Monday, 30 December 2019

Unit 9: Audit of Limited Companies

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Unit 9: Audit of Limited Companies

The audit of a company differs from the audit of a partnership in various ways and involves many preliminaries.

The auditor has to (a) make sure that his appointment is in order, (b) obtain a letter of engagement, and (c) acquaint himself with articles and memorandum of association, the scope of work, the system of accounting and internal control, etc.

For the whole audit assignment he must follow the normal procedure of audit, the relevant statutory provisions and the guidelines of auditing standards.

Audit of share capital assumes significance at the time of incorporation of the company as well as subsequently when fresh share capital is issued.

Audit of share capital should be conducted at three stages viz, application stage, allotment stage and call stage.

The auditor must ensure that in case of shares issued for cash, bash has actually been received.

In case of shares issued for consideration other than cash the relevant contract may be examined.

If the shares had been issued at a premium or at a discount, the auditor should examine compliance with all legal requirements and proper disclosure in the financial statements.

 Advanced Auditing Notes   The audit of calls on shares requires examination of calls-in-arrears and calls received in advance.

In case some shareholders fail to pay money due on calls, companies may be forced to forfeit shares and reissue the same.

Redemption of preference shares can be made either out of fresh issue of shares or out of profits.

An equivalent amount should be transferred to capital redemption reserve account in case these are redeemed out of distributable profits.

If bonus shares have been issued, the auditor is required to check compliance with all statutory and other procedural requirements in this regard.

A company may after its share capital in various ways.

The auditor has to ensure that necessary procedure, has been followed for the purpose and alterations are duly reflected in all the relevant documents and records.

Finally, audit of share transfers does not form part of normal audit work but companies get audited transfer of shares on a regular basis to ensure accuracy of the share transfers.

Authorised Share Capital: The number and par value, of each class of shares that an enterprise may issue in accordance with its instrument of incorporation.

This is sometimes referred to as nominal share capital.

Bonus Shares: Shares allotted by capitalization of the reserves or surplus of a corporate enterprise.

Call: A demand pursuant to terms of issue to pay a part or whole of the balance remaining payable on shares or debentures after allotment.

Called-up Share Capital: The part of the subscribed share capital which shareholders have been required to pay.

Capital Redemption Reserve: A reserve created for the redemption of preference shares out of its distributable profits.

Issued Share Capital: Portion of the authorized share capital which has actually been offered for subscription is known as issued share capital.

It includes any bonus shares allotted by the corporate enterprise.

Paid-up Share Capital: That part of the subscribed share capital for which consideration in cash or otherwise has been received.

This includes bonus shares allotted by the corporate enterprise.

Preliminary Expenses: Expenses relating to the formation of an enterprise.

These include legal, accounting and share issue expenses incurred for formation of the enterprise.

Reduction of Share Capital: The extinguishment or reduction of shareholders’ liability on in respect of the subscribed share capital.

Share Capital: Aggregate amount of money paid or credited as paid on the shares and/ or stocks of a corporate enterprise.

Share Issued for Consideration other than Cash: The shares issued to vendors as consideration for the assets acquired from them.

Subscribed Share Capital: Portion of the issued share capital which has actually been subscribed and allotted is known as subscribed capital.

It includes any bonus shares allotted by the corporate enterprise.

Unissued Share Capital: That portion of the authorized share capital for which shares have not been offered for subscription.


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