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8 The Company Audit – II

LEARNING OBJECTIVES After studying this chapter, you will be able to understanding – ♦ The general considerations in a company audit. ♦ The procedure of auditing of share capital, debentures, dividends and verification of

issue of bonus shares. ♦ The presentation of financial statement, such as, balance sheet and profit and loss

accounts.

The previous chapter basically dealt with provisions relating to company auditor i.e. his qualifications, disqualifications, rights, duties, etc. In this Chapter, we shall concentrate on provisions relating to company accounts, some specific items of financial statements relating to companies and audit thereof. Students are also expected to know in detail the requirements of Revised Schedule VI (as applicable from 1.4.2011 for financial year 2011-2012 and onwards) to the Act, while auditing different items contained in financial statements.

8.1 General Considerations in Company Audit These have to be determined on a consideration of : (a) objectives of audit; (b) various provisions in the Companies Act, 1956, especially those concerning accounts

and audit; and (c) the scope of the report that the auditor of a company is required to make in pursuance of

the provisions contained in section 227 of the Act. The objectives of an audit are : (i) Verification of statements of account so as to express an opinion; (ii) Detection of errors and frauds; and (iii) Prevention of occurrence of errors and frauds. Detection and prevention of frauds and errors were originally regarded as the main objectives

© The Institute of Chartered Accountants of India

8.2 Auditing and Assurance

of an audit. It was because the auditor, at that time, was looked upon as the watchdog over the assets that the business possessed as well as over its functioning in general. Such a concept of duties of auditors has its origin in the natural distrust that exists among human beings, especially where the course of business dealings involve several persons entrusting their monies or properties to others. So deep rooted is this belief that whenever, on a company being wound up, a fraud or error is discovered, even today there is a public outcry that the auditors should be held responsible for it. Though the broad objectives of an audit, to this day, continue to be the same as aforementioned, the emphasis has shifted from the detection of frauds and prevention of occurrence of errors to the verification of the statements of account. It is because in the context of present system of management of companies, it is of greater importance that the annual statement of account should exhibit a true and fair state of affairs of their working instead of auditor’s time and energy being devoted to tracking down petty frauds and error in accounts, which the internal staff of the company can be entrusted to detect or guard against. The function of an audit primarily, therefore, has come to be regarded as verification of statements of account and expressing an opinion thereon. The expression of opinion lends credibility to financial statements. However, while conducting the audit, the auditor is expected to bear in mind the possibility of existence of a fraud or other irregularity in accounts. Nonetheless, he is not expected to conduct the audit with the objective of discovering all frauds or irregularities, for if that is to be done, the audit would take an unduly long time and the cost of it would be quite out of proportion to its benefit. Nevertheless, it is expected that the auditor would be vigilant and watchful and whenever he comes across a circumstance which arouses his suspicion, he should find out whether a fraud, or irregularity, in fact does exist and, if so, whether it is sufficiently material to necessitate qualifications of the audit report. It is generally accepted that the auditor is not an insurer and does not guarantee that the books of account truly reflect the company’s affairs. Such a view is based on the decision in the famous case, London and General Bank. The auditor, thus, is principally responsible for carrying out his duties by exercising due care and skill in consonance with the professional standards. If, despite the fact, any fraud or irreg-ularity in accounts remains undetected, he cannot be held liable for the failure to detect it. Moreover, since the management is primarily responsible for safeguarding the assets and property of the company, the auditor, while framing his audit programme, is entitled to rely upon the internal controls in this regard instituted by the management based on a proper evaluation. It would be observed that Companies Act, 1956 also does not contemplate that an auditor is responsible for the detection of errors and frauds, except when they are so material as to vitiate the opinion expressed by him that statements of account exhibit a true and fair state of affairs.


The Company Audit-II 8.3

The aforementioned shift of emphasis in the objectives of audit which also has the tacit acceptance of law has come about primarily due to the extraordinary increase that has taken place in the size of corporate organisations as well as in the volume, complexity and variety of transactions handled by them. On this account, it has become impracticable for the statutory auditor to frame a programme for carrying on a detailed audit for the detection of all frauds and irregularities. He is increasingly obliged to rely on the internal control measures. As such, he is not in a position to give a categorical assurance to the shareholders that there does not exist a fraud or irregularity in the books of account except to the limited extent that the fraud, if any, is not sufficiently material to affect true and fair position exhibited by the statements of account. The auditor, nonetheless, is required to verify the final statements of account; also to check or verify all the matters affecting them so as to ensure fully that they exhibit a true and fair state of affairs of the business of the company. For the purpose, he may either carry out a detailed examination of the books or relying on the internal control measures in operation, after testing their strength, merely test the accuracy of transaction recorded therein. It is permissible for an auditor to verify the accuracy of transactions recorded in the books of account by the application of test checks, if he is satisfied that the system of internal control, in operation, is adequate and satisfactory. One of the refined forms that test checks can take is selection of a representative sample statistically from the area of accounts which is to be test checked and checking in depth the transactions comprised in the sample. Other forms that test checks take are procedural tests. These are applied to a variety of transactions selected from areas of account provided such areas, as selected for test checking, contain a representative sample of the transactions entered into by the concern and the transactions are checked exhaustively. On this consideration, the practice of verification of transactions by application of test-checks has come to be recognised universally. As against test checking, a detailed checking of 100% of transactions would only reveal arithmetical mistakes but still fail to ensure true and fair view. In any case, detailed checking would be very time consuming and almost impracticable having regard to size of organisation spread across the globe. However, the conditions under which test checks can be substituted for detailed checking, and the extent of test checks that must be applied in each case, are matters which the auditor must decide having regard to the circumstances of each case. On this consideration, while conducting the audit of a large business house which has on its staff a qualified accountant, as internal auditor, it is nowadays sometimes possible for the statutory auditor to somewhat reduce the scope and extent of his routine checking. He, instead of going over the facts and figures as have already been examined by a competent and trustworthy internal staff, may limit his checking only to application of test-checks; if however, any significant mistakes are observed in the test period, the scope of the audit is suitably extended. A consciousness is growing in the profession that a greater co-ordination is possible between



the work of the internal auditor and the statutory auditor which, if brought about, would enable the statutory auditor to make use of, to a greater extent, the detailed checking carried on by the internal auditor in the discharge of his duties and responsibilities.

8.2 Specific Provisions as Regards Accounts in the Companies Act, 1956 The provisions in the matter of books of account which a company is required to maintain are contained in section 209 of the Companies Act, 1956. They are briefly summarised below: (1) Every company shall maintain at its registered office proper books of account with regard

to : (a) all sums of money received and expended by the company and the matters in

respect of which the receipts and expenditure take place; (b) all sales and purchases of goods by the company; (c) the assets and liabilities of the company; and (d) in case, it is a company engaged in production, processing, manufacturing or mining

activities, particulars relating to utilisation of material or labour or other items of cost, provided there is such a requirement by the Central Government in respect of the class of companies to which it belongs.

N.B. - It is permissible, however, for all or any of the books of account may be kept at such place in India as the Board of directors may decide but, when a decision in this regard is taken, the company shall file with the Registrar of Companies a notice giving full address of the other place.

(2) When a company has a branch office, whether in or outside India, to comply with the aforementioned provisions, the company must maintain proper books of account relating to transactions effected at the branch office, also arrange to obtain from the branch proper summarised returns, at intervals of not more than three months, for being kept at the registered office or the other place.

(3) For the purposes of sub-sections (1) and (2), proper books of account shall not be deemed to be kept with respect to the matters specified therein : (a) if there are not kept such books as are necessary to give a true and fair view of the

state of affairs of the company or branch office, as the case may be, and to explain its transactions; and

(b) if such books are not kept on accrual basis and according to the double entry system of accounting.

(4) The books of account and other books and papers shall be open to inspection by any director during business hours.



(4A) The books of account together with vouchers relevant to any entry made therein for a period of not less than eight years immediately preceding the current year shall be preserved by the company in goodorder.

(5) If any of the persons referred to in sub-section (6), fails to take reasonable steps to secure compliance with the requirements of law aforementioned or by a wilful act causes any default by the company, he shall be punishable for each offence with imprisonment for a term which may extend to six months or a fine which may extend to ` 10000 or with both. But he may be relieved from such a liability if he can show that he has reasonable ground to believe that a competent and responsible person was charged with the duty of seeing that these requirements were complied with and he was in a position to discharge that duty.

(6) Where the company has a managing director or manager, such managing director or manager and all officers and other employees of the company; and where the company has neither a managing director nor manager, every director of the company.

(7) If a person, not being a person referred to in the foregoing paragraph, who has been charged with the duty of seeing that requirements of law in regard to the books of account is complied with, makes a default in doing so, he shall, in respect of each offence, be punishable with a fine which may extend to ` 10,000.

Section 541(2) (applicable to a company in the course of winding up) is also relevant. It has been provided in Section 541(2) that proper books of account shall constitute (a) such books or accounts as are necessary to exhibit and explain the transactions

and financial position of the business of the company, including books containing entries made from day to day in sufficient detail of all cash received and all cash paid; and

(b) where the business of the company has involved dealings in goods, statements of the annual stock takings and (except in the case of goods sold by way of ordinary retail trade) of all goods sold and purchased, showing the goods and the buyers and sellers thereof in sufficient detail to enable those goods and those buyers and sellers to be identified.

Although Section 541 relates to winding up of a company yet it has the effect of further elaborating the requirements as regards maintenance of books of accounts and should be considered as a general requirement from the point of view of the company. To conclude, it can be said that its application should not be confined to winding up process only. Inspection of Books of Account, etc. of Companies - Section 209 A provides that the books of account and other books and papers of every company shall be opened to inspection during business hours: (i) by the registrar, or (ii) by such officer authorised by the Central Government, or (iii) by such officer authorized by the SEBI.



Such inspection may be made without giving any previous notice to the company or any officer thereof. It shall be the duty of every director, other officer or employee of the company to produce to the person making inspection of such books of account and other books and papers of the company in his custody or control and to furnish him with any statement, information or explanation relating to the affairs of the company as the said person may require to him within such time and at such place as he may specify. Further it shall also be the duty of every director, other officer or employee of the company to give to the person making inspection under this section all assistance in connection with the inspection which the company may be reasonably expected to give. The person making the inspection is also empowered to make copies of books of account and other books and papers and put any marks of identification in token of the inspection have been made. The person making the inspection under this section shall make a report to the Central Government. Annual accounts and balance sheet : Section 210 requires that the Board shall lay before the company at every annual general meeting a balance sheet as at the end of the period and a profit and loss account for that period. In case of a company not carrying on business for profit an income and expenditure account shall be laid. The profit and loss account shall relate— (a) in the case of the first annual general meeting of the company, to the period beginning

with the incorporation of the company and ending with a day which shall not precede the day of the meeting by more than nine months; and

(b) in the case of any subsequent annual general meeting of the company, to the period beginning with the day immediately after the period for which the account was last submitted and ending with a day which shall not precede the day of the meeting by more than six months, or in cases where an extension of time has been granted for building the meeting under the second proviso to sub-section (1) of section 166, by more than six months and the extension so granted.

