new audit final

8/7/2019 New audit final

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WHAT IS VERIFICATION?

Verification means a careful checking of the value

ownership and the title of assets.

It includes determination of actual possession and

existence and the presence of any charge on it.

According to Spices and Pegler, Verification of assets

means an inquiry into the value, ownership and title,

existence and possession, the presence of any charge on

the assets.

The main objective of an audit is to give an opinion on

the financial statements. The verification is a process

incurred to derive the opinion.

Verification is an important activity that the auditor

must do carefully. As was observed in the case of London

Oil Storage Co. Ltd Vs. Scar Has Luck Co. (1904), it is the

duty of the auditor to verify the existence of assets statedin the Balance Sheet and he will be liable for any damage

suffered by the client if he fails in his duty.

INTANGIBLE ASSTES

*These represent companys ownership of such assetswhich is evidenced by legal documents or otherwise.

*These are valued at fair values and any amortization isappropriately recorded and presented.*These are properly described and classified in thebalance sheet, and disclosures have been made for anyrestrictions against the assets and adequate disclosures


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have been made in accordance with the CompaniesOrdinance, 1984 and the relevant IASs.*Obtain the schedule of all intangible assets and its

amortization. Foot and trace ending balances to the lead

schedule. Tie the additions, retirements and amortization

provision for the year to supporting schedules.

*Discuss with appropriate client personnel the companyspolicies for capitalizing and amortizing intangible assets.Consider the acceptability of the stated policies and therelationship of the intangible assets to the clientsbusiness. Evaluate any changes in policy as to whether

they constitute a change in accounting principles orotherwise require disclosure in the financial statements.*For all major additions, obtain a listing of additions and

review whether the intangible assets are acquired or self

generated.

*Ensure that internally generated goodwill, brands,

masthead, publishing titles, customers list and items

similarly substance have not been recognized as anintangible asset.

VERIFICATION OF LOAN AND BOROWING

1. VERIFY EXISTENCE,OBLIGATION AND COMPLETENESS

a)Examine whether the loans obtained are within theborrowing powers of the entity.


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b)Examine the relevant records and documentationsupporting the transactions to assess the validityand accuracy of loans. The auditor should keep thefollowing into consideration while doing so-

* The loans and borrowings are valid and have

been properly authorized. For eg, in case of a

limited company the auditor should examine board

of directors authorization. In case the enterprise

has accepted deposits, the auditor should ensure

compliance with directives issued by the reservebank of India.

* In case of loans and advances from banks,

financial institution and others, whether balance as

per books and statement of lenders tally. In case of

difference between the two amounts, reconciliationstatement prepared by the client should account

for the reasons.

* Examine loan agreements to gain knowledge

about important terms affecting the financial

statements and ensure their compliance. For eg ,restrictions as to dividend payment , maintenance

of debt equity ratio , retained earning restrictions,

restrictions on the issuance of additional debt ,etc

should be adhered to.


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* Examine documents to ensure that statutory

requirements, if any, for creation and registration

of charges in respect of loans and advances havebeen met.

c) Confirm loans and borrowings outstanding and interest

payable on them directly with the lender.

d) Incase the enterprise has acquired assets under hire

purchase agreements the auditor should ensure that

future installments have been shown as secured loans.

VALUATION OF LOANS AND

BORROWINGS

The auditor should examine whether liabilities are

classified and disclosed in the Balance Sheet inaccordance with recognized accounting principle andrelevant statutory requirements, if any.

Examine whether installments of long term loans

falling due within next 12 months have been

disclosed in the Balance Sheet as a foot note or in

parentheses.

Where the market value of an asset offered as asecurity against loans has fallen below the amount of

loan outstanding, the auditor should ensure that the

loan is classified as secured only to the extent of

market value of security.


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Ensure that the assets hypothecated as security in

case of a company are duly registered with registrar

of companies and are recorded in the register of

charge as required under Section 125 of theCompanies Act 1956.

BANK BALANCE AND CASH IN HAND

Bank Balances

1. Check entries from case book to bank statements,

and compare the bank balances with the

corresponding case book balances or bank accountbalances, if separately maintained.

2. Check the bank reconciliation statement and

ascertain how outstanding entries have been cleared

both at the beginning and at the end of the year.

3. While checking balances at the year-end, note down

the last number of cheque drawn and see at time ofaudit that no further cheques have been issued.

