Rathore Institute Auditing & Assurance CA. Nitin Gupta RATHORE INSTITUTE

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1 RATHORE INSTITUTE [Best Gate way to clear CA-IPC (GR-2)] Strategic Management (in 18 Lectures) - Mr. P.S. Rathore Information Technology (in 14 Lectures) - CA. Atul Gupta Auditing & Assurance (in 24 Lectures)- CA. Nitin Gupta Combined fee of SM, IT & Audit- Rs. 8,000/- only Get 100% Satisfaction in much less time & fee. PH: ,

2 Books of Accounts- Section 209 Proper books of account with regard to All sum of money received & expended All sales & purchases of goods The assets & liabilities of the Co. In case of Co. Engaged in Production, Processing, Manufacturing or Mining activities- Particulars relating to utilisation of Material, Labour or other item of cost. Shall be opened for inspection by directors during business hours by Directors of the Co. Books of account will be prepared in accordance with accrual basis & double entry system. By Registrar Inspection of Books of Accounts and other books Section 209 A By officers authorised by SEBI Can be made without giving any previous notice. By officers authorised by CG Every officer, director, and employee must produce all books of account to the person making inspection. Inspecting person can make copies of books of account and put any mark of identification. Retention time period- Section-209 (4A) Location 8 Years immediately preceding the current year Registered Office Branch Office All the books of a/c in respect of branch Branch will prepare up-to date summarised return Maximum interval between 2 return- 3 Months Return will be sent- To Reg. Office or Other place Any other place Other than Reg. Office In India Board Resolution (BR) is required Notice to RoC within 7 days of BR.

3 Form and Content of BS & Statement of P/L [Sec-211] Balance Sheet Shall give T&F view of State of the Co s affairs Both should comply with AS. Section- 211 (3A) Any departure with AS should be clearly disclosed Section- 211 (3B) Nature of departure, Reason for departure, impact on FS AS mean, AS recommended by ICAI, prescribed by CG after consultation with NACAS. Shall include any notes thereon or document annexed there to Statement of P&L Shall give T&F view of Profit or loss Shall comply with Part-I of Schedule VI The CG may by notification in official Gazette, exempt any class of Co from compliance with any requirement in Schedule VI Shall comply with Part-II of Schedule VI Annual Account & Balance Sheet- Section 210 The Board shall lay before the Co. at every AGM a B/S as at end of year and Statement of P&L for the period In case of a company not carrying on business for profit, an income and expenditure account shall be made The period to which the accounts relate is referred as Financial Year and it may be less or more than a calendar year, but it shall not exceed 15 months. However, it may extend to 18 months where a special permission has been granted in that behalf by the ROC.

4 Board s Report- Section 217 A report by BoD which is attached to B/S With respect to Other Disclosures Director s Responsibility Statement Signing of report State of Company s affairs Profits proposed to be transferred to reserve Dividend recommended by BoD Material changes subsequent to close of FY Conservation of energy, technology absorption, foreign exchange earnings and outgo 1- Disclose any changes Nature of Co Business Co. Subsidiary or in the nature of business carried on by them Classes of business in which Company has an interest 2- Reason for failure to complete the buy back within the specified time limit 3- Give full information and explanations for every reservation, adverse comment, qualification in auditor s report. AS AP Pass the Sufficient & Proper J/E on the basis of Materiality & Going Concern 1) AS had been followed 2) Selection and consistent application of Accounting Policies (AP). 3) Proper & sufficient care for the maintenance of adequate accounting records. 4) Judgements & Estimates (J/E) that are reasonable and prudent. 5) Proper explanation relating to material departure. 6) Annual accounts as per going concern basis. By Chairman (If he is authorised) If not authorised By such number of directors as are required to sign B/S and statement of P/L

5 Shares issued for Cash Application Stage App. Money- it should be at least 5% of FV (As per SEBI 25% of issue price) Minimum Subscription- Ascertain that Minimum subscription of 90% has been received. Examine J/E- Bank A/c Dr To Share Application A/c To Bank A/c (Refund) Check the entries in Cash Book Check the entries in Application Book Allotment Stage Examine the Director s minutes book to verify approval of allotment Check entries in allotment book Examine cash book, bank statement. Ascertain whether Share certificate have been delivered within 3 months of allotment. Examine J/E Share Application A/c Dr To Share Capital A/c Call Stage Examine Director s resolution making the call Vouch amount received with counterfoils of receipts Verify J/E, Cash book, Bank statement. Note the calls in arrears and ensure proper disclosure. (Deduction from called up capital in B/S) Note the calls in advances and ensure their proper disclosure. (U/H Current Liabilities) Examine interest paid on calls in advance and interest received in calls in arrears. Issue of shares for consideration other than cash When Shares are issued to Vendors towards payment of Purchase Consideration. Promoters Underwriters for payment of Underwriting Commission. Audit Procedures: (a) Examine Director s Minute Book (That proper BR has been passed) (b) Examine Contract (To determine how many shares for what value and nature) (c) Examine J/E (d) Examine disclosures in B//S

