Capital work-in-progress

(iv) Intangible assets under development

(b) Non-current investments

(c) Deferred tax assets (net)

(d) Long-term loans and advances

(e) Other non-current assets

(2) Current assets

(a) Current investments

(b) Inventories

(c) Trade receivables

(d) Cash and cash equivalents

(e) Short-term loans and advances

(f) Other current assets

TOTAL

19

Part II

Form of Statement of Profit And Loss

Name of the Company.....................................

Balance Sheet as at......................................... (Rupees in .....................)

Particulars Note

No.

Figures as at the

end of the

current

reporting period

Figures as at the

end of the

current

reporting

period

(1) (2) (3) (4)

I Revenue from operations

II Other income

III Total revenue (I+II)

IV Expenses

Cost of materials consumed

(b) Purchases of stock-in-trade

(c) Changes in inventories of finished

goods,

work-in-progress and stock-in-trade

(d) Employee benefits expense

(e) Finance costs

(f) Depreciation and amortisation

expense

(g) Other expenses

Total expenses

V Profit / (Loss) before exceptional and

20

extraordinary items and tax (III - IV)

VI Exceptional items

VII Profit / (Loss) before extraordinary

items and tax (V – VI)

VIII Extraordinary items

IX Profit / (Loss) before tax (VII – VIII)

X Tax expense:

(1) Current tax

(2) Deferred tax

XI Profit / (Loss) for the period from

continuing operations (IX - X- XIV)

XII Profit / (Loss) from discontinuing

operations

XIII Tax expense of discontinuing

operations

XIV Profit / (Loss) from discontinuing

operations (after tax) (XII - XIII)

XV Profit / (Loss) for the year (XI + XIV)

XVI Earnings per equity share:

(1) Basic

(2) Diluted

21

9. SHARES AND SHARE CAPITAL

According to Section 2(46) of the Companies Act, ‘share’ means share in the

share capital of a company and includes stock except where a distinction between

stock and share is expressed or implied. There are two basic types of share capital

based on the types of shares which can be issued by a company under the

Companies Act, 1956 i.e. (a) preference shares and (b) equity shares

Preference Shares:-

Preference shares are those which carry the following preferential rights as to:

The payment of dividend at a fixed rate; and

The return of capital on winding up of the company.

Equity Shares:-

An equity share is one which is not a preference share. These are normally risk

bearing shares. Equity shareholders will get dividend and repayment of capital

after meeting the claims of preference shareholders. In other words, if the

shareholder is not entitled to dividend at a fixed rate in preference to others or if

there is no preferential right for the capital to be repaid, the share capital will be

treated as equity share capital.

Share Capital in Company’s Balance Sheet

The prescribed form of the Balance Sheet of a company given in Schedule VI of

the Companies Act, 1956requires the description of Share Capital under the

following categories:

22

Nominal or Authorised Capital:

It refers to that amount which is stated in the Memorandum of Association as the

share capital of the company. The company is registered with this amount of

capital. This is the maximum limit of capital which the company is authorised to

issue and beyond which the company cannot issue shares unless the capital clause

in the Memorandum is altered.

Issued Capital:

It refers to that part of the authorised capital of the company which has actually

been offered to the public for subscription in cash including shares allotted to

vendors/promoters for consideration other than cash. It sets the limit of the capital

available for subscription.

Subscribed Capital:

It refers to that part of the issued capital which has actually been subscribed by the

public and subsequently allotted to them by the directors of the company which

are fully paid or partially paid.

Called up Capital:

It is that portion of the subscribed capital which the shareholders are called upon

to pay on the shares applied by them. A company does not necessarily require the

full amount at once, on the shares subscribed and hence calls up only such portion

as it needs. The balance then remaining is known as uncalled capital.