4. Obtain directly bank confirmation letter stating the

balance in the account as on the year-end date and


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see whether any charge or similar other restrictions

exist in making use of the balance amount.

5. In respect of fixed deposits with the bank, vouch

such deposits with bank advice and verify suchaccounts with the certificates from the bank. See

that the interest has been received or accrued as per

the terms of the certificate.

Cash in Hand

1. Attend year-end cash count, if possible. If not,

count cash on any other day close to the date of

the year-end & work it backward or forward to the

date of the balance sheet & see whether the

balance so found agrees with the balance in the

cash book. He should see that there is nounauthorized IOU to cover up the cash shortage.

2. Make surprise cash count on any day & compare

the same with the balance of that day as per the

cash book.

3. Test the accuracy of cash book totals, balancing &

carry-forward etc.

4. See that the cash is kept in secured place. Also see

that there is adequate insurance cover for cash

movements between office & the bank & vice-


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versa & even for the cash in hand if that is usually

heavy.

5. In case of a petty cash book is maintained, the

above mentioned procedure should be applied inverifying petty cash also.

6. Examine that there is no over-writing in the Cash

Book & entries are made on a day-to-day basis.

VERIFICATION OF PROVISION FORTAX

According to International Financial Reporting

Standards (IFRS), provision for income taxes means

liability for Income taxes payable. Provision for income

tax means or refers to line items in profit and loss

statement.

Provision for income tax may be shown on the

Liabilities side of the Balance sheet or on the debit side of

the profit and loss account.

Thus, provision for income tax is a liability and

should be verified from time to time.

Audit Procedures for Verification of Provision for

Income Tax

Various audit procedures are adopted by the

auditor for verifying of provision for income tax. These

procedures are as follows:


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1) Recalculate the provision for tax liability for the

year as per the provisions of the income-tax Act,

1961 and rues made under AS-22.

2)Examine the records and documents such as

receipted challans, bank statements and demand

notices to gain knowledge about payment of

advance tax, self assessment tax and any other

demand raised by Income tax department

3) Review the assessments completed revised or

rectified up to the time of audit and ensures

suitable adjustments have been made in respect of

additional demands or refunds.

4)Compute tax payable as per the latest applicable

rates in the finance act.

5)Ensure that overall provisions on the date of the

balance sheet is adequate in regard to current

year provisions, advance tax paid, assessment

orders, etc.

6)In case of any disputed liability with regards to

demands raised, examine whether there is a

positive evidence of action by the enterprise to


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show that it has not accepted the demands, eg., it

has gone to appeal against the demand or had

made an application for rectification of a mistake.

7)The auditor should also examine whether disputed

tax liability requires a provision or suitable

disclosure. The probability of such a provision can

be assessed after making appropriate enquiries of

management, examining the correspondence

relating to dispute and obtaining management

representation.

8)Review adjustments, expenses, disallowed special

rebates, etc with reference to the last available

completed assessment.

9) Ensure proper disclosure along with accounting

policy adopted as per AS-22 requirements.

WHAT IS VOUCHING?

Vouching in auditing means verification of any

transaction with supporting documents attached with the

voucher And verification refer complete checking system.


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It can be represented by the four Vowels:

A stand for Authority

E stand for Existence

I stand for Importance

O stand for Object and

U stand for value

Vouching is an important procedure for obtaining audit

evidence. Normally entries in the books of accounts are

made on the basis of documentary evidence such as bills,receipts, and pay in slips and so on. Such documentary

evidence is called a voucher. Vouching means critical

examination of such vouchers.

The term vouching in the context of auditing has been

defined by prof Dicksee as Vouching consists of

comparing entries in the books of accounts with

documentary evidence in support thereof

According to Spicer and Pegler the examination by the

auditor of all documentary evidence which is available to

support the authencity of the transactions entered in the

clients records

It is clear that vouching is the process of inspecting the

documents that supports the recorded transactions inorder to verify the authencity and authority of such

transactions


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VOUCHING OF PURCHASE AND

PURCHASE RETURNS:Vouching of purchase transactions

Credit purchase: the auditor should vouch credit purchase

by following the audit procedures mentioned below.

