Rathore Institute Auditing & Assurance CA.

Nitin Gupta

RATHORE INSTITUTE
[Best Gate way to clear CA-IPC (GR-2)]
Strategic Management (in 18 Lectures) - Mr. P.S. Rathore
Information Technology (in 14 Lectures) - CA. Atul Gupta
Auditing & Assurance (in 24 Lectures)- CA. Nitin Gupta

Combined fee of SM, IT & Audit- Rs. 8,000/- only

Get 100% Satisfaction in much less time & fee.

PH: 011-43073355, 8527336600
 Rathore Institute Auditing & Assurance CA. Nitin Gupta

Books of Accounts- Section 209

Proper books of account with regard to
All sum of money received & expended
All sales & purchases of goods
The assets & liabilities of the Co.
In case of Co. Engaged in Production,
Processing, Manufacturing or Mining
activities- Particulars relating to utilisation of
Material, Labour or other item of cost.
 Shall be opened for inspection by
directors during business hours by
Directors of the Co.
 Books of account will be prepared in
accordance with accrual basis & double
entry system.
Inspection of Books of Accounts and other books
Section 209 A
By Registrar By officers authorised by SEBI By officers authorised by CG
 Can be made without giving any previous notice.
 Every officer, director, and employee must produce all books of account to
the person making inspection.
 Inspecting person can make copies of books of account and put any mark of
identification.
Retention time period- Section-209 (4A)

8 Years immediately preceding the current year

Location

Registered Branch Office Any other place

Office
 All the books of a/c in respect of branch
 Branch will prepare up-to –date summarised return
 Maximum interval between 2 return- 3 Months
 Return will be sent- To Reg. Office or Other place
 Other than Reg. Office
 In India
 Board Resolution (BR) is required
 Notice to RoC within 7 days of BR.
Rathore Institute Auditing & Assurance CA. Nitin Gupta

Form and Content of BS & Statement of P/L [Sec-211]

 Both should comply with AS. Section- 211 (3A)

Balance Sheet Statement of P&L
 Any departure with AS should be clearly disclosed Section-
211 (3B)
Shall give T&F view of State of Nature of departure, Reason for departure, impact on FS
Shall give T&F view of
the Co‟s affairs  AS mean, AS recommended by ICAI, prescribed by CG after Profit or loss
consultation with NACAS.
 Shall include any notes thereon or document annexed there to

Shall comply with Part-I of The CG may by notification in official Gazette, exempt any class Shall comply with Part-II of
Schedule VI of Co from compliance with any requirement in Schedule VI Schedule VI

Annual Account & Balance Sheet- Section 210

 The Board shall lay before the Co. at every AGM a B/S as at end of year and Statement of P&L for the period
 In case of a company not carrying on business for profit, an income and expenditure account shall be made
 The period to which the accounts relate is referred as „Financial Year’ and it may be less or more than a calendar year, but it
shall not exceed 15 months. However, it may extend to 18 months where a special permission has been granted in that behalf
by the ROC.
Rathore Institute Auditing & Assurance
Board’s Report- Section 217
A report by BoD which is attached to B/S
With respect to Other Disclosures
 State of Company’s affairs 1- Disclose any changes
 Profits proposed to be  Nature of Co Business
transferred to reserve  Co . Subsidiary or in the
 Dividend recommended by nature of business carried on
BoD by them
 Material changes subsequent  Classes of business in which
to close of FY Company has an interest
 Conservation of energy,
2- Reason for failure to
technology absorption,
complete the buy back within
foreign exchange earnings
the specified time limit
and outgo
3- Give full information and
explanations for every
reservation, adverse comment,
qualification in auditor’s
report.
CA. Nitin Gupta
Director‟s Responsibility Statement Signing of report
“AS AP Pass the Sufficient & Proper J/E on By Chairman (If he
the basis of Materiality & Going Concern” is authorised)
1) AS had been followed If not authorised
2) Selection and consistent application of
Accounting Policies (AP). By such number of
3) Proper & sufficient care for the directors as are
maintenance of adequate accounting required to sign B/S
and statement of P/L
records.
4) Judgements & Estimates (J/E) that are
reasonable and prudent.
5) Proper explanation relating to material
departure.
6) Annual accounts as per going concern basis.
 Rathore Institute Auditing & Assurance CA. Nitin Gupta