6 Shares issued at Premium, Discount & Sweat Equity Shares Issued at Premium (Section 78) Meaning- When Issue price > FV It is inherent right of Co, Auditor should examine minutes of BM to ensure rate/amount of premium. It should be credited in a separate account called as Security Premium A/C and it is properly disclosed in B/S under head Shareholder s Fund (Reserve & Surplus). Security Premium may be utilised for following purposes: To issue Bonus Shares To w/o preliminary exp To w/o the expenses of, or the commission paid or the discount allowed on, any issue of securities or debentures of the company, or Providing for the premium-payable on redemption of any security of the Co. Issued at Discount (Section-79) Meaning- When issue price < FV Procedure to issue shares at discount AoA (Authorisation) 2 Preconditions 1- Shares must belong to a class already issued 2- At least one year time period must have elapsed since the date when the Co was entitled to commence the business BR in BM OR in GM (Approving discount rate- Maximum-10% unless higher rate is permitted by CG) Approval from CG Issue of share at discount within 2 month from the date of approval Amount of discount should be debited in a separate account called Discount on issue of Share Account. As per revised schedule VI, unamortised discount will appear in Balance Sheet under head Current Assets/Non Current Assets (Depending on remaining period of amortisation) Issue of Sweat Equity Shares (Sec-79A) Meaning- Sweat equity Shares are issued to employees/ directors at discount or consideration other than cash for providing know-how or making available right in the nature of intellectual property rights or value additions Procedure to issue sweat equity AoA 2 Preconditions (Same as in case of Discount) BR in BM SR in GM In SR followings will be specified No of shares, Current MP, Consideration, Class of directors/employee

7 Alteration, Reduction & Issue of Bonus Shares Alteration of Share Capital (Section 94) Procedure Authorised by AoA BR in BM OR in GM Journal Entries Share Capital as altered correctly disclosed in B/S Changes in Register of SH Changes in Register of Director s Share Holding Cancellation of Share Certificate Issue of new certificate Reduction of Share Capital (Section-100) Procedure Authorised by AoA BR in BM SR in GM Confirmation of Court (Court may direct the Co to add the words and reduced at the end of name of Co.) Confirm that Co has delivered to RoC the following 1. A certified copy of the order of court and 2. Certified copy of minute approved by court Reduction shall become effective only on registration of the order and minute Journal Entries Share Capital as altered correctly disclosed in B/S Changes in Register of SH Changes in Register of Director s Share Holding Cancellation of Share Certificate Issue of new certificate Issue of Bonus Shares Meaning- Issue of fully paid bonus shares on fully paid shares. Procedure Authorised by AoA BR in BM OR in GM Journal Entries Share Capital as altered correctly disclosed in B/S Changes in Register of SH Changes in Register of Director s Share Holding Issue of new certificate regarding bonus issue. Examine SEBI guidelines in case of Bonus issue by listed Co.

8 Buy Back of Shares/Purchase of Own Securities [Sec-77A] Condition of Buy Back Authorised by AoA Shares should be fully paid up Limit of Buy Back 25% of Total paid up Capital & Reserve If it is up to 10%- Only BR is required. If is more than 10%- SR is required in GM Sources of Buy Back Free Reserve Security Premium Fresh issue of shares Mode of Buy Back From existing SH on a proportionate basis From open market From odd lot ESOP & Sweat equity Other Obligation Time limit to complete Buy back- Within 12 Months from the date of passing resolution Shares should be physically destroyed within- Within 7 days from completion of Buy Back Filing of declaration of solvency to RoC& SEBI (in case of listed Co.)- in Form- 4A Return of Buy Back with RoC and SEBI within 30 days from completion of Buy Back- in Form -4C After Buy back Debt Equity Ratio- not more than 2:1 (Unless higher ratio is permitted by CG) Option on Unissued Share Capital Meaning- It refers to right of persons who under an agreement with the company have the option to subscribe for shares of the company. Example- Loan Agreements, Convertible Debentures, Convertible Preference Shares, ESOP, To vendor under any agreement of purchase of Goods/Assets. If this option is to be applied on Non convertible portion- Approval of CG SR+ Payment of Interest out of Capital (Section-208) Condition: Co has raised money by issue of shares to meet the cost of works or building or plant which cannot be profitable for a long period Procedure- Authorisation by AoA or SR in GM Previous Sanction of CG Only for such period as may be determined by CG Rate of Interest 4% Pa or a rate notified by CG Accounting treatment of Interest- Such interest shall be capitalised Auditor should examine that all the options are properly disclosed as per the requirement of Part I of schedule-vi