Examine purchase book: the auditor should examine

the transaction recorded in the purchase book with

reference to related purchase invoice and othersupporting documents attached to it-purchase

requisition, purchase order and receiving report or

goods received notes

Examine purchase invoices: the auditor should select

a small sample of vendors invoice at random and

should conduct audit in depth on them i.e, trace the

transaction from placing the order to the entries in

inventory goods for actually receipt and payment

made to the suppliers the auditor should ensure that

subsidies, rebates, duty drawbacks or other similar

items have been properly accounted for.

Examine the numerical sequence of source

documents: the auditor should ensure that numericalsequence of source document such as purchase

requisition, purchase orders, receiving reports and

vouchers have been maintained and missing

numbers have been duly accounted for


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Examine cut-off points: in order to ensure the

purchase were recorded at the point of time when

title was passed to the client, the auditor should

examine cut-off points on prenumbered purchaserequisition, purchase orders and goods received

notes. The auditor should, then trace the goods

received notes pertaining to a few days before the

end of the period under audit to the related purchase

invoices such a comparison would ensure that

purchase represented by such invoices have been

recorded as the purchases of the period under audit.

Vouching or purchase returns

Examine purchase return book: the auditor should

examine purchase return book with reference to

copies of debit notes issued to suppliers and outward

return notes

Examine debit notes: the auditor should examine the

copies of debit notes with reference of goods

outward return notes, original purchase invoice and

advice note for returns. He should also examine

whether returns have been properly authorized and

debit notes are prepared by the person authorized to

do so.

Examine cut-off points: he should trace the outward

returns notes and transporters receipts pertaining to

a few days before the end of the period under audit


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to the related debit notes, such an examination

would reveal whether returns represented by debit

notes have actually been recorded as the purchase

returns of the period under audit.

VOUCHING OF SALES AND SALES

RETURNS

The auditor should check the following points while

vouching the sales

I. supporting documents: the sales transactions should be

supported by copy of cash memo or sales bill of the client

2. Copy of delivery challan, excise gatepass

3. Transporters bill or octroi receipt if paid by client. In

case of export items bill of lading, customs duty receipt

and bank advise showing the remittances received in

rupees. After conversion at foreign exchange rate

ii.Name: name of the concern on the sales bill in the sales

register & in the supporting documents should be of

client

iii.date: date on sales bill in the sales register &

supporting document should tally and pertain to the

current year.


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iv.amount: amount in figures & words in the sales bill

should tally with that in the supporting documents and

entries

v.quantity: the quantity mentioned in the sales bill shouldtally with that in supporting documents & entry in the

books.

Vi.signature on the books: The sales bill should by an

authorized official of the client to indicate approval &

person preparing bills and making entries in the sales

register to fix responsibility for any error.

vii.Check the serial number

viii.to check errors and frauds

ix.check whether sales are properly accounted has been

maintained in the books

X. Compliance with guidelines of ICAI and Indian

companies act.

Auditor should vouch sales return in the

following manner.

1. Supporting documents: the sales returns should be

supported by 1.copy of credit note of the client ordebit note of the customer.2 copy of delivery challan

etc.


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2. Name: name of the concern on credit notes on the

sales return register and in the supporting

documents should of the client.

3. Date: date on the credit notes in the sales returnregister and in the supporting document should

tally.

4. Sr.no: sr. number on the credit notes should be

continuous and tally with those in the books.

5. Amount: amount in figures and words on the credit

notes should be the same and tally with the amountin the book and the supporting documents.

6. Quantity: the quantity mentioned in the credit notes

should tally with the supporting documents and the

entry in the books.

7. Signatures on credit notes and GRN: the credit note

should be signed by an authorized official of theclient to indicate approval similarly the goods

received note should be signed by the storekeeper to

indicate receipt of goods.

8. Signature and stamp of party.

PREPAID EXPENSES:

For vouching the prepaid expenses, the auditor should

examine the nominal accounts, the demand notes,


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relevant receipts etc. and make sure that proper

adjustments have been made in the books of account at

the date of balance sheet. He should also satisfy himself

that calculations in respect of prepaid expenses arecorrect.

i. Accrual Accounting: Accrual is the fundamental

basis of accounting. A limited company must

maintain its accounts on accrual basis. Under this

basis amounts which are paid in advance are treated

as pre-paid expenses. This gives rise to pre-paid

expenses.

ii. Scrutiny of Expenses Accounts: Auditor should

scrutinize all expense accounts(esp. accounts like

service charges paid, interest, rent, salaries,

royalties.etc) to ascertain the amounts prepaid.