Shares issued for Cash

Application Stage Allotment Stage Call Stage

 App. Money- it should be at least 5% of FV (As per
SEBI 25% of issue price)
 Minimum Subscription- Ascertain that Minimum
subscription of 90% has been received.
 Examine J/E-
Bank A/c Dr
To Share Application A/c
To Bank A/c (Refund)
 Check the entries in Cash Book
 Check the entries in Application Book
 Examine the Director’s minutes  Examine Director’s resolution making the call
book to verify approval of allotment  Vouch amount received with counterfoils of
 Check entries in allotment book receipts
 Examine cash book, bank statement.  Verify J/E, Cash book, Bank statement.
 Ascertain whether Share certificate  Note the calls in arrears and ensure proper
have been delivered within 3 months disclosure. (Deduction from called up capital in
of allotment. B/S)
 Examine J/E  Note the calls in advances and ensure their
proper disclosure. (U/H Current Liabilities)
Share Application A/c Dr
 Examine interest paid on calls in advance and
To Share Capital A/c
interest received in calls in arrears.

Issue of shares for consideration other than cash

When Shares are issued to

 Vendors towards payment of Purchase Consideration.
 Promoters
 Underwriters for payment of Underwriting Commission.

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

Alteration, Reduction & Issue of Bonus Shares

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

Buy Back of Shares/Purchase of Own Securities [Sec-77A]

Mode of Buy Back
Other Obligation
Condition of Buy Back Sources of Buy Back
 Free Reserve  From existing SH on Time limit to complete Buy back-
 Authorised by AoA  Security Premium a proportionate basis Within 12 Months from the date of passing resolution
 Shares should be fully  Fresh issue of shares  From open market
paid up Shares should be physically destroyed within-
 From odd lot
Within 7 days from completion of Buy Back
Limit of Buy Back  ESOP & Sweat equity
Filing of declaration of solvency to RoC& SEBI (in
25% of Total paid up Capital & Reserve
case of listed Co.)- in Form- 4A
If it is up to 10%- Only BR is required.
Return of Buy Back with RoC and SEBI within 30
If is more than 10%- SR is required in GM days from completion of Buy Back- in Form -4C

After Buy back Debt Equity Ratio- not more than 2:1
(Unless higher ratio is permitted by CG)
Option on Unissued Share Capital
Meaning- It refers to right of persons who under an agreement with
the company have the option to subscribe for shares of the company.
Example- Loan Agreements, Convertible Debentures, Convertible
Preference Shares, ESOP, To vendor under any agreement of
purchase of Goods/Assets.
If this option is to be applied on Non convertible portion- SR+
Approval of CG
Payment of Interest out of Capital (Section-208)
Condition: Co has raised money by issue of shares to meet the cost of
works or building or plant which cannot be profitable for a long period
Procedure-
Authorisation by AoA or SR in GM
Previous Sanction of CG
Only for such period as may be determined by CG
Rate of Interest 4% Pa or a rate notified by CG
Accounting treatment of Interest- Such interest shall be capitalised

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

Share Transfer Audit

Dated, signed, witnessed
Application of Share transfer by Transferee
Amount of consideration in
figure & words Share Transmission Audit
In Form -7B
Name & address of transferee Meaning of Share Transmission:
Prescribed authority will stamped the date on which it Accompanied by share It covers those cases where a person
was presented certificate or letter of allotment
acquires interest in shares by
operation of law, without any
Ascertain whether proper notice was sent by Co to transferor or Joint holder (if any) voluntary Act. According to
Companies Act, a company may
register as shareholder any person to
Objection if any raised by transferor or Joint holder was considered before transfer is
whom the right to any share has
registered
passed by transmission, operation of
law. For example- Death, Bankruptcy
Test check some entries in share transfer with reference to minutes of meeting of BoD
Audit Procedures-

Check the relevant document (Death

In case only a part of shares have been transferred auditor should check that correct
certificate, copy of order of the court)
balance certificates have been issued to transferor
Examine the minutes of the meeting of
the BoD in which transmissions were
For transfer of share of shares held by directors, verify appropriate entries have been approved.
made in the register of director’s shareholding
Examine share transfer register.

If transfer is denied- notice of refusal to transferor & transferee with in specified time.
Rathore Institute Auditing & Assurance CA. Nitin Gupta

Audit of Dividend
 First of all, dividend is recommended by the Board (Sec. 217).
 The members in the AGM may declare the dividend by passing OR. Declaration of dividend at an AGM is an item of ordinary
business (Sec. 173).
 The members may reduce the rate or amount recommended by the Board, but they cannot increase it.
 