The period to which the account aforesaid relates is referred to in this Act as a ‘financial year’; and it may be less or more than a calendar year, but it shall not exceed fifteen months: Provided that it may be extended to eighteen months where special permission has been granted in that behalf by the Registrar. Constitution of National Advisory Committee on Accounting Standards : Section 210A has been inserted by the Companies (Amendment) Act, 1999 which provides that the Central Government may, by notification in the Official Gazette constitute a National Advisory Committee on Accounting Standards to advise the Central Government on the formulation and laying down of accounting policies and accounting standards for adoption by companies or



class of companies under this Act. A notification constituting the said committee was issued in July 2001 by the Central Government. Form and contents of balance sheet and profit and loss account : Section 211 states : (1) 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 this section, be in the form set out in Part I of Revised 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; and 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 :

Provided that nothing contained in this sub-section 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 has been specified in or under the Act governing such class of company.

(2) Every profit and loss account 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 as aforesaid, the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Revised Schedule VI, so far as they are applicable thereto :

Provided that nothing contained in this sub-section 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 profit and loss account has been specified in or under the Act governing such class of company.

(3) The Central Government may, by notification in the Official Gazette, exempt any class of companies from compliance with any of the requirements in Schedule VI if, in its opinion, it is necessary to grant the exemption in the public interest.

Any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification.

(3A) Every profit and loss account and balance sheet of the company shall comply with the accounting standards.

(3B) Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the following namely :— (a) the deviation from the accounting standards; (b) the reasons for such deviation; and (c) the financial effect, if any arising due to such deviation.

(3C) For the purposes of this section, the expression “accounting standards” means the standards of accounting recommended by the Institute of Chartered Accountants of India



constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be pre-scribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A :

Provided that the standard of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the Accounting Standards until the accounting standards are prescribed by the Central Government under this sub-section.

(4) The Central Government may, on the application, or with the consent of the Board of directors of the company, by order, modify in relation to that company any of the requirements of this Act as to the 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.

(5) The balance sheet and the profit and loss account of a company shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose – (i) in the case of an insurance company, any matters which are not required to be

disclosed by the Insurance Act, 1938 (4 of 1938); (ii) in the case of a banking company, any matters which are not required to be

disclosed by the Banking Companies Act, 1949 (10 of 1949); (iii) in the case of a company engaged in the generation or supply of electricity, any

matters which are not required to be disclosed by both the Indian Electricity Act, 1910 (9 of 1910), and the Electricity (Supply) Act, 1948 (54 of 1948);

(iv) in the case of a company governed by any other special Act for the time being in force, any matters which are not required to be disclosed by that special Act; or

(v) in the case of any company, any matters which are not required to be disclosed by virtue of the provisions contained in Revised Schedule VI or by virtue of a notification issued under sub-section (3) or an order issued under sub-section (4).

(6) For the purposes of this section, except where the context otherwise requires, any reference to a balance sheet or profit and loss account shall include any notes thereon or documents annexed thereto, giving information required by this Act, and allowed by this Act to be given in the form of such notes or documents.

(7) If any such person as is referred to in sub-section (6) of section 209 fails to take all reasonable steps to secure compliance by the company, as respects any accounts laid before the company, in general meeting with the provisions of this section and with the other requirements of this Act as to the matters to be stated in the accounts, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both :

Provided that in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove that a competent and reliable person was charged



with the duty of seeing that the provisions of this section and the other requirements aforesaid were complied with and was in a position to discharge that duty.

Provided further, that no person shall be sentenced to imprisonment for any such offence unless it was committed willfully.

(8) If any person, not being a person referred to in sub-section (6) of section 209, having been charged by the managing director or manager, or Board of directors, as the case may be, with the duty of seeing that the provisions of this section and the other requirements aforesaid are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months or with fine which may extend to ten thousand rupees, or with both.

Provided that no person shall be sentenced to imprisonment for any such of offence unless it was committed willfully.

Students may note that sub-section (3A), (3B) and (3C) were added in section 211 making it mandatory on the part of the management of the company to comply with the accounting standards as specified in sub-section (3C). Hence, statutory recognition has been given to the accounting standards by the legislation. It is incumbent on the company, in case of non-compliance, to mention the fact of deviation, reason for deviation and the financial effect, if any, as well. [ Note : Recently the Ministry of Corporate Affairs through Notification No. S.O. 301(E) dated 8th Feb, 2011 issued a notification on General Exemption under Section 211 of the Companies Act, 1956. According to this, a general exemption is issued whereby the categories of companies in column (2) of the Table below will be exempted from the disclosures given in column 3:-

Class of Companies Exemptions from para(s) of Part-II of Schedule VI.

1. Companies producing Defence Equipments including Space Research;

para 3(i)(a), 3(ii(a), 3(ii)(d), 4-C, 4-D (a) to (e) except (d).

2. Export Oriented company (whose export is more than 20% of the turnover);

para 3(i)(a) 3(ii)(a), 3(ii)(b), 3(ii)(d).

3. Shipping companies (Including Airlines);

para 4-D (a) to (e) except (d).

4. Hotel companies (including Restaurants);

para 3(i)(a) and 3(ii)(d)

5. Manufacturing companies/multi-product companies;

para 3(i)(a) and 3(ii)(a).

6. Trading companies; para 3(i)(a) and 3(ii)(b).



Abovementioned notification along with table is given for knowledge of the Students] Balance sheet of holding company to include certain particulars as to its subsidiaries :

Section 212 requires that there shall be attached to the balance sheet of a holding company having a subsidiary or subsidiaries at the end of the financial year as at which the holding company’s balance sheet is made out. The Central Government hereby directs vide General Circular No: 2/2011 (issued by MCA dated 08-02-2011) that provisions of Section 212 shall not apply in relation to subsidiaries of those companies which fulfil the following conditions:- (i) The Board of Directors of the Company has by resolution given consent for not

attaching the balance sheet of the subsidiary concerned; (ii) The company shall present in the annual report, the consolidated financial

statements of holding company and all subsidiaries duly audited by its statutory auditors;

(iii) The consolidated financial statement shall be prepared in strict compliance with applicable Accounting Standards and, where applicable, Listing Agreement as prescribed by the Security and Exchange Board of India;

(iv) The company shall disclose in the consolidated balance sheet the following information in aggregate for each subsidiary including subsidiaries of subsidiaries:- (a) capital (b)reserves (c) total assets (d) total liabilities (e) details of investment (except in case of investment in the subsidiaries) (f) turnover (g) profit before taxation (h) provision for taxation (i) profit after taxation (j) proposed dividend;

(v) The holding company shall undertake in its annual report that annual accounts of the subsidiary companies and the related detailed information shall be made available to shareholders of the holding and subsidiary companies seeking such information at any point of time. The annual accounts of the subsidiary companies shall also be kept for inspection by any shareholders in the head office of the holding company and of the subsidiary companies concerned and a note to the above effect will be included in the annual report of the holding company. The holding company shall furnish a hard copy of details of accounts of subsidiaries to any shareholder on demand;

(vi) The holding as well as subsidiary companies in question shall regularly file such data to the various regulatory and Government authorities as may be required by them;

(vii) The company shall give Indian rupee equivalent of the figures given in foreign currency appearing in the accounts of the subsidiary companies along with exchange rate as on closing day of the financial year;

(Note: Students may note that as per section 227 of the Act, the duty of the auditor extends to expressing an opinion on balance sheet and profit and loss account and all other documents annexed thereto. Since section 212 requires that particulars of



subsidiary company are required to be attached to balance sheet of holding company, the same shall not be covered by auditor’s report. Also refer to section 222 which deals with construction of references to documents annexed to accounts. The Board’s Report under section 217 is also attached to every balance sheet of a company.

Profit and loss account to be annexed and auditor’s report to be attached to balance sheet - The profit and loss account shall be annexed to the balance sheet and the auditors’ report including the auditors’ separate, special or supplementary report, if any shall be attached thereto.

Board’s report (Section 217): (1) There shall be attached to every balance sheet laid before a company in general

meeting, a report by its Board of directors, with respect to— (a) the state of company’s affairs; (b) the amounts, if any, which it proposes to carry to any reserves in such balance

sheet; (c) the amount, if any, which it recommends should be paid by way of dividend; (d) material changes and commitments, if any, affecting the financial position of the

company which have occurred between the end of the financial year of the company to which the balance sheet relates and the date of the report;

(e) the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed.

(2) The Board’s report shall, so far as is material for the appreciation of the state of the company’s affairs by its members and will not in the Board’s opinion be harmful to the business of the company or of any of its subsidiaries, deal with any changes which have occurred during the financial year— (a) in the nature of the company’s business; (b) in the company’s subsidiaries or in the nature of the business carried on by them;

and (c) generally in the classes of business in which the company has as an interest.

(2A) (a) The Board’s report shall also include a statement showing the name of every employee of the company who— (i) if employed throughout the financial year, was in receipt of remuneration for

that year which, in the aggregate, was not less than such sum as may be prescribed; or

(ii) if employed for a part of the financial year, was in receipt of remuneration for any part of that year, at a rate which, in the aggregate, was not less than such sum per month as may be prescribed; or



(iii) if employed throughout the financial year or part thereof, was in receipt of remuneration in that year which, in the aggregate, or as the case may be, at a rate which, in the aggregate, is in excess of that drawn by the managing director or whole-time director or manager and holds by himself or along with his spouse and dependent children, not less than two per cent, of the equity shares of the company.

(b) The statement referred to in clause (a) shall also indicate,— (i) whether any such employee is a relative of any director or manager of the

company and if so, the name of such director, and (ii) such other particulars as may be prescribed.

Explanation: Remuneration has the meaning assigned to it in the Explanation to section 198.

(2AA)The board’s report shall also include a Directors’ Responsibility Statement, indicating therein, - (i) that in the preparation of the annual accounts, the applicable accounting standards

had been followed along with proper explanation relating to material departures; (ii) that the directors had selected such accounting policies and applied them

consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period;

(iii) that the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;

(iv) that the directors had prepared the annual accounts on a going concern basis. (2B) The Board’s report shall also specify the reasons for the failure, if any, to complete the

buy back within the time specified in sub-section (4) of section 77A. (3) The Board shall also be bound to give the fullest information and explanations in its

report aforesaid, or, in cases falling under the proviso to section 222, in an addendum to that report, on every reservation, qualification or adverse remark contained in the auditors’ report.

(4) The Board’s report and any addendum thereto shall be signed by its chairman if he is authorised in that behalf by the Board; and where he is not so authorised, shall be signed by such number of directors as are required to sign the balance sheet and the profit and loss account of the company by virtue of sub-sections (1) and (2) of section 215.

(5) If any person, being a director of a company, fails to take all reasonable steps to comply with the provisions of sub-sections (1) to (3), or being, the chairman, signs the Board’s



report otherwise than in conformity with the provisions of sub-section (4), he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to twenty thousand rupees, or with both :

Provided that no person shall be sentenced to imprisonment for any such offence unless it was committed willfully:

Provided, further that in any proceedings against a person in respect of an offence under sub-section (1), it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that the provisions of that sub-section were complied with and was in a position to discharge that duty.