iii. General Rule: As a general rule, expenses should

be booked when they have accrued as per the termsof agreement between the parties.

iv. Service Charges: Service charges accrue when the

service is performed and complete. Thus, charges for

job work (i.e., processing by outsiders of material

supplied by the concern) accrue when the job or the

processing is complete. If any amount is paid but the

job is not complete as at year end, it should beshown as prepaid expenses.

v. Interest Due: Interest accrues on time basis at the

rate agreed. Thus, if a loan agreement states that

interest or a loan of Rs. 1, 00,000 is payable @ 20%


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per year, interest for a year would be Rs.20, 000. If

interest paid is Rs. 25,000, Rs. 5,000 is paid in

advance and pertains to the next year. Auditor

should scrutinize the interest account to ascertainthe amount of interest pre-paid.

vi. Rent: Rent also accrues on time basis at the rate

agreed. Thus, if a rent agreement states that rest of

Rs. 1000 is payable per month, rent for a year would

be Rs. 12,000. If Rs. 15,000 is paid during the year,

Rs. 3000 should be shown as pre-paid expenses.

vii. Royalty: Royalty means the charges for use of

know-how, patents, trademarks and copyrights.

Royalties accrue as per the terms of the concerned

agreement.

viii. Closing Balance: Auditor should check that the

closing balance in the pre-paid expenses account is

disclosed under the head loans and advances in theasset side of the balance sheet as per requirements

ofSchedule VI, Part I of the Companies Act.

1956.

ix. Opening Balance: Auditor should check that the

opening balance brought forward from the previous

years in the pre-paid expenses account is squared off

during the current year.

TRAVELING EXPENSES

The auditor should adopt the following procedures to

verify the payment of travelling expenses:


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1. Examine the cash book: The auditor should

examine the cash book for payments made for

travelling expenses with reference to standard form

for such reimbursement filled in by the claimant with

his and designation clearly indicated.

2. Examine the standard form for claimant

reimbursement: The auditor should examine the

standard form to verify details such as-

a. Whether the tour was sanctioned by proper

authority.

b.Whether claim for travelling expenses is

supported by the relevant vouchers such as

travelers copy of the air ticket in case of air

travel, hotel bills, etc.

c. Whether travelling expenses such as boarding

and lodging expenses, daily allowance,

conveyance, etc. have been claimed and paid as

per rules, if any, framed by the entity in this

regard. For example, entitlement of employees

working at different levels of authority may vary

with regard to mode of travel, class of travel,

boarding and lodging facilities, etc.


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d. Whether amount claimed for sundry expenses

such as porter age, tips, etc. and not supported

by bills, is reasonable.

3. Examine the adjustment for advances, if any:

In case some amount has been given as advance to

the claimant, the auditor should ensure that a proper

adjustment has been made for it at the time of

payment.

OUTSTANDING LIABILITIES:

UNEARNED INCOME REFERS TO THE INCOME RECEIVED IN

THE CURRENT YEAR BY WAY OF AN ADVANCE, BUTPERTAINS TO THE SUBSEQUENT YEAR. THE AUDITOR

SHOULD VOUCH SUCH ITEMS VERY CAREFULLY AND

MAKE SURE THAT ALL INCOMES, WHICH RELATE TO THE

SUBSEQUENT YEARS, SHOULD BE TREATED AS

UNEARNED INCOME AND ARE SHOWN IN BALANCE SHEET

LIABILITY SIDE.

SOME OF THE COMMON UNPAID OR OUTSTANDINGEXPENSES ARE O/s WAGES AND SALARIES, O/s RENT,

RATES, TAXES, O/s AUDIT FEES, O/s FREIGHTS AND

CARRIAGE, O/s TRAVELLERS AND AGENTS COMMISSION

ETC. TO VOUCH THE O/s EXPENSES AUDITOR SHOULD


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SCRUTINIZE ALL NOMINAL ACCOUNTS REPRESENTING

EXPENSES, RELEVENT RECEIPTS, DEMAND NOTES AND

INVOICES. HE SHOULD ALSO CHECK THAT THESE HAVE

BEEN DEBITED TO CURRENT YEARS PROFIT AND LOSSA/c AND SHOWN AS a LIABILITY IN THE BALANCE SHEET.

