Share Capital Audit for a New Company
Auditor's Duties Regarding Issue of shares of a new Company
Share Capital Audit for a New Company / First Issue
Audit involves three stages, namely the application share capital of a new company in the first issue stage, the allotment stage and the call stage. However, the company is required to fulfill a lot of formalities before actually going for public subscription. The auditor should examine compliance of provisions.
Verification of Capital
1.
The auditor should confirm that
the permission of the Controller of Capital Issues has been obtained in case
the issue exceeds Rs. One crore.
2.
He should study the terms and
conditions of issue contained in the Memorandum and Articles and Prospectus or
Statement in lieu of Prospectus and see that these have been fully complied
with.
3.
He should ensure that the
prospectus contains a provision in terms of Sec. 26 A that any person who
a)
Makes, in a fictitious name, an
application to a company for acquiring or subscribing for, any shares therein,
or
b)
Otherwise induces a company to
allot or register any transfer of shares therein to him, or any other person in
a fictitious name, shall be punishable with imprisonment for a term which may
extend up to five years.
4.
He should verify that
preliminary contracts, if any, entered into for the purchase of a property or
business, for creating on organisation for management of the company etc., have
been carried out strictly as laid down in the prospectus.
5.
He should as certain that there
exist in internal check on receipts of amount along with the application.
6.
He should examine shares issued
for cash and shares issued for consideration other than cash, if any.
Auditor’s Duties
1. Application stage: The
auditor should undertake the following checks:
1)
Checking of the original
applications with the application and allotment sheets.
2)
Checking and comparing entries
in the application and the allotment books as regards deposit of money at the
time of application with those in the cash book.
3)
Vouching that amounts pertaining
to rejected applications, non-allotted application or any excess amount there
to have been returned by comparing entries in the cash book with that of
application and allotment sheets (books) or letters of regret, if any.
4)
Examining that the issue is
within the limits authorized by the Memorandum and Articles of Association.
5)
Examining that the minimum
subscription fee, the amount received on application being not less that 5% of
the nominal value of shares, has actually been received before making the
allotment.
6)
Checking the balance on the
application and allotment sheets (book) and verify the total capital issued.
2. Allotment stage: Following
steps may be taken in this stage.
1)
Examining the Director’s Minute
Book to verify approval of allotments which may be in stages as spreading over
a number of days. He should note that recording at each stage was properly
initialed by at least one director. He should also see that the allotment was
legally in order.
2)
Comparing copies of letters of
allotment / letters of regrets with entries in the application and allotment
sheets (book).
3)
Vouching money receipt on
allotment by comparing the entries in the application and allotment sheets with
the cash book or bank statement.
4)
Confirming the journal entries
regarding allotment money, examining the ledger accounts and comparing the
balances in the ledger accounts with the number of shares allotted.
5)
Verifying the entries in the
Register of Members by comparing these with a separate summary of shares
allotted. Verifying that the amounts of the shares allotted do not exceed the
authorized or nominal capital of the company.
6)
Seeing that returns of
allotment have been filed with the Registrar of Companies.
3. Calls stage: The
auditor should take the following steps:
1)
Examining the Director’s Minute
Books regarding decisions about calls.
2)
Seeing that the calls as
resolved are within the provisions in the Articles of Association and statement
in the prospectus issued by the company.
3)
Vouching amounts received
against calls with the counterfoils of receipts.
4)
Checking postings of the
amounts received from the calls book (for calls due) and the cash book (for
cash money received) into the share register.
5)
Comparing the application and
allotment books with the schedule of calls in arrears showing the difference
between calls due and calls received. He should confirm that the call in
arrears figure is correct.
6)
Checking the calls received in
advance either in the cash book or through the journal and seeing that these
are transferred to a separate account not meant up with the share capital of
the company.
Auditor’s duties in case of Shares Issued for Consideration Other than Cash
A company may issue certain shares for consideration other than
cash. Checks by the auditor under different situations are as follows:
1.
Issue of Shares to a Vendor as Purchase Consideration: The auditor should vouch it by reference to the contract between the
company and the vendor, and the Director’s minutes recording the allotment. He
must see that such contracts have been filed with the Registrar of Companies
within thirty days after allotment. If the vendor’s nominees are issued shares
under a supplementary agreement or a written nomination thereto, these are the basic
documents for the audit purposes.
2.
Issue of Shares to Underwriters: The
auditor should study the Prospectus and verify that it does contain the right
for the payment of the commission. He should study Articles of Association to
determine the procedure of payment. He should check the resolution of Allotment
from Director’s Minute Book and the contract to see that the issue is in terms
of these documents.
3.
Issue of Shares to Promoters: The
auditor should study the documents such as the contract, the Articles of
Association and the Prospectus.
4. Issue of shares to shareholders of an old company on amalgamation or reconstruction: The auditor should see the amalgamation agreement, duly approved by a competent High Court and if required, check that the allotment has been made in accordance with the agreed arrangement.
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