(6) If any person, not being a director, having been charged by the Board of directors with the duty of seeing that the provisions of sub-sections (1) to (3) are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to twenty thousand rupees, or with both:

Provided, that no person shall be sentenced to imprisonment for any such offence unless it was committed willfully.

8.3 Payment of Interest out of Capital during Construction Under the provisions of section 208, a company which has raised money by issue of shares to meet the cost of construction of any work or building or provision of any plant which cannot be made profitable for a long time, can pay interest on paid-up capital for a period and subject to conditions specified in sub-sections (2) to (7) of section 208. Accordingly, the payment of interest should be verified as follows:— (a) Ascertain that the payment is authorised by the Articles or by a special resolution. (b) Verify that the previous sanction of the Central Government for making such payment

has been obtained. (c) Confirm that the interest has been paid only for such period as has been authorised by

the Central Government and does not extend beyond the half-year next following during which the construction was completed or the plant was provided.

(d) Verify that the rate of interest shall, in no case exceed such rate as the Central Government may, by notification in official Gazette direct.

(e) Check that the amount of interest paid has been added to the cost of assets created out of the capital.

The interest paid being a part of the capital expenditure incurred in bringing into existence assets, it should be added thereto. Until so added, it must be shown as a separate item in the Balance Sheet under the head ‘Miscellaneous Expenditure’.



8.4 Special Requirements of Company Audit

(i) Verification of the constitution and powers - A company can function within the limits prescribed by the documents on the basis of which it has been registered. It raises its capital from the public on certain conditions, specified in the Prospectus. Before commencing business, to purchase a property or to have subscription to its capital underwritten on this account, it is essential that the auditor, prior to starting the audit of a company, shall examine: (a) The Memorandum of Association. (b) The Articles of Association. (c) Contracts entered into with vendors and other persons relating to purchase of property,

payment of commission, etc. A company cannot enter into a contract before it has been registered. What is more, a public company cannot commence business until the certificate of commencement of business has been granted to it by the Registrar of Companies. It is, therefore, the duty of the auditor to take into account, while examining the transaction entered into by the company, the dates when these were entered into for confirming the validity. With a view to carrying out the audit effectively, it is necessary that the auditor should know the authority structure of the company. Under Section 291 of the Act, the Board of Directors of a company are entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to do. However, the Board shall not exercise any power or do any act or thing which is directed or required by any legislation (including the Companies Act) or by the memorandum or articles of the company, to be exercised or done by the company, in general meeting. Section 292 specifies six types of decisions that can be taken by the Board of Directors only in Board’s meetings. These relate to : (i) making calls on partly paid shares. (ii) issue of debentures, (iii) borrowing monies otherwise than on debentures, (iv) investing the funds of the company, and (v) making loans. The transaction barring the first three can be delegated to any of the following: (a) a committee of directors, (b) managing director, (c) manager, (d) any other principal officer of the company, or (e) principal officer of the branch office, in relation to the branch.



Apart from the above, a number of other functions are also carried out by the Board. A few of such functions are stated herein by way of examples : (a) Adopting of accounts before the same submitted to the auditor for their report-Section

215. (b) Appointment of the first auditors and filling of casual vacancy - Section 224. (c) Investment in shares of companies within the limits specified in Section 372A. (d) Entering into contracts with persons who are directors of the company or related to or

associated with the directors as are specified in Section 297 of the Act. Some of the matters which only the shareholders can sanction at a general meeting : (a) Appointment and fixation of remuneration of auditors in the annual general meeting -

Section 224. (b) Declaration of dividends - Regulation 85, Table A. (c) Appointment of relatives of directors etc. to an office or place of profit in the company

under Section 314 of the Act. (d) Sale, lease or a disposal of the whole of the company’s undertaking or a substantial part

of it and donations above a certain limits [Section 293(1)]. (ii) Matters which require sanction of the Central Government :

Loans to directors by a company other than a banking or a finance company (Section 295). For verifying the foregoing transactions and others authorised by the directors or shareholders, the auditor should refer to the minutes of the meeting at which these have been considered. Further, for judging the validity or otherwise of section accorded, the relevant provision of law must be referred to. A few such instances are given below : (a) Appointment of Directors (Section 256). (b) Disqualifications of Directors (Section 274). (c) Conduct of Board Meeting (Sections 285-290). (d) General powers of Board (Section 291). (e) Powers which the Board must exercise only at a meeting (Section 292). (f) Restriction on powers of the Board regarding disposal of the undertaking or part of it

etc. (Section 293). (g) Prohibitions and restrictions regarding political contributions (Section 293A). (h) Power of Board and other persons to make contributions to the National Defence

Fund, etc. (Section 293B). (i) Restriction on advancing loans to Directors, etc. (Section 295).



(j) Restriction on a Director or his relative, a firm in which a director or relative is a partner; or any other partner of the firm or a private company of which such a director is a member or director to enter into a contract of sale or purchase of goods except with the sanction of the Board of Directors (Section 297).

(k) Restriction on an interested director in participating in or voting at Board’s proceedings (Section 300).

(l) Disclosure of interest by directors (Section 299). (m) Register of contracts, Companies or firms in which directors are inspected (Section

301) (n) Remuneration of directors (Section 309). (o) Restraint on a director’s holding offices or places of profit (Section 314). (p) Restraint on payment of compensation for loss of office to a director (Sections 318

to 321). (q) Restriction on loans, etc., to companies under the same management (Section 370). (r) Regulation of inter-corporate loans and investments (Section 372A).

(iii) Special considerations involved in the examination of certain documents (a) Memorandum of Association - It is a charter containing particulars of business

activities that the company can undertake and the powers it can exercise in regard thereto. Only on a consideration thereof it is possible for the auditor to determine whether a transaction which has been entered into by the company is intra vires, i.e. the company is authorised to enter into it. If a company enters into a transaction which is ultra vires, the shareholders, though entitled to claim the profit arising on such a transaction, may restrain the management from charging the loss, if any, has been suffered thereon, to the company. If the auditor fails to detect and report the transactions which are ultra vires the company, he would be guilty of negligence.

Generally the Memorandum of Association of companies is drawn up comprehensively in order that the company may be able to enter into a wide variety of transactions which it may be required to do for carrying out one or more of its objects. Nevertheless, sometimes occasions arise when a company, inadvertently, or deliberately, enters into a transaction which is ultra vires objects to powers. In such a case, the shareholders may decide to restrain the management from charging to the company the losses suffered by the company in respect of such a transaction.

(b) Articles of Association - These are rules and regulations for the internal management of the company; and they define the rights of different classes of shareholders, conditions under which calls can be made, the maximum and minimum number of directors the company can have, their qualifications, disqualifications and removal, etc. The terms and conditions of these provisions



have relevance to the examination of transaction, that the auditor is required to carry out. He should, therefore, study the Articles and include extracts from them in his permanent audit file. The auditor, who fails to take note of the provisions in the Articles in the verification of statements of accounts, would be guilty of professional negligence. While delivering judgment in the case, Leeds Estate Building and Investment Co. v. Shepherd, Starling J. said, “It is the duty of the auditor to see that the balance sheet is a true and correct representation of the company’s affairs. It was no excuse that the auditor had not seen the articles when he knew of their existence.”

The auditor must, therefore, acquaint himself with the provision of the Articles of the company and should apply this knowledge in the verification of the transactions of the company.

(c) Prospectus - It is a formal document which a public company must issue before it makes the allotment of shares under section 56. It must contain all the terms and conditions on which subscription to the shares is sought to be obtained from the public e.g. the company may stipulate, that it would obtain a quotation for its shares at a Stock Exchange or that it shall purchase a property which is considered valuable for the company or that it has obtained the services of technical experts whose services will be valuable for setting up the factory. In case the company fails to carry out any of these undertakings or if any statement made by it ultimately is proven to be false, the shareholder has the option to claim refund of the amount paid by him. The auditor should, therefore, study carefully all the conditions and stipulations made in the prospectus and, in case any of them has not been carried out, to draw the attention of shareholders thereto. It may be noted that the right to claim refund is restricted to such of the shareholders who subscribed for shares on the basis of prospectus. A shareholder who has purchased the shares from stock exchange or otherwise cannot claim refund.

Section 60A inserted by the Companies (Amendment) Act, 2000 has introduced the concept of “Shelf Prospectus”. Such prospectus would enable companies engaged in financial activities to raise money by way of offer of securities more than once during its validity and, in such case, only an information memorandum stating certain material particulars. Section 60B has introduced the concept of “red-herring” prospectus. Accordingly, section 60B involves concept of information memorandum also.

8.5 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 raising of capital. The receipt of applications for shares and allotment of shares in pursuance thereto 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. 8.5.1 General Programme for Verification of Share Capital Authorised capital - The authorised 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 - 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: (1) 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.

(2) 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.

(3) Confirm that the brokerage and underwriting commission was paid only at the rates authorised by the Prospectus or the Articles of Association, having regard to the provisions contained in Section 76.

(4) Ensure that legal requirements as laid down in section 81 (dealing with right shares) have been complied with.

(5) 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.

(6) Ensure that the company intending to offer shares to the public for subscription by the issue of a Prospectus has, before such issue, made an application to one or more recognised stock exchanges for permission for the shares intending to be so offered within the stock exchange or each stock exchange as required by the Companies



(Amendment) Act, 1988. Section 73 provides that allotment made by a company would be void if the permission is not granted by stock exchange before the expiry of ten weeks from the date of the closing of the subscription list.

(7) 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.

(8) Ascertain that there exists an internal check on receipt of amounts alongwith the application and that the same throughout has continued to function satisfactorily.

(9) Verify compliance with legal provision relating to issue of shares at premium (section 78), issue of shares at discount (section 79), and issue of sweat equity shares (section 79A)

8.5.2 Verification of Shares Issued for Cash: Usually, there are three stages in the issue of shares for cash, viz. : (i) Receipt of applications for shares alongwith application money; (ii) Allotment of shares and receipt of allotment; and (iii) 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: (1) Applications - Verify the amount received alongwith the applications for shares in the

following manner: (i) Check entries in the Application and Allotment Book (or Sheets) with the original

applications; (ii) Check entries in the Application and the Allotment Book as regards deposits of

money, received with the applications, with those in the Cash Book; (iii) Vouch amounts refunded to the unsuccessful applicants with copies of Letters of

Regret; (iv) Check the totals columns in the Application and Allotment Book and confirm the

journal entry debiting Share Application Account and crediting Share Capital Account.

(2) Allotment (i) Examine Director’s Minutes Book to verify approval of allotments. (ii) Compare copies of letters of allotment with entries in the Application and Allotment

Book. (iii) Trace entries in the Cash book into the Application and Allotment Book for the

verification of amounts collected on allotment.



(iv) Trace the amount collected on application as well as those on allotment from the Application and Allotment Book into the Share Register.

(v) Check totals of amounts payable on allotment and verify the journal entry debiting Share Allotment Account and crediting Share Capital Account.