9 Issue of Debenture Meaning Debenture is a written acknowledgement, usually under seal, of a debt due by a company, containing provisions as to payment of interest and repayment of principal It may be secured or unsecured. If it is secured then charge may be fixed charge or floating charge Debenture may be issued at par, at premium, or at discount. Audit Procedure [Verify Following] AoA (Whether Co is authorised or not) BR (Issue should be properly authorised by BoD) Verify Prospectus/Statement in lieu of prospectus Debenture Application (J/E, Debenture application register) Debenture Allotment (J/E, Debenture Allotment register, Minutes of meeting of BM authorising allotment) Proper disclosures in B/S Debenture trust deed Compliance with Guidelines issued by SEBI Interest of Debenture Interest is charge against the profit Such interest should disclosed as a separate line item in the statement of profit & loss The total amount paid should be reconciled with total amount due, total interest paid and interest outstanding Reissue of Debenture Where a company has redeemed any debenture previously issued, Co have right to keep debentures alive for the purpose of reissue The Debenture holders shall have the same right as if debentures had never been redeemed. Benefit of keeping debentures alive is that formalities for reissue need not be complied with again and issue can be made without delay However it will be considered as new issue for the purpose of payment of stamp duty. Issue as Collateral Security It may be issued as collateral security to creditors, bankers etc. Collateral security becomes effective only in the event of default Examine BR Amount of debenture is shown in an inner column of balance Sheet.

10 Share Transfer Audit Application of Share transfer by Transferee In Form -7B Dated, signed, witnessed Amount of consideration in figure & words Name & address of transferee Share Transmission Audit Meaning of Share Transmission: Prescribed authority will stamped the date on which it was presented Accompanied by share certificate or letter of allotment Ascertain whether proper notice was sent by Co to transferor or Joint holder (if any) Objection if any raised by transferor or Joint holder was considered before transfer is registered Test check some entries in share transfer with reference to minutes of meeting of BoD In case only a part of shares have been transferred auditor should check that correct balance certificates have been issued to transferor For transfer of share of shares held by directors, verify appropriate entries have been made in the register of director s shareholding It covers those cases where a person acquires interest in shares by operation of law, without any voluntary Act. According to Companies Act, a company may register as shareholder any person to whom the right to any share has passed by transmission, operation of law. For example- Death, Bankruptcy Audit Procedures- Check the relevant document (Death certificate, copy of order of the court) Examine the minutes of the meeting of the BoD in which transmissions were approved. Examine share transfer register. If transfer is denied- notice of refusal to transferor & transferee with in specified time.

11 Audit of Dividend First of all, dividend is recommended by the Board (Sec. 217). The members in the AGM may declare the dividend by passing OR. Declaration of dividend at an AGM is an item of ordinary business (Sec. 173). The members may reduce the rate or amount recommended by the Board, but they cannot increase it. Examine that dividend has been declared only out of: Profits of current FY Undistributed profits of previous FY(s) Moneys provided by CG or SG Dividend can also be paid out of Capital profits subject to following condition: It should be authorised by AoA. Such profits are realized in cash Profits remains even after revaluation of assets & liabilities. Ensure compliance with following: Profits for every FY shall be arrived at after providing for depreciation. CG may allow a company to declare dividend for any FY without providing for depreciation. If in any previous FY, depreciation has not been provided, it shall be provided before declaring dividend Companies (Transfer of Profits to Reserves) Rules, Before declaration or payment of dividend, profits shall be compulsorily transferred to reserves at the following rates: Rate of proposed dividend Minimum amount to be transferred to Reserves Not exceeding 10% Nil Exceeding 10% but not exceeding 12.5% 2.5% of current profits Exceeding 12.5% but not exceeding 15% 5% of current profits Exceeding 15% but not exceeding 20% 7.5% of current profits Exceeding 20% 10% of current profits Dividend shall be only payable in cash or by cheque Examine whether it has been deposited in a separate bank account within 5 days declaration of dividend. Check bank statement w.r.t. same.

12 The amount so deposited shall be used only for the purpose of payment of dividend (Whether interim or final). The Co. has been given 30 days time from the date of declaration of dividend with which it must pay dividend or post dividend warrants to all shareholders entitled to the payment of dividend. Dividend which remains unpaid or unclaimed is required to be transferred to the special bank account Unpaid Dividend Account of, within 7 days of the expiry of 30 days from the date of declaration. The unclaimed dividend should be shown as a liability in the Balance Sheet. The company cannot forfeit unpaid or unclaimed dividend if any divided remains unpaid or unclaimed period of 7 years from the date of transfer, the amount standing to the credit of special bank account has to be transferred by the company to the Fund called Investor Education and Protection Fund. Where dividend has been declared and not been paid or warrant' has not been posted within 30 days from the date of declaration to any shareholder, then every director of Co. shall if he is knowingly a party to default be punishable with simple imprisonment for a term which may extend to 3 years with fine.

Share Capital. IPCC Paper 2: Law, Ethics & Communication Chapter 3. CA. Paridhi Sinha, FCA

Share Capital. IPCC Paper 2: Law, Ethics & Communication Chapter 3. CA. Paridhi Sinha, FCA Share Capital IPCC Paper 2: Law, Ethics & Communication Chapter 3 CA. Paridhi Sinha, FCA Learning Objectives Minimum Subscription & Irregular Allotment 1 Provisional Allotment 2 Underwriting Commission,