GENERALLY PURCHASE MADE AT THE COLSE OF THE

YEAR IS ENTERED IN THE STOCK REGISTER BUT NO

ENTRY IS MADE IN THE PURCHASE BOOK. THE RESULT OF

SAME IS THAT PURCHASE IS UNDERSTATED AND PROFITS

GET INFLATED. THE AUDITOR SHOULD CHECK THAT

PURCHASE ACCOUNTS IS DEBITED WITH THE TOTALPURCHASES MADE DURING THE YEAR AND THE UNPAID

AMOUNT IS SHOWN AS A LIABILITY IN THE BALANCE

SHEET. TO DETECT UNRECORDED PURCHASES, THE

AUDITOR SHOULD COMPARE STOCK REGISTER WITH

PURCHASE BOOK AT END OF CURRENT YEAR.

DIVIDEND

AUDITORS DUTY RELATING TO DIVIDENDS

Verify that if the company has any contractualobligation towards financial institution or other party

limiting the distribution of dividend or laying anycondition on distribution the co. has complied withthose obligations. For eg while granting a loan to theco. the lending financial institution may stipulate thatthe dividend cannot exceeds a certain rate unlessthe co. satisfies the stipulated terms .


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Examine whether the procedural requirementsrelating to declaration and distribution have beenfollowed.

Examine the minutes of BOD meeting in which thedividend was recommended or not.

Examine that the co. has paid the dividend within theprescribed period to its registered members.

Check the gross amt of dividend with paid up capitalto satisfy that it matches with % of declareddividend.

Check reconciliation with bank statement in regards

to net dividend paid, transferred to unpaid amt andTDS.etc.

Obtain letter of representation containing the viewsof the BOD on all compliances.

Satisfy that in case of shares held jointly, thedividend was paid to the first named holder unlessany other instruction was there.

Verification and valuation of stock

What is inventory stock?

The ICAi has defined inventory as, Tangible propertyheld for sale in the ordinary course of business or in the

process of production for such sale or for consumption in

the production of goods or services for sale including

maintenance supplies and consumables other than

machinery spares


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Techniques of verification of stock

Stock can be verified by physical verification, observationor confirmation.

1 verification means physical inspection

2 Observation means observing or witnessing the

inspection of assets done by others

3 confirmation means obtaining written evidence from

outside parties regarding the existence of an asset

Duty of the auditor is to ascertain that the

procedures for stock taking done by the

management

Were effective and that they were actually followed. The

statement on auditing practices has made the following

recommendations in this respect.1 Written instruction

2 Note quantities on tags

3 No stock movements

4 Test check

5 Check all tags

6 Stock sheets

7 Up-to-date stock books

8 Reconciliation.


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Verification of share capitals

Capital: Capital is the main source of funds for any organization. The capital

is the amount of money invested in the concern by its owners. The capital isthe amount of money invested in the concern by its owners.

Share Capital: It may be defined as the capital rose by the issue of shares.

Kinds of Share Capital:

Section 85 to 90 of Companies Act 1956, deal with the provisions relatingto the kinds of share capital of a company. These are not applicable to aprivate company unless it is a subsidiary of a public company. According toSec 86, share capital of company will be following two types:

(a)Equity Share Capital

(b)Preference Share Capital

Equity Share Capital

According to Sec 85 means that share capital, which is not preferenceshare capital. Equity Share Capital may be:

i. With voting rights

ii. With differential rights as to dividend, voting or otherwise in

accordance with such rules and subject to such conditions as may beprescribed.

Preference Share Capital

According to Sec 85, Preference Share Capital means that part of sharecapital which:

i. Carries a preferential right as to payment of dividend, which may beeither a fixed amount or an amount calculated at a fixed rate and

ii. Carries a preferential right on winding up a repayment of capital, to berepaid the amount of the capital paid up a deemed to have been paidup.

Verification of Capital


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The auditor should keep the guidance note on audit of capital,summarized below, in mind during the verification of capital:

1. Authorized Capital

a. Closing Balance: The authorized capital shown in the balancesheet should be checked with the Memorandum of Association incase of the company. The auditor may also refer the auditedbalance sheet of the immediately preceding year.

b. Changes during the Year: The changes in authorized capitalduring the year should be verified in the following manner:

i. Minutes: The minutes of the general meeting and/orBoard should be examined to see, if any, change in thecapital structure has taken place since the last balancesheet & whether it is properly authorized.

ii. ROC Forms: A company, having a share capital, in termsof the provision of Sec 94 of the Companies Act, 1956 maychange its share capital as follows:

Increase its share capital by such amount as it thinksexpedient by issuing new shares.