(3) Calls (i) Examine the Director’s resolution making the call. (ii) Vouch amounts received with the counterfoils of receipts. (iii) Trace postings of the amounts received from the Calls Book (for calls due) and the

Cash Book (for calls collected) into the Share Register. (iv) Verify the journal entry, debiting the Call Account and crediting Share Capital with

totals of the amounts due. (v) Note the calls in arrears.

(4) General (i) Ascertain that the nominal value of shares allotted does not, exceed the authorised

and issued capital and that allotments were made in accordance with conditions contained in the Prospectus.

(ii) See the returns of allotment have been filed with the Registrar of Companies. (iii) Extract balances of shareholders’ accounts contained in the Share Register and

tally their total with the balance in the Share Capital Account. (iv) If the issue was underwritten, examine the contract with the underwriters to ensure

that all obligations under the contracts have been fully satisfied. (v) Vouch payment of commission and brokerage, the first by reference to the

underwriting contract and the second by reference to stamps of brokers on application forms.

(vi) See that the company has delivered share certificates within three months after the allotment of any of its shares in accordance with the procedure laid down under Section 53.

Note : The signatories to the Memorandum of Association being the first shareholder of the company, it is usual to make allotment in their favour. 8.5.3 Shares Issued for Consideration other than Cash: The contract, on the basis of which the shares have been allotted, should be referred to and the allotment confirmed by reference to the Minutes of the Board of Directors. It should also be verified that a copy of the contract as required by Section 75(1)(b) of the Act has been filed with the Register of Companies within one month of the date of allotment and in the absence thereof, a memorandum in writing stating particulars of the contract has been filed.



Sometimes, in view of the nature of the transaction, it may be difficult to know whether an allotment is for cash or for a consideration, other than cash, for instance, allotment of shares in adjustment of a debt owed by the company. In such a case, if the allotment is made in adjustment of a bonafide debt payable in money at once, the allotment should be considered as against cash. (Spargo’s Case 1873, 3 Ch. A 407). This position should be kept in view when inquiring into matters stated in Section 227(1A). Again if the shares are allotted on a cash basis, though the amount is actually paid later, it should constitute an allotment against cash. 8.5.4 Shares Issued at a Premium: Where a company has issued shares at a premium, that is, at amount in excess of the nominal value of the shares, whether for cash or otherwise, Section 78 prescribes that a sum equal to the amount of the premium collected should be transferred to the Securities Premium Account. Since the Act provides that the amount of premium will be considered a part of the share capital and that the amount of premium collected on shares can only be reduced in the manner prescribed for the reduction of capital, the amount of share premium received cannot be forfeited when the shares in respect thereof are forfeited. The auditor should also see compliance with SEBI Guidelines.

8.5.5 Shares Issued at a Discount: A company can issue shares at a discount on the following conditions (Section 79) : (i) The issue should be authorised by an ordinary resolution of the company and sanctioned

by the Central Government. (ii) No such resolution shall be sanctioned by the Central Government in case the maximum

rate of discount should exceed 10 per cent unless the Central Government is of opinion that a higher rate for discount is justified by the special circumstances of the case.

(iii) The issue should be made within two months of the sanction by the Central Government but not earlier than one year after the date of commencement of business.

(iv) The shares should be of a class already issued by the company. It is the duty of the auditor to confirm that all the conditions aforementioned have been complied with by the company at the time the allotment was made. Though there appears to be no obligation on the part of the company to write off discount on the issue of shares, it is nonetheless advisable that is should be so done within a few years of the shares being issued. As per the Revised Schedule VI, the unamortised discount on issue of shares should be disclosed in the balance sheet under the heading “Other Non-Current Assets/Current assets” (depending on the remaining period of amortisation). 8.5.6 Issue of Sweat Equity Shares: The Companies (Amendment) Act, 1999 recognised that in the wake of globalisation of corporate sector, the employees will have to be rewarded suitably to share in the growth of company. By insertion of section 79A, the em-ployees may be compensated in the form of “sweat equity shares”. As per explanation to



section 79A, the expression “sweat equity shares” means equity shares issued by the company to employees or directors at a discount or for consideration other than cash for providing know-how or making available right in the nature of intellectual property rights or value additions, by whatever name called. The auditor may see that the sweat equity shares issued by the company are of a class of shares already issued and following conditions are fulfilled: (a) The issue of sweat equity shares is authorised by a special resolution passed by the

company in the general meeting; (b) The resolution specifies the number of shares, current market price, consideration, if any,

and the class or classes of directors or employees to whom such equity shares are to be issued;

(c) Not less than one year has, at the date of the issue elapsed since the date on which the company was entitled to commence business;

(d) The sweat equity shares of a company whose equity shares are listed on a recognised stock exchange are issued in accordance with the regulations made by the Securities Exchange Board of India in this behalf:

Provided that in the case of a company whose equity shares are not listed on any recognised stock exchange, the sweat equity shares are issued in accordance with the guidelines as may be prescribed. For the purposes of this sub-section, the expression “a company” means the company incorporated, formed and registered under this Act and includes its subsidiary company incorporated in a country outside India. 8.5.7 Power of Company to Purchase its Own Securities: The Companies (Amendment) Act, 1999 contains elaborate provisions enabling a company to buy-back its own securities. The word security here includes employee stock option, i.e., sweat equity share or any other security notified by the government. The word security includes both equity and preference share. But preference share can be redeemed, perhaps the reform is intended to equity share only. As per section 77A, a company may purchase its own shares or other specified securities (hereinafter referred to as “buy-back”) out of— (i) its free reserves; or (ii) the securities premium account; or (iii) the proceeds of any earlier issue other than from issue of shares made specifically for

buy-back purposes. (1) No company shall purchase its own shares or other specified securities unless—

(a) the buy-back is authorised by its articles;



(b) a special resolution has been passed in general meeting of the company authorising the buy-back;

Provided that nothing contained in this clause shall apply in any case where (i) the buy-back is or less than 10 percent of the total paid-up equity capital and free reserve of the company and (ii) such buy-back has been authorized by the Board by means of a resolution passed at its meeting.

(c) the buy-back is or less than twenty-five per cent, of the total paid-up capital (equity shares and preference shares) and free reserves of the company;

(d) The debt-equity ratio is not more than 2 : 1 after such buy-back : Explanation.—For the purposes of this clause, the expression “debt” includes all

amounts of unsecured and secured debts; (e) all the shares or other specified securities are fully paid-up; (f) the buy-back of the shares or other specified securities listed on any recognised

stock exchange is in accordance with the regulations made by the Securities and Exchange Board of India;

(g) the buy-back in respect of shares or other specified securities other than those specified in clause (f) is in accordance with the guidelines as may be prescribed.

(2) The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating— (a) a full and complete disclosure of all material facts; (b) the necessity for the buy-back; (c) the class of security intended to be purchased; (d) the amount to be invested; and (e) the time limit for completion of buy-back.

(3) Every buy-back shall be completed within twelve months from the date of passing the special resolution.

(4) The buy-back under sub-section (1) may be— (a) from the existing security holders on a proportionate basis; or (b) from the open market; or (c) from odd lots, (d) by purchasing the securities issued to employees of the company pursuant to a

scheme of stock option or sweat equity. (5) A solvency certificate to be filed before making buy-back.



(6) A company buy-back its own securities, it shall extinguish and physically destroy the securities so bought-back within seven days of the last date of completion of buy-back.

(7) A company shall not make further issue of same kind of shares (including allotment of further shares under clause (a) of sub-section (1) of section 81) or other specified securities within a period of six months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.

(8) A company maintains a register of the securities so bought, the consideration paid for the securities bought-back, the date of cancellation of securities, the date of existing and physically destroying of securities and such other particulars as may be prescribed.

(9) A company shall, after completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board of India, a return containing such particulars relating to the buy-back within thirty days of such completion, as may be prescribed:

Provided that no return shall be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognised stock exchange. The auditor should ensure that the proper accounting entries have been passed immediately after the buy-back. Further prohibition to buy-back shares is contained in section 77B. 8.5.8 Calls Paid in Advance: A company, if permitted by the articles, may accept from members, either the whole or part of the amount remaining unpaid on any shares held by him as calls in advance; but the amount so received cannot be treated as a part of the capital for the purpose of any voting rights until the same becomes presently payable and duly appropriated. A company, if so authorised by its Articles, may pay dividend in proportion to the amount paid upon each share, where a larger amount is paid up on some shares than that on other (Section 93). It may be noted that Clause 88(2) of Table A does not permit calls in advance being treated as amounts paid up on shares for the purpose of payment of dividends. Unless the company exercises the right as aforementioned, the shareholders who have paid calls in advance would be entitled to receive interest at the rate specified in the Articles. The interest on calls in advance, though chargeable against profits, also can be paid out of capital when profits are not available for such a payment. In the event of a winding up, calls in advance repayable alongwith interest accrued thereon before any part of the capital is returned to shareholders. 8.5.9 Calls in Arrears: The amounts due from shareholders in respect of calls in arrears should be verified by reference to the Share register. If any calls are due from Directors, they should be shown separately in the balance sheet. Often the Articles provide that interest be charged on calls in arrears. The adjustment of interest in such a case should be verified.



8.5.10 Issue and Redemption of Preference Shares (a) Power to issue redeemable preference shares: A company limited by shares, if

authorised by its articles, may issue preference shares which are liable to be redeemed at the option of the company before or on an appointed date. However, after the commencement of the Companies (Amendment) Act, 1996 no company limited by shares shall issue any preference share which is irredeemable or is redeemable after the expiry of a period of 20 years from the date of its issue. So long as the shares are not redeemed, the terms of redemption or conversion must be stated in the balance sheet together with the earliest date of redemption or conversion.

In the matter of redemption of shares the auditor should confirm that the requirements of Section 80 have been complied with, viz.: (i) that the shares redeemed were fully paid up; (ii) that the shares were redeemed out of profit available for distribution as dividend or

out of proceeds of a fresh issue made for purpose of redemption; (iii) that the premium if any, on redemption, was provided for either out of the Securities

Premium Account or out of divisible profits of the company; and (iv) that if the shares were redeemed out of profits, otherwise available for dividend, an

amount equal to nominal amount of shares redeemed has been transferred to the Capital Redemption Reserve Account.

The Capital Redemption Reserve Account is treated as part of capital in the same way as Securities Premium Account. It cannot, therefore, be applied except for paying up unissued share capital of the company to be issued to members as fully paid up bonus shares.

(b) Redemption of irredeemable preference shares : Section 80-A inserted by the Companies (Amendment) Act, 1988 requires that irrespective of the fact anything contained in the terms of issue of any preference shares, every preference share issued before the commencement of this said Act, which is irredeemable shall be redeemed by the company within a period not exceeding 5 years from the date of due thereon in accordance with the terms of its issue and which had not been redeemed before such commencement be redeemed by the company on the date of which such share is due for redemption or within a period not exceeding 10 years from such commencement whichever is earlier.