23

10. AUDIT OF SHARE CAPITAL

Almost the first function of a company is to raise capital. Excepting a private

company, every other company issues a prospectus, which may be in the abridged

form, or a Statement in lieu of Prospectus, before it proceeds to allotment, share

capital. The object is to publicly announce the conditions on which allotment will be

made, to specify the projects on which the amount raised will be spent (when these

have been decided upon in advance) and to specify limits on certain expenses

incidental to rising of capital. The receipt of applications for shares and allotment of

shares in pursuance there are two important aspects of every issue of capital in so far

as these constitute the legal basis of the transactions in the matter of purchase of

shares. These, therefore, should receive a careful attention of the auditor. He also

must verify that each party has performed his part of the contract, within the allotted

time. The audit of share capital is necessary both on incorporation and afterwards

whenever the directors decide to increase the subscribed share capital. However,

except when fresh capital 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-up capital of the company.

Verification of share capital

Authorized capital-

The authorized capital may be verified with reference to the amount shown in the

Memorandum of Associations. Previous year audited balance sheet may also be seen.

Issued capital-

24

Verify the amount of issued capital with reference to last year audited balance sheet.

Also see whether the Central Government has issued any notification for conversion

of debenture or loan into equity share under section 94A.

Further issue of capital – The general points are given as under:

Study the conditions of issue contained in the Memorandum and Articles of

Association, Prospectus or Statement in lieu of Prospectus, shelf prospectus, red-

herring prospectus and information memorandum, as the case may be, and see that

all of them have fully been complied with.

Verify that the first allotment was not made until the amount of minimum

subscription stated in the Prospectus had been subscribed and until then the

amount received was kept deposited in a Scheduled bank as required by Section

69 of the Act.

Confirm that the brokerage and underwriting commission was paid only at the

rates authorized by the Prospectus or the Articles of Association, having regard to

the provisions contained in Section 76.

Ensure that legal requirements as laid down in section 81 (dealing with right

shares) have been complied with.

Verify that preliminary contracts, if any, entered into for purchase of a property or

business, for creating an organisation for management of the company, etc. have

been carried out strictly according to the terms stated in the Prospectus.

Confirm that the guidelines issued by the Securities and Exchange Board of India

(SEBI) have been followed. Compliance reports submitted by lead managers and

reports submitted to SEBI may be examined in this regard.

25

11. SHARES ISSUED FOR CASH

Usually, there are three stages in the issue of shares for cash, viz.:

Receipt of applications for shares along with application money;

Allotment of shares and receipt of allotment; and

Making calls and receipt of call money.

The programme of work to be carried out in respect of each of the above

mentioned three stages is stated below:

Application Stage:

The auditor should proceed in the following manner:

He should check original applications, and entries in the Application and

Allotment Book should be vouched with these applications.

Then he should compare the entries in the Application and Allotment Book with

those in the Cash Book.

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).

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.

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.

26

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.

Call Stage:

The auditor should examine the Directors’ Minute Book for making calls.

Entries in the Calls Book should be checked with the help of the copies of letters

of calls.

Postings from the Calls Book and the Cash Book into the Share Register should be

checked.

He should compare the Application and Allotment Book with the schedule of calls

in arrear and confirm that the amount is correct.

Calls in advance should be verified.

27

The totals of the Calls Book should be checked and the entries passed in this

connection shall be vouched.

Other General Duties:

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.

The total of the balances of Shareholders’ Account should be tallied with balances

of Share Capital Account.

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.

Payment of commission, brokerage, etc., should be vouched by reference to the

relevant documentary evidence.

28

12. 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:

Issue of Shares to a Vendor,

Issue of Shares to Underwriters of Shares, and

Issue of Shares to Promoters.

The auditor should proceed in the following manner:

Issue of Shares to a Vendor

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.

Prospectus:

He should examine the Prospectus to enquire the mode of payment of the

purchase consideration.

Director’s Minute Book:

The Director’s Minutes should be referred to confirm the allotment of shares

to the vendor.

29

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.

Issue of Shares to Underwriters of Shares:

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.

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.

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.

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.

Issue of Shares to Promoters:

30

Contract:

For this, again, the auditor should examine the contract with the promoters.