Consolidate or divide all or any of its share capitalinto shares of larger amount than its existing shares.

Convert all or any of its fully paid-up shares intostock, and reconvert that stock into fully paid-upshares of any denomination.

Sub-divide its shares, or any of them, into shares ofsmaller amount that is fixed by the memorandum.

Cancel shares which at the date of passing of theresolution in that regard, have not been taken oragreed to be taken by any person, and diminish theamount of its share capital by the amount of the

shares so cancelled.

In such cases, the auditor should also examine the copy of the documentsfiled with the Registrar of Companies in relevant forms along with thespecified fee pursuant to the requirements of Sec 97 of the Companies Act,1956.

2. Issued Capital


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The following records/documents would ordinarily provide necessaryevidence for issued capital:

a. Minutes: The minutes of the general and/or boardmeetings for further issue of shares, e.g., under Sec 81 of theCompanies Act, 1956.

b. Offer documents: Offer documents, if any, filed with theSecurities and Exchange Board of India (SEBI)/Registrar ofCompanies (ROC) & Reserve Bank of India (RBI) in respect ofpermission in case of ADR/GDR issue.

c. Return with ROC: Return of allotment filed with the ROC.

3. Issue of Shares for Cash

While vouching the issue of shares for cash, the auditor should:

a. Check the application forms for shares with applicationbooks.

b. Check the amount received in cash or by cheques with thecashbooks or bank passbooks to ensure receipt of application ofmoney.

c. Check that the application money was kept in a separateaccount with a scheduled bank.

d. Check the resolution passed by directors in DirectorsMinute books, to ensure that all the allotments have beenproperly approved.

e. Check that allotment of shares is as per the basis ofallotment recommended by the stock exchange.

f. Check that the allotment has been made only afterreceiving the minimum subscription.

g. Check that the shares allotted do not exceed theauthorized capital of the company.

h. Check the allotment letters with allotment books.

i. Check the cash refunded to applicants to whom shareshave not been allotted, with the copies of letters of regret,cashbook, and the application & allotment books.

j. Check the payees acknowledgement receipt.


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k. Check the postings from application & allotment books intothe share register.

l. Check the journal entries & ledger postings in theapplication/allotment/share capital account etc.

m. Check that the return of allotment of shares was filed withthe ROC within 30 days of allotment.

n. If shares were issued to non-residents, check that RBIformalities have been complied with.

4. Issue of Shares for Consideration other than Cash

a. Cases: While vouching issue and allotment of sharesauditor should inquire whether any shares have been issued forconsideration other than cash, e.g. in the following cases:

To promoters of the company against services rendered orreimbursement of preliminary expenses incurred by themon formation of company etc.

To vendors from whom business is purchased.

To underwriters in lieu of commission.

To shareholders of company being absorbed oramalgamated.

b. Agreement: The auditor should verify whether theagreement has been properly approved. The auditor needs toverify that the consideration for which shares are issued, viz.,supply of machinery or technical knowledge is prima-facie fullyreceived. The auditor should verify the numbers of shares, whichhave been allotted under the agreement. These shares may beeither fully paid or partly paid.

c. Minute Book: He should examine the minute book of theboard of directors to confirm that the agreements were properlyapproved and to ascertain the basis of issue of shares.

d. Prospectus: He should see whether this fact has beenmentioned in the prospectus.

e. ROC: Further, as per the provision of Sec 75 of theCompanies Act, 1956, whenever company having a share capitalmakes any allotment of its shares, the company has to complywith the following conditions:


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It has to file with the ROC, a return of the allotment, within30 days, stating that the number and nominal amount ofshares comprised in the allotment, the names, addressesand occupations of the allottees, and the amount if any,paid or due and payable on the shares.

In case of shares allotted for other than cash, it has toproduce before the Registrar, inter alia, a contract inwriting, constituting the title of the allotted to theallotment together with any contract of sale, or a contractfor services or other consideration in respect of whichallotment was made.

5. Issue of Shares at a Premium

a. Law: Auditor should check that the following provisions ofSec 78 of the Companies Act, 1956 are complied with:

A company may issue shares at a premium, i.e., at aprice higher than their face value.