Provided that where a company is not in a position to redeem any such share within the period aforesaid and to pay the dividend, if any, due thereon (such shares being hereinafter refer to as unredeemed preference shares), the company may with the consent of the Tribunal on a petition made by it in this behalf and not withstanding anything contained in this Act, issue further redeemable preference shares equal to the amounts due to (including the dividend due thereon) in respect of the unredeemed



preference shares and on the issue of such further redeemable preference shares, the unredeemed shares shall be deemed to have been redeemed.

8.5.11 Alteration of Share Capital: A company, having a share capital, if so authorised by its Articles, may alter its share capital by an ordinary resolution without confirmation of the Court, in any of the manners authorised by Section 94. Each alteration made should be noted in every copy of the Memorandum and Articles issued subsequent to date of the alteration (Section 40). The auditor’s duties in the circumstances shall be: (i) to verify that the alteration of capital is authorised by the Articles; (ii) to inspect the minutes of the shareholders authorising the alteration; (iii) to obtain Allotment Lists containing details of the new holdings of share or stock by each

member and to verify the same with the entries. (iv) to inspect the directors’ resolution in regard to allotment, consolidation, conversion or

sub-division passed pursuant to the resolution of the members; (v) to examine the cancelled share certificates, if any, and agree the same with the

counterfoils of new certificates issued; (iv) to see that the procedure, prescribed by the Articles in this regard, has been complied

with; (vii) to verify that the share capital account is correctly shown in the Balance Sheet; and (viii) to see that the necessary intimation to the Registrar contemplated by Section 95 has

been sent. 8.5.12Reduction of Capital (Section 100): The duties of the auditor in this regard are following: (i) Verifying that the meeting of the shareholder held to pass the special resolution was

properly convened; also that the proposal was circularised in advance among the members.

(ii) Confirming that the Articles of Association authorise reduction of capital. (iii) Examining the order of the Tribunal confirming the reduction and seeing that a copy of

the order and the minutes have been registered and filed with the Registrar of Companies.

(iv) Inspecting the Registrar’s Certificate as regards reduction of capital. (v) Vouching the journal entries recorded to reduce the capital and to write down the assets

by reference to the resolution of shareholders and other documentary evidence; also seeing that the requirements of Revised Schedule VI, Part I, have been complied with.

(vi) Confirming that the revaluation of assets have been properly disclosed in the Balance Sheet.



(vii) Verifying the adjustment made in the members’ accounts in the Register of Members and confirming that either the paid up amount shown on the old share certificates have been altered or new certificates have been issued in lieu of the old, and the old ones have been cancelled.

(viii) Confirming that the words “and reduced”, if required by the order of the Tribunal, have been added to the name of the company in the Balance Sheet.

(ix) Verifying that the Memorandum of Association of the company has been suitably altered. 8.5.13 (a) Verification of Forfeiture of Shares The auditor should : (i) ascertain that the Articles authorise the Board of Directors to forfeit shares and that the

power has been exercised by the Board in the best interest of the company; (ii) verify the amount of call or instalment of calls which was outstanding in respect of each

of the share forfeited; (iii) ascertain that the procedure in the Articles has been followed, viz., the notice given (14

days, according to Table A) to the defaulting shareholders, warning them that in the event of non-payment, by a specified date, of the amount of call already made on the shares standing in their names, together with interest, if any, the shares shall be forfeited; see that the proper resolutions of Directors, first as regards issuance of notice and afterwards in respect of forfeiture of shares; and

(iv) verify the entries recorded in the books of account consequent upon forfeiture of shares to confirm that the premium, if any, received on the issue of shares has not been transferred to the Forfeited Shares Account.

(b) Re-issue of Forfeited Shares: The auditor should:

(i) ascertain that the Board of Directors has the authority under the Articles to re-issue forfeited shares;

(ii) refer to the resolution of the Board of Directors, reallotting forfeited shares; (iii) vouch the amounts collected from person to whom the shares have been allotted and

verify the entries recorded from reallotment and see that the total amount received on the share, including that received prior to forfeiture, is not less than the par value; and

(iv) verify that computation of the amount of surplus resulting on the reissue of shares credited to the Capital Reserve Account; and

(v) where partly paid shares are forfeited for non-payment of call, and are re-issued as fully paid, the re-issue is treated as an allotment at a discount Biochemical and Synthetic Products Ltd. v. Registrar of Companies [(1962) 32 Comp. Case 654]. In such a case the provisions of Section 79 would require compliance.



8.6 Option on Share Capital Revised Schedule VI, Part I, requires disclosure of the particulars of any option on unissued share capital. An option on shares arises when a person has acquired a right under an agreement with the company to subscribe for share in the company if he so chooses. Such options generally arise under the following circumstances: (i) Under the promoter’s agreements, subsequently ratified by the company; (ii) Collaboration agreement; (iii) Loan agreements, debenture deeds (Refer to Section 81 of the Companies Act); (iv) Agreements to convert preference shares into equity shares; and (v) Other contracts, such as for supply of capital goods and/or merchandise.

8.7 Shares Transfer Audit Frequently, big companies require auditors to undertake audit of share transfer recorded by the company during the previous year. The object of such an audit is detection of mistakes in the registration of transfers which may have the effect of saddling the company with the liability for damages claimed by a shareholder on account of losses suffered in consequence thereof. The various steps which are considered necessary for carrying out such an audit are given below: 1. Ascertain whether notices were sent in every case to the transferors and, in case of joint-

holders, to each of the holders and the objections, if any, raised by them were taken into consideration before the transfers were registered.

2. Verify that in the case of partly paid shares, where the application for registration was made by the transferor, a notice invariably was sent to the transferee and the transfer was registered only when “no objection” had been received from him, within two weeks from service of notice on him [Section 110(2)].

3. Scrutinise Transfer forms, noting specially: (a) that in every case, the application for transfer was made in the prescribed form and

the prescribed authority (contemplated in Clause 1A of Section 108) had stamped the data on which it was presented to it; also that it was delivered to the company : (i) in case of ‘quoted’ shares before the Register of members were closed for the

first time subsequent to the transfer within twelve months from the date of presentation of the application to the prescribed authority whichever is later;

(ii) in any other case within two months from the date of such presentation; (b) that each transfer form is properly executed and bears the appropriate stamp duty; (c) that the name of the company is correctly stated on the form;



(d) that where the consideration for transfer appears to be inadequate, an enquiry was made by the company for ascertaining the reasons therefore. (This is not necessary if the Transfer Form bears the seal of the Collector of Stamps);

(e) that the alterations, if any, have been suitably initialed; and (f) that the name and address of the transferee have been recorded completely and

fully for purposes of correspondence. 4. Compare the signature of each transferor Form with his signature on the original

application for shares or on the Transfer Form (when shares were acquired on a transfer).

5. Ascertain that none of the transferees is disqualified from holding shares in the company. 6. Vouch the entries in the Share Transfer Journal by reference to the transfer forms, noting

in each case: (a) the name of transferor; (b) the name and address of the transferee; (c) the number and class of shares transferred; and (d) the distinctive number, if any, of the Share Transfer.

The Transfer Forms, after they have been checked, should be marked and the transferor’s share certificate cancelled to prevent the same being presented once again in support of another transfer. The distinctive number of shares, if any, on the shares certificate surrendered, should be verified by reference to the distinctive numbers recorded in the member’s Register.

In the case of a transfer registered in the absence of share certificate, the Letter of Indemnity or any other documentary evidence on the basis of which the transfer has been registered should be inspected.

7. Verify by reference to the Minute Book of the Board of Directors that all the transfer recorded in the Transfer Journal have been approved by the Board.

8. Confirm that every clerk who was entrusted with certain duties as regards the registration of transfers has initialed the documents verified by him.

9. Check the postings of distinctive numbers of shares transferred and the name of transferors and transferees into the Register of Members from the Share Transfer Journal.

10. Verify the particulars entered on counterfoils of shares certificate issued to the transferees in pursuance of the transfers registered by reference to Directors’ Minute Book.



In case where only a part of the shares have been transferred out of those mentioned in a Share Certificate, verify the issue of Balance Certificates to the transferor and confirm that the distinctive numbers of shares are correctly stated.

11. Verify that every duplicate Shares Certificate in lieu of the one lost or destroyed has been issued under the consent of the Board and on the conditions prescribed by the Board as regards production of evidence or execution of a Bond of Indemnity.

12. Ascertain, in cases where share certificates have been issued in replacement of old certificates, whether such a fact was entered on the face of the Certificate and also whether such a fact was entered on the stub of the counterfoil. Further, that in case of duplicate issued in lieu of the one lost or destroyed the under mentioned statement was entered on the duplicate Share Certificates and also stated on the stub of the counterfoil;

“Duplicate issued in lieu of Share Certificate No. ......” 13. Confirm that in either of the above mentioned two cases, the word “Duplicate” was

punched or stamped in bold letters across the face of the Share Certificate. 14. Trace the essential particulars from the counterfoils of the Share Certificate issued in lieu

of those lost or destroyed into both the Register of Members and in the Register of Renewed or Duplicate Certificates.

15. Confirm that the forms of share certificates are printed only under the authority of the Board and that a person, appointed by the Board, is in custody of all the unused stock of Share Certificates, as well as, the blocks and other equipment employed for their printing and that the person appointed is responsible for rendering an account thereof.

Note : The Depositories Act, 1996 requires that nothing contained in section 108 relating to transfer shall apply to transfer of security effected by the transferor and transferee both of whom are entered as beneficial owners in the records of a depository. Transmission - In the case of transmission of shares registered on the death or insolvency of a shareholder, the auditor should see: (a) that the procedure prescribed by the Articles in this regard has been strictly followed. (b) that in case of transmission on death of any executor the under mentioned documents

relating to his authority for such a transfer were examined by the company: (i) the grant of probate or succession certificate of Power of Attorney; and (ii) a request from the executor that the shares be entered in his name. Ascertain that

particulars of those documents are entered in a register specially maintained for the purpose; and

(c) that in the case of a transmission on insolvency, the order of the Court and any other document relevant thereto was examined; also refer to the Minutes of the Board of Directors approving the transmission.

Transmission of shares is generally governed by the provision contained in the Articles of



Association. Section 109A inserted by the Companies (Amendment) Act, 1999 provides for the facility of nomination. The nominee can either be individual or a company. Section 109B accordingly deals with registration of nominee shareholder, his rights and duties. General : (i) Reconcile the amount of transfer fees collected with total number of transfers lodged and

verify that the amounts of transfer fees have been accounted for. (ii) Reconcile the total number of shares of different classes issued by the company with the

total amount of capital issued and its sub-divisions by extracting balance of shares held by different members from the Member’s Register.

(iii) Confirm that, in case of transfer registration whereof was refused, the notice of refusal was sent to the transferor and the transferee within a period of two months (Section 111).

Further section 111A relating to rectification of register pursuant to the Depositories Act, 1996, contains relevant provision enabling the Tribunal to direct rectification of registers.

(iv) Confirm that, in case any shares held by Directors have been transferred by them, corresponding entries have been made in the Register of Director’s shareholding.

(v) Confirm that if a company has refused to register the transfer of or the transmission by operation of law the right to any shares within 2 months from the date on which the instrument of transfer or the intimation of such transmission was delivered to the company has sent notice of the refusal to the transferee and the transferor or the person giving intimation of such transmission as the case may be giving reasons for such refusal.