Directors’ Minute Book:

Then, the Minutes of the Board of Directors should be inspected to verify the

allotment of shares.

13. ISSUE AND REDEMPTION OF PREFERENCE

SHARES

31

Power to issue redeemable preference shares section 80 in The Companies Act,

1956

Subject to the provisions of this section, a company limited by shares may, if so

authorised by its articles, issue preference shares which are, or at the option of the

company are to be liable, to be redeemed:

Provided that-

No such shares shall be redeemed except out of profits of the company which

would otherwise be available for dividend or out of the proceeds of a fresh issue

of shares made for the purposes of the redemption;

No such shares shall be redeemed unless they are fully paid;

The premium,, if any, payable on redemption shall have been provided for out of

the profits of the company or, out of the company' s share premium account,

before the shares are redeemed;

Where any such shares are redeemed otherwise than out of the proceeds of a fresh

issue, there shall, out of profits which would otherwise have been available for

dividend, be transferred to a reserve fund, to be called 1 the capital redemption

reserve account], a sum equal to the nominal amount of the shares redeemed; and

the provisions of this Act relating to the reduction of the share capital of a

company shall, except as provided in this section, apply as if the capital

redemption reserve account were paid- up share capital of the company.

Subject to the provisions of this section, the redemption of preference shares there

under may be affected on such terms and in such manner as may be provided by

the articles of the company.

32

The redemption of preference shares under this section by a company shall not be

taken as reducing the amount of its authorised share capital.

Where in pursuance of this section, a company has redeemed or is about to

redeem any preference shares, it shall have power to issue shares up to the

nominal amount of the shares redeemed or to be redeemed as if those shares had

never been issued.

Where new shares are issued before the redemption of the old shares, the new

shares shall not, so far as relates to stamp duty, be deemed to have been issued in

pursuance of this sub- section unless the old shares are redeemed within one

month after the issue of the new shares.

The capital redemption reserve account] may, notwithstanding anything in this

section, be applied by the company, in paying up unissued shares of the company

to be issued to members of the company as fully paid bonus shares.

Notwithstanding anything contained in this Act, no company limited by shares

shall, after the commencement of the Companies (Amendment) Act, 1988, issue

any preference share which is irredeemable or is redeemable after the expiry of a

period of ten years from the date of its issue.

If a company fails to comply with the provisions of this section, the company, and

every officer of the company who is in default, shall be punishable with fine

which may extend to one thousand rupees.

Before going to redeem the preference shares as per section 80 of the Companies

Act, 1956, a company should have to follow the conditions:

Auditor’s Duty

33

There must be a provision in the Articles of Association regarding the redemption

of preference shares.

The redeemable preference shares must be fully paid up. If there is any partly paid

share, it should be converted in to fully paid shares before redemption.

The redeemable preference shareholders should be paid out of undistributed

profit/ distributable profit or out of fresh issue of shares for the purpose of

redemption.

If the shares are redeemed at a premium, it should be should be provided out of

securities premium or profit and loss account or general reserve account.

The proceeds from fresh issue of debentures cannot be utilized for redemption.

The amount of capital reserve cannot be used for redemption of preference shares.

If the shares are redeemed out of undistributed profit, the nominal value of share

capital, so redeemed should be transferred to Capital Redemption Reserve

Account. This is also known as capitalization profit.

14. ISSUE OF SHARES AT A PREMIUM

Section 78 of the Companies Act prescribes that:

34

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’.

The Share Premium Account may be applied by the company:

In paying up unissued shares of the company to be issued to members of the

company as fully paid bonus shares;

In writing off the preliminary expenses of the company;

In writing off the expenses of or the commission paid or discount allowed on any

issue of shares or debentures of the company; or

In providing for the premium payable on the redemption of any redeemable

preference shares or debentures of the company.

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.

15. BIBLIOGRAPHY

Prefer the Book of Dr. Varsha M. Ainapure

www.icai.org

35

www.caclubindia.com

36