The total amount of the premium on such sharesmust be transferred to an account known as the securitypremium account.

Such a premium can be regarded as capital andshould not be mixed up with the share capital of the

company.

The premium cannot be treated as profit and hencecannot be distributed to the shareholders of the companyas dividend. In no case it should be transferred to thecredit side of the P/L A/C of the company.

However, the amount of share premium may be usedfor- Writing down fictitious assets, i.e., preliminaryexpenses, brokerage or underwriting commission on issueof shares and debentures; Issue of bonus shares; paying

premium on the redemption of redeemable preferenceshares or debentures; or Writing off discount allowed onany issue of shares or debentures of the company.

b. Authorization: Auditor should examine the prospectus,the article of association and the minutes-book of the directors toascertain whether they permit the issue of shares at a premiumand if so at what rate.


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c. Supporting Documents: Auditor should examine thesupporting documents as mentioned in vouching shares issuedfor cash.

d. Accounting: Auditor should see that the premiumreceived has been taken to the securities premium account andshown on the liabilities side of the balance sheet.

e. Use of Premium: Auditor should ensure that the companyhas complied with the provisions of Sec 78 of the Companies Act,1956 regarding the use of premium money.

f. Return of Allotment: Auditor should check the return ofallotment, which should be filed with the ROC, within 30 days ofthe allotment.

6. Issue of Shares at a Discount

a. Provisions: Section 79 of the Companies Act, 1956, permits acompany to issue shares at a discount only on the followingconditions:

i. The issue of shares at a discount must be of a class ofshares already issued by the company.

ii. The issue of shares at a discount must be authorized by aresolution passed in the general meeting and sanctionedby the Company Law Board (CLB).

iii. The maximum rate of discount must not exceed 10%unless the CLB is of the opinion that a higher percentage ofdiscount may be allowed in special circumstances.

iv. The shares must be issued within 2 months from the dateof sanction by the CLB or within such extended time as theBoard may allow.

v. The issue of shares at a discount can be done by acompany only a year after the commencement of thebusiness by the company.

b. Auditors Duty

i. Auditor should see that such shares have been issuedaccording to the various provisions of the Companies Act,1956.


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ii. Every prospectus relating to the issue of the shares mustcontain the particulars of the discount allowed on the issueof the shares or the amount not written off at the date ofthe issue of the prospectus.

iii. Such discount until written off should be shown on theasset side of the balance sheet under the headMiscellaneous Expenditure.

iv. To check the Return of Allotment, which should be filedwith the ROC, within 30 days of the allotment?

Vouching Of Sale of Scrap

Meaning of sale:

The transfer of ownership of an item or theentitlement to a service in exchange formoney.

Meaning of scrap:

A small piece of something that is leftover after the rest has been used.

Vouching of Sale of scrap:


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(1) Check whether the organization ismaintaining reasonable records for generationof scrap.

(2) Ascertain and review internal control andrecords for sale or disposal of scrap.

(3) Review production and\or cost records todetermine the scrap which may have generatedduring given period, see if there are any normsset by the management in this regard. Ifmaterial difference is there, make enquiriesfrom the management.

(4) Compare the sale proceeds of scrap duringthe year with the previous two or three yearsamount to see the reasonableness of theamount after taking into account any materialchange in the volume of production.

(5) Vouch sales, with invoices raised,

advertisement for tender, rate contract withscrap dealers.

(6) Check that disposals of scrap were madethrough proper procedures for outgoingmaterial and scrap is lifted during normalbusiness hours.

(7) Check that the company or concern had

raised proper invoice and issued receipt fordisposal of scrap and the sale proceeds wereduly accounted for.


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(8) Check that there is proper procedure toprevent other materials going out of thepremises under the garb of scrap.

(9) Check that scrap is sold only to thecompetitive scrap dealers and apparently thereis no bias in selecting the buyer.

(10) Ensure that there exists a proper controlprocedure to identify scrap and good units andthey are not mixed up and sold as scrap.

(11) Make an overall assessment of the value

of realization from scrap as to itsreasonableness.

(12) In case of a company, if there isrequirement to make a statement onrealization of scrap in the auditors reportunder the Manufacturing and OtherCompanies (Auditor's Report) Order, 1988["MAOCARO"] see that the necessarystatement has been made in the audit report.