Note - Students should also refer to study material on Company Law for restrictions on transfer of shares. Further, it may be noted that sections 108A to 108G which intended to restrict acquisition and transfer of shares of or by companies shifted to the MRTP Act, 1969 have been transferred back to the Companies Act, 1956.

8.8 Verification of Issue of Bonus Shares Primarily, it should be ascertained whether the Articles permit capitalisation of profits; also whether the company had a sufficient number of unissued shares for allotment as bonus shares. In addition, the following steps should be taken: (a) Inspect the Minute book of Shareholders for the resolution authorising declaration of the

Bonus and Director’s Minute for the resolution appropriating profits for being applied in payment of shares to be allotted to shareholders as bonus shares;

(b) Trace the allotment of shares as per particulars contained in the Allotment Book or sheets into the Register of Members; and

(c) Confirm that all statutory requirements relevant to the issue of shares have been complied with, viz., the filing of the particulars of the bonus shares allotted with the



Registrar together with a copy of the resolution pursuant to which allotment has been made.

(d) Confirm that the issue of fully paid up bonus shares in pursuance of sub-section (3) of Section 205 has been kept in abeyance in respect of shares where any instrument of transfer of such shares has been delivered to the company for registration and the transfer of such shares has not been registered by the company as required by the provisions of section 206A of the Companies (Amendment) Act, 1988.

(e) Ensure that SEBI Guidelines relating to issue of bonus shares have been complied with. It has been stated earlier in this chapter that the balances in the Securities Premium Account and Capital Redemption Reserve Account, which are not available for distribution as dividend, can be utilised for allotment of fully paid bonus shares to the members and the balance in the above-mentioned account are usually first utilised for the purpose. All applications for bonus issue have to be signed by a person not below the rank of a Director together with a certificate indicating that the information furnished is true and correct and that all the data acquired in the application form and guidelines has been furnished.

8.9 Audit of Debentures 8.9.1 Allotment of Debentures: As in the case of shares, in the case of debentures also, it is necessary for the auditor to verify whether allotment was made having regard to the terms and conditions contained in the prospectus or the Statement in lieu of Prospectus. The Companies (Amendment) Act, 1988 has made it compulsory for every company intending to offer debentures to the public for subscription by the issue of a prospectus shall, before such issue, make an application to one or more recognised stock exchanges for permission for the debentures intending to be so offered to be dealt with in the stock exchange or each such stock exchange. The auditor also must ascertain that the directors, while issuing the debentures, had acted within their powers having regard to restrictions contained in Section 293 and any further restrictions which may be contained in the Articles of Association. Section 117A has now made it compulsory for filing of Debenture Trust Deed and creation of Debenture Redemption Reserve as per section 117B. It is specified that Debenture Trust Deed shall be open for inspection and can be made available on payment. The creation of Debenture Redemption Reserve is compulsory and it is further specified that this amount cannot be utilised for any other purpose except for redemption of debentures. Section 117B has also made it compulsory appointment of debenture trustees and specified their duties. The following are the steps that should be taken for such verification: (i) Verify that the Prospectus or the Statement in lieu of Prospectus had been duly filed with

the Registrar before the date of allotment.



(ii) Check the applications for debentures with the Application and Allotment Book to verify that the name, address of the applicants and the number of debentures applied for are correctly recorded.

(iii) Verify the allotment of debentures by reference to the Directors’ Minute Book. (iv) Vouch the amounts collected as are entered in the Cash Book with the counterfoils of

receipts issued to the applicants; also trace the amounts into the Application and Allotment Book.

(v) Check postings of allotments of debentures and the amounts received in respect thereof from the Application and Allotment Book, into the Debentures Register.

(vi) Verify the entries on the counterfoils of debentures issued with the Debentures Register. (vii) Extract balances in the Debentures Register in respect of amounts paid by the debenture

holders and agree their total with the balance in the Debentures Account in the General Ledger.

(viii) Examine a copy of the Debenture Trust Deed and note the conditions including creation of Debenture Redemption Reserve contained therein as to issue and repayment.

(ix) If the debentures are covered by a mortgage or charge, it should be verified that the charge has been correctly recorded in the Register of Mortgages and Charges and that it has also been registered with the Registrar of Companies. Further, that the charge is clearly disclosed in the Balance Sheet.

(x) Compliance with SEBI Guidelines should also be seen. Where debentures have been issued as fully paid up to vendors as a part of the purchase consideration, the contract in this regard should be referred to. 8.9.2 Issue of Debentures: Debentures may be issued at par or at a premium or at a discount. When these are issued at a premium, the amount of premium collected should be credited to Premium on Debenture Account. Since it would be a capital profit, the balance to the credit of this account subsequently should be transferred to the Capital Reserve Account. Where debentures have been issued at a discount, the amount of discount should be debited to Discount on Debenture Account so that the Debenture Account is credited with the full normal value of debentures. The balance in this account shall appear in the Balance Sheet until written off. Usually, the debentures will continue to stand in the books of the company. Where, however, the debentures are irredeemable, the amount of discount should be written off over a reasonable period of the time. 8.9.3 Redemption of Debentures at a Premium: The provision for the premium payable on redemption of debentures may be made in either of the following two ways: (i) The total amount of premium payable on redemption may be debited to an account

denominated as “Loss on Issue of Debentures” and credited to “Premium payable on



Redemption of Debentures Account or subsequently, the debit balance in the first mentioned account should be carried forward till it is written off, while the latter account would be closed on payment of the premium, on redemption of debentures.

(ii) The fact that the debentures will have to be redeemed at a premium may be disclosed by way of a note in the Balance Sheet along with the date of redemption and, as and when redemption is made, the amount paid as a premium should be debited to the Premium on Redemption of Debentures Accounts.

It may be noted that the second method is only a slight variation of the first in so far that, in the latter case, the premium paid on debentures is written off subsequent to the redemption. 8.9.4 Interest on Debentures: The payment of interest should be vouched with the acknowledgment of the debenture holders, endorsed warrants and in the case of bearer debentures, with the coupons surrendered. The total amount paid should be reconciled with the total amount due and payable with the amount of interest outstanding for payment. Interest on debentures is payable whether or not any profit is made. Therefore, a provision should be made unless it has been specially agreed with the debenture holders that interest in such a case would be waived by them. The interest paid on debentures, like that on other fixed loans, must be disclosed as a separate item in the Profit and Loss Account.

8.9.5 Re-issue of Redeemed Debentures: A company may issue debentures previously redeemed, either by reissuing the debentures or by issuing others in their place unless the Articles or a contract or resolution, recorded at a General Meeting, or terms of issue or some other act of the company expressly or impliedly manifest the intention that, on redemption, the debentures shall be cancelled. However, the re-issue of redeemed debentures or the issue of others in their place is treated as a new issue for the purpose of stamp duty and the rights and privileges attaching to the debentures that re-issued shall be the same as if the debentures had never been redeemed. On these considerations, it is necessary for the auditor to verify the re-issue of debentures in the same manner as those issued for the first time.

8.9.6 Re-issue as Collateral Security: Quite frequently debentures are issued as collateral security to creditors, bankers or other parties. The nominal value of the debentures deposited as security generally exceeds the amounts of the loan by 10 or 20 per cent. In such a case, the liability of the company being limited to the amount of the loan and not the face value of the debentures which have been issued, only as a collateral (secondary or additional) security, the amount of debentures is shown only in an inner column in the Balance Sheet. The collateral security becomes effective only in the event of default or the loan not being repaid when due. As soon as the loan is repaid, the debentures are automatically freed. The auditor should ensure that the existence of the collateral security is disclosed against the liability concerned in the Balance Sheet. He should also examine the loan agreement and confirm that the issue has been approved by the Board of Directors and other formalities, as regards registration of the charge, etc., with the Registrar of Companies have been carried out.



8.10 Audit of Dividends 8.10.1 Verification of Dividends: In Unit 1 of Chapter-2 of IPCC study material on Accounting, the various conditions subject to which profits earned by a company can be distributed as a dividend have been discussed. Therefore, only the procedure for the verification of payment of dividends is stated below: 1. Examine the company’s Memorandum and Articles of Association to ascertain the

dividend rights of different classes of shares. 2. Confirm that the profits appropriated for payment of dividend are distributable having

regard to the provisions contained in Section 205 and that the transfer to reserves is ac-cording to rules framed by the Central Government in this respect [vide Section 205(2A)]. It may be noted that now there exists a requirement to transfer profits to reserves upon 10 per cent of the profits of that year. However, if the rate of dividend does not exceed 10 per cent no such transfer is necessary. If the company proposes to pay the dividend out of past profit in reserves, see that either this is in accordance with the rules framed by the Central Government in this behalf or the consent of the Government has been obtained. [vide Section 205A(3)].

3. Inspect the shareholders’ Minute Book to verify the amount of dividend declared and confirm that the amount recommended by the directors.

4. If a separate bank account was opened for payment of dividends, check the transfer of the total amount of dividends payable from the Dividends Accounts.

5. Check the particulars of members as are entered in the Dividend Register or Dividend List by reference to the Register of Members, test check the calculation of the gross amount of dividend payable to each shareholder on the basis of the number of the shares held and the amount deductible for income-tax, if applicable. Verify the casts and crosscast of the different columns.

6. Check the amount of dividend paid with the dividend warrants surrendered. Reconcile the amount of dividend warrants outstanding with the balance in the Dividend Bank Account.

7. Examine the dividend warrants in respect of previous years, presented during the year for payment and verify that by their payment, any provision contained in the Articles in the matter of period of time during which amount of unclaimed dividend can be paid had not been contravened.

8. According to section 205A, as it is compulsory for a company to transfer the total amount of dividend which remains unpaid or unclaimed, within thirty days of the declaration of the dividend to a special bank account entitled “Unpaid Dividend Account of .... Company Limited/Company (Pvt.) Limited”. Such an account is to be opened only in a scheduled bank. The transfer must be made within 7 days from the date of expiry of thirty days.



The expression “dividend which remains unpaid” means any dividend the warrant in respect thereof has not been encashed or which has otherwise not been paid or claimed.

9. In case any money transferred to the unpaid dividend amount of a company remain unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred to Investor Education and Protection Fund established under section 205C of the Act.

8.10.2 Interim Dividends: A company may distribute part of its profits during the two annual general meetings. That means, a company may declare dividends before the close of the accounting year and finalisation of accounts. Regulation 86 of Table ‘A’ of Schedule I to the Companies Act, 1956, provided that the Board may from time to time pay to the members such interim dividend as appeared to be justified by the company. However, the definition of “dividend” has been amended by the Companies (Amendment) Act, 2000, whereby the interim dividend is part of dividends. With the further amendment of section 205, the interim dividend has been brought completely at par with “dividends” declared in the normal course since it has been specified that provisions contained in sections 205, 205A, 205C, 206, 206A and 207 shall also apply to any interim dividend. The amended provisions read as under: (1A) The Board of directors may declare interim dividend and the amount of dividend including

interim dividend shall be deposited in a separate bank account within five days from the date of declaration of such dividend.

(1B) The amount of dividend including interim dividend so deposited under sub-section (1A) shall be used for payment of interim dividend.

(1C) The provisions contained in sections 205, 205A, 205C, 206, 206A and 207 shall, as far as may be, also apply to any interim dividend.

Therefore, conditions and procedures laid down in section 205A, 205C, 206, 206A and 207 would have to be complied with while declaring interim dividends. Right to dividend, Right Shares and Bonus Shares to be held in abeyance pending registration of transfers of shares - Section 206A inserted by the Companies (Amendment) Act, [1988] requires that where any instrument of transfer of shares has been delivered to any company for registration and a transfer of such shares has not been registered by the company, the company shall transfer the dividend in relation to such shares to the special account referred to in section 205A. Further the company shall also keep in abeyance and offer to right shares and any issue of fully paid up bonus shares in respect of such shares which have not been registered by the company. However, the company may transfer the dividend in case it has been authorised by the registered holder of such shares in writing to pay such dividend to the transferee specified in such instrument of transfer. Penalty for failure to distribute dividend within the prescribed period, i.e., thirty day, has been made quite stiff by prescribing imprisonment for three year. Rupees one thousand everyday for which the default continues as also liability to pay simple interest at the rate of 18% p.a.



8.11 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 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.

Schedule VI (Revised) Ministry of Corporate Affairs [MCA] has on 3 March 2011, hosted on its website, the revised Schedule VI to the Companies Act, 1956 which deals with the Form of Balance sheet, Profit & * Adapted from Spicer and Pegler’s Practical Auditing by S.V. Ghatalia.



Loss Account and disclosures to be made therein. The revised Schedule VI has been framed as per the existing non-converged Indian Accounting Standards notified under the Companies (Accounting Standards), Rules, 2006 and has no connection with the converged Indian Accounting Standards. The revised Schedule VI will apply to all the companies uniformly for the financial statements to be prepared for the financial year 2010-11 and onwards. A ready referencer based on Schedule VI (Revised) is prepared for reference. A. General Instructions 1. Compliance with the requirements of the Companies Act including Accounting Standards

to have precedence over the requirements of the Schedule VI; 2. Disclosure requirements specified in Part I and Part II of this Schedule are in addition to

the disclosure requirements of the Companies Act including Accounting Standards; 3. Notes to accounts to contain information in addition to that presented in the Financial

Statements and shall provide where required: (a) narrative descriptions or disaggregation of items recognized in those statements; and (b) information about items that do not qualify for recognition in those statements;

4. Each item on the face of the Balance Sheet and Statement of Profit and Loss shall be cross referenced to any related information in the notes to accounts;

5. The corresponding amounts for the immediately preceding year to be shown for all items in financial statements including notes except for first financial statements.

6. Rounding Off Requirements: Depending upon the turnover of the company, the figures appearing in the Financial Statements may be rounded off as below: Turnover Rounding off

(i) < ` 100 Crore To the nearest hundreds, thousands, lakhs or millions, or decimals thereof.

(ii) >= ` 100 Crore To the nearest, lakhs, millions or crores, or decimals thereof.

Once a unit of measurement is used, it should be used uniformly in the Financial Statements.

B. Balance Sheet I. Equity and Liabilities 1) Shareholders' Funds



(a) Share Capital 1. Each class of share capital to be shown - Equity Share Capital and Preference Share

Capital (different classes to be treated differently); 2. Following details to be given for each class of share capital:

- Number and Amount of Authorised share capital - Issued share capital - Subscribed and fully paid share capital - Subscribed share capital but not fully paid - Par value per share shown

3. Reconciliation of the Opening and Closing Outstanding number of shares to be shown; 4. Rights, Preferences and restrictions attaching to each class of shares to be shown

including restrictions on Dividends distribution and Repayment of Capital; 5. Shares (in aggregate) of each class held by:

- Its Holding Company - Ultimate Holding Company - Subsidiaries - Associates of the Holding Company - Associates of the Ultimate Holding Company

6. Shareholders having more than 5% of the shares to be shown, specifying the number of shares;

7. Terms and amount of: - Shares reserved for issue under option of control - Commitments for the sale of shares/disinvestments.

8. For the preceding five years: - Aggregate number and class of shares allotted as fully paid up pursuant to

contact(s) without payment being received in cash - Aggregate number and class of shares allotted as fully paid Bonus Shares - Aggregate number and class of shares bought back

9. Terms of conversion of securities into equity/preference share capital with earliest date of conversion being shown in descending order starting from the farthest such date;

10. Calls unpaid shown as: - by directors and officers



- by others 11. Forfeited Shares to be shown (with amount originally paid up) (b) Reserves and Surplus

1. Classification of Reserves and Surplus into: - Capital reserves - Capital Redemption Reserves - Securities premium reserves - Debenture Redemption Reserve - Revaluation Reserve - Share Option Outstanding Account - Other reserves, specifying nature, purpose and amount of each - Surplus, showing allocations and appropriations such as dividend, bonus shares and transfer to/ from reserves

2. Additions and Deductions since last Balance Sheet date to be shown under each of the specified heads;

3. Fund: The word `fund' in connection with reserve is to be used only where such Reserve is specifically represented by earmarked investments;

4. Negative Balance of Profit and Loss Account, if any, to be shown under the "Surplus" head as a negative figure.

(c) Money Received Against Share Warrants 2) SHARE APPLICATION MONEY PENDING ALLOTMENT (For Clarification Refer Note 2 at the end) 3) NON-CURRENT LIABILITIES (For clarification Refer Note 3 at the end) (a) Long-term Borrowings

1. Classification of Long term Borrowings into: - Bonds / Debentures - Term Loans: a) From Banks b) From Other Parties - Deferred Payment liabilities - Deposits shown - Loans and advances from related parties



- Long Term maturities of finance lease obligations - Other Loans and advances, specifying nature, shown

2. Long term Borrowings to be sub-classified as: - Secured (nature of the security to be specified) - Unsecured

3. Aggregate of loans guaranteed by the following should be disclosed: - Directors - Others

4. Rate of interest and terms of redemption/ conversion of bonds / debentures (to be stated in descending order of maturity of redemption/ conversion) (For Clarification Refer Note 1 at the end);

5. Particulars of the redeemed bonds which can be reissued to be shown; 6. Terms of repayment of the following to be shown:

- Term loans - Other Loans

7. Period and amount of continuing default in the repayment of loans and interest shown separately in each case

(b) Deferred Tax Liabilities (Net) (c) Other Long-term Liabilities

1. Classification of other long term liabilities as: - Trade payables (For clarification Refer Note 6 at the end) - Others

(d) Long-Term Provisions 1. Classification of Provisions as:

- Provision for employee benefits - Others (Specifying nature)

4) CURRENT LIABILITIES (For clarification Refer Note 3 at the end) (a) Short-Term Borrowings

1. Classification of borrowings as: - Loans repayable on demand a) From banks



b) From other parties - Loans and Advances from related parties - Deposits - Other Loans and Advances, specifying nature

2. Further sub-classification of the borrowings into: - Secured (nature of the security to be specified) - Unsecured

3. Aggregate of loans guaranteed by the following should be disclosed: - Directors - Others

4. Period and amount of continuing default in the Repayment of Loans and Interest shown separately in each case

(b) Trade Payables (For clarification Refer Note 6 at the end) (c) Other Current Liabilities

1. Classification of other current liabilities into: - Current maturities of Long term debt - Current maturities of finance lease obligations - Interest accrued but not due on borrowings - Interest accrued and due on borrowings - Income received in advance - Unpaid Dividends - Application money received for allotment of securities and due for refund and interest accrued thereon (For clarification Refer Note 2 at the end)

- Unpaid matured deposits and interests accrued thereon - Unpaid matured debentures and interest accrued thereon - Other payables, specifying nature

(d) Short- term Provisions 1. Classification of short term provisions into:

- Provision for employee benefits - Others, specifying nature



II. Assets 1) NON-CURRENT ASSETS (For clarification Refer Note 4 at the end) (a) Fixed Assets (i) Tangible Assets

1. Classification of Tangible Assets into: - Land - Buildings - Plant and Equipment - Furniture and fixtures - Vehicles - Office Equipments - Others (specifying nature)

2. Asset under lease shall be shown separately under each class of asset 3. Reconciliation of gross and net carrying amounts of each class of assets at the

beginning and end of the reporting period showing: - Additions - Disposals - Acquisitions through business combinations - Other Adjustments - Depreciation - Impairment losses/reversals

4. Where a capital reduction scheme or a revaluation of assets has taken place, every balance sheet subsequent to the reduction or revaluation shall show the reduced/increased figures, the date of the reduction/increase and the amount of reduction / increase for the first 5 years subsequent to the reduction/ revaluation.

(ii) Intangible Assets 1. Classification of Intangible Assets into:

- Goodwill - Brands/trademarks - Computer software - Mastheads and publishing titles - Mining rights



- Copyrights and patents and other Intellectual property rights, services and operating rights

- Recipes, formulae, models, designs and prototypes - Licenses and franchises - Others (specifying nature)

2. Reconciliation of gross and net carrying amounts of each class of assets at the beginning and end of the reporting period showing: - Additions - Disposals - Acquisitions through business combinations - Other Adjustments - Amortization - Impairment losses/reversals

3. Where a capital reduction scheme or a revaluation of assets has taken place, every balance sheet subsequent to the reduction or revaluation shall show the reduced/increased figures, the date of the reduction/increase and the amount of reduction / increase for the first 5 years subsequent to the reduction/ revaluation.

(iii) Capital Work In Progress (iv) Intangible Assets Under Development (b) Non-Current Investments

1. Classification of Non-current Investments into: - Trade investments - Other Investments

2. For each of above (i.e., trade & other investment), a sub-classification into: - Investments in Property - Investments in Equity instruments - Investments in Preference shares - Investments in Government or trust securities - Investments in Debentures or Bonds - Investments in Mutual funds - Investments in Partnership firms - Others (specifying nature)



3. In case of investments in bodies corporate, the following additional disclosures shall be made under each classification: - Names of the body corporate (indicating whether they are associates, joint ventures,

subsidiaries or controlled special purpose entities) - Nature and extent of the investments - Partly paid investments to be separately shown.

4. In case of investments in partnership firms, the following additional disclosures shall be made under each classification: - Names of the firms and their respective partners - Total capital and the profit sharing ratio

5. Investments carried at other than costs to be separately shown specifying basis of valuation

6. Following shall be additionally disclosed: - Aggregate book value of Quoted Investments and market value thereof - Aggregate amount of unquoted investments - Aggregate provision for diminution in value of investments

(c) Deferred Tax Asset (Net) (d) Long Term Loans and Advances

1. Loans and advances classified into: - Capital Advances - Security deposits - Loans and advances to related parties (giving details thereof) - Other loans and advances (specifying nature)

2. Sub-classification of above as: - Secured, considered good - Unsecured, considered good - Doubtful

3. Allowance for bad and doubtful loans and advances disclosed under relevant heads.

4. Loans and Advances due from: - Directors or other officers of the company - Amounts due by firms in which any director is a partner



- Amounts due by private companies in which any director is a director or member, to be aggregated and separately stated

(e) Other Non-Current Assets 1. Other non-current assets classified into:

- Long term trade receivables (including deferred credits) (For clarification Refer Note 5 at the end)

- Others (specifying nature) 2. Sub-classification of Long term trade receivables into:

- Secured, considered good - Unsecured, considered good - Doubtful

3. Allowance for bad and doubtful debts disclosed under relevant heads: 4. Debts due from:

- Directors or other officers of the company - Amounts due by firms in which any director is a partner - Amounts due by private companies in which any director is a director or member - To be aggregated and separately stated

2) CURRENT ASSETS (For clarification Refer Note 4 at the end) (a) Current Investments

1. Classification of Current Investments into: - Investments in Equity instruments - Investments in Preference shares - Investments in Government or trust securities - Investments in Debentures or Bonds - Investments in Mutual funds - Investments in Partnership firms - Others (specifying nature)

2. In case of investments in bodies corporate, the following additional disclosures shall be made under each classification:

- Names of the body corporate (indicating whether they are associates, joint ventures, subsidiaries or controlled special purpose entities) - Nature and extent of the investments - Partly paid investments to be separately shown



3. In case of investments in partnership firms, the following additional disclosures shall be made under each classification: - Names of the firms and their respective partners - Total capital and the profit sharing ratio

4. The basis of valuation of individual investments 5. Following shall be additionally disclosed:

- Aggregate book value of Quoted Investments and market value thereof - Aggregate amount of unquoted investments - Aggregate provision for diminution in value of investments

(b) Inventories 1. Classification of Inventories into:

- Raw materials - Work in progress - Finished goods - Stock in trade (in respect of goods acquired for trading) - Stores and spares - Loose tools - Others (specifying nature)

2. Goods-in-transit to be disclosed under relevant sub-head; 3. Mode of Valuation to be stated

(c) Trade Receivables (For clarification Refer Note 5 at the end) 1. Aggregate amount of outstanding trade receivables exceeding 6 months

shown separately 2. Sub-classification of Trade Receivables:

- Secured, considered good - Unsecured, considered good - Doubtful

3. Allowance for bad and doubtful debts disclosed under relevant heads: 4. Debts due from:




(d) Cash and Cash Equivalents 1. Classification of Cash and Cash Equivalents into:

- Balances with Bank - Cheques, Drafts on hand - Cash on hand - Others (specifying nature)

2. The following shall be shown separately: - Earmarked balances with bank. - Balances with bank held as margin money or security against borrowing, guarantees and other commitments. - Repatriation restrictions, if any, in respect of cash and bank balances. - Bank deposits with more than 12 months maturity.

(e) Short Term Loans and Advances 1. Classification of Loans and Advances:

- Loans and Advances to Related parties (giving details thereof) - Others (specifying nature)

2. Sub-classification of Loans and Advances: - Secured, considered good - Unsecured, considered good - Doubtful

3. Allowance for bad and doubtful debts disclosed under relevant heads; 4. Debts due from:


(f) Other Current Assets 1. All inclusive heading which incorporates current assets that do not fit in other asset

categories, specifying nature of all items. III. Contingent Liabilities and Commitments

The following shall be disclosed to the extent not provided for: 1. Classification of Contingent liabilities:



- Claims against the company not acknowledged as debts - Guarantees - Other money for which the company is contingently liable.

2. Classification of Commitments into: - Estimated amount of contracts remaining to be executed on capital account and not provided for - Uncalled liability on shares and other investments partly paid - Other commitments (specifying nature)

C. Statement of Profit and Loss The following shall be disclosed separately by way of notes to accounts: I. Revenue from Operations

1. In respect of Company other than Finance Company, revenue shall be disclosed separately in notes from: - Sale of products - Sale of services - Other Operating revenues - Less: Excise Duty

2. In respect of Finance Company, revenue shall be disclosed separately in notes from: - Interest - Other Financial Services

3. Gross Income/ Sales to be shown under broad heads (For clarification Refer Note 7 at the end)

II. Other Income 1. Classification of Other Income into:

- Interest Income (except for a finance company) - Dividend Income - Net gain / loss on sale of Investments - Other Non-Operating Income (net of expenses directly attributable)

2. Dividend from foreign company 3. Adjustments to the carrying amount of investments



4. Net gain from foreign currency transactions and translations other than those considered as Finance Costs

5. Any item of revenue which exceed 1 % of revenue from operations or ` 1 lakh, whichever is higher

III. Total Revenue (I + II) IV. Expenses: (a) Cost of Materials Consumed

1. In case of Manufacturing Companies: - Raw Materials under broad heads - Goods purchased under broad heads (For clarification Refer Note 7 at the end)

(b) Purchases of Stock-in-trade 1. In case of Trading Companies:

- Purchases of goods traded in by Company under broad heads (For clarification Refer Note 7 at the end)

(c) Changes in Inventories of Finished Goods, Work-in-progress and Stock-in-trade: - Work in progress to be shown under broad heads (For clarification Refer Note 7 at the end)

(d) Employee Benefits Expense 1. The following shall be shown separately:

- Salaries and Wages - Contribution to Provident and Other Funds - Expenses on Employee Stock Option Scheme (ESOP) and Employee Stock Purchase Plan (ESPP) - Staff Welfare Expenses

(e) Finance Costs 1. Classification of Finance Cost into:

- Interest Expense - Other Borrowing Cost - Net gain/ loss from foreign currency transactions and translations

(f) Depreciation and amortization expense



(g) Other Expenses 1. Any item of expenditure which exceed 1 % of revenue from operations or Rs.1

lakh, whichever is higher 2. Adjustments to the carrying amount of investments 3. Net loss from foreign currency transactions and translations other than those

considered as Finance Costs 4. Payment to the Auditors:

- As Auditors - For Taxation matters - For Company Law matters - For Management services - For other services - For Reimbursement of expenses

5. Prior Period Items 6. Following expenditures to be shown separately:

- Consumption of stores and spare parts - Power and Fuel - Rent - Repairs to Buildings - Repairs to Machinery - Insurance - Rates and Taxes, excluding Tax on Income - Miscellaneous Expenses

7. Provision for losses of subsidiary companies 8. Amounts set aside/ withdrawn to/ from reserves:

- The aggregate, if material, of any amounts set aside or proposed to be set aside, to reserve, but not including provisions made to meet any specific liability, contingency or commitment known to exist at the date as to which the balance-sheet is made up.

- The aggregate, if material, of any amounts withdrawn from such reserves. 9. Amounts set aside/ withdrawn to/ from provisions:

- The aggregate, if material, of the amounts set aside to provisions made for meeting specific liabilities, contingencies or commitments.



- The aggregate, if material, of the amounts withdrawn from such provisions, as no longer required.

V. Profit before exceptional and extraordinary items and tax VI. Exceptional Items (Details of such items to be given) VII. Profit Before Extraordinary Items And Tax VIII. Extraordinary Items (Details of such items to be given) IX. Profit before tax X. Tax Expense:

1. To be classified into Current and Deferred Tax (in the face of Profit and Loss Account)

XI. Profit / (Loss) For The Period From Continuing Operations XII. Profit / (Loss) From Discontinuing Operations XIII. Tax Expense Of Discontinuing Operations XIV. Profit / (Loss) From Discontinuing Operations (After Tax) XV. Profit / (Loss) For The Period XVI. Earnings per equity share:

1. Basic 2. Diluted

D. Additional information 1. The amount of dividends proposed to be distributed to equity and preference

shareholders for the period and the related amount per share to be shown. 2. Arrears of fixed cumulative dividend on preference shares to be shown separately. 3. In respect of issue of securities for specific purpose, where whole or part of such

amount has not been used for specified purpose at Balance Sheet date, indication by way of note of how such unutilised amount has been utilised.

4. In opinion of Board, if any asset other than Fixed Assets and Non-Current assets do not have value on realisation in ordinary course at least equal to the amount at which they are stated, the fact that the Board is at that opinion shall be stated.

5. Value of imports during the year calculated on CIF basis have been shown by way of note in respect of : - Raw materials - Components and spare parts - Capital goods



6. Expenditure in foreign currency on the following during the year: - Royalty - Know-how - Professional and consultancy fees - Interest - Other matters

7. Value of indigenous and imported materials: - Total value of all imported raw materials, spare parts and components consumed during the financial year - Total value of all indigenous raw materials, spare parts and components consumed during the financial year - The percentage of each to total consumption

8. Dividends to non-residents: - Amount remitted during the year in foreign currencies on account of dividend

dividends specifically mentioning the total number of non-resident shareholders - Number of shares held by them on which dividends were due and the year to

which the dividend is related 9. Classification of Foreign Exchange Earnings:

- Export of goods calculated on FOB basis - Royalty, know-how, professional and consultancy fees - Interest and dividend - Other income (indicating nature)

E. Notes 1. Where Bonds/ Debentures are redeemable by instalments, the date of maturity for

this purpose must be reckoned as the date on which the first instalment becomes due.

2. Share Application Money: (i) The terms and conditions and number of shares proposed to be issued,

premium, in any, and the period before which shares shall be allotted shall be disclosed.

(ii) It shall be disclosed whether the company has sufficient authorised capital to cover the share capital amount.

(iii) The period for which the share application money has been pending beyond the period for allotment shall be disclosed.



(iv) Share application money not exceeding the issued share capital and to the extent not refundable shall be shown under equity and share application money to the extent refundable i.e., the amount in excess of subscription or in case, the requirements of minimum subscription are not net, it shall be separately shown under 'Other Current Liabilities’.

3. A liability shall be classified as current when it satisfies any of the following criteria: (a) it is expected to be settled in the company's normal operating cycle; (b) it is held primarily for the purpose of being traded; (c) it is due to be settled within twelve months after the reporting date; or (d) the company does not have an unconditional right to defer settlement of the

liability for at least twelve months after the reporting date. Terms of a liability that could at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

All other liabilities shall be classified as non- current. 4. An asset shall be classified as current when it satisfies any of the following criteria:

(a) it is expected to be realized in, or is intended for sale or consumption in, the company’s normal operating cycle;

(b) it is held primarily for the purpose of being traded; (c) it is expected to be realized within twelve months after the reporting date; or (d) it is cash or cash equivalent unless it is restricted from being exchanged or

used to settle a liability for at least twelve months after the reporting date. All other assets shall be classified as non-current.

5. A receivable shall be classified as a ‘trade receivable’ if it is in respect of the amount due on account of goods sold or services rendered in the normal course of business.

6. A payable shall be classified as a ‘trade payable’ if it is in respect of the amount due on account of goods purchased or services received in the normal course of business.

7. “Broad heads” shall be decided taking into account the concept of materiality and presentation of true and fair view of financial statements.

In case of a company which falls under more than one of the three categories i.e. Manufacturing, trading and servicing companies it shall be sufficient compliance with the requirements herein if purchase, sales and consumption of raw materials and gross income from services rendered is shown under broad heads.


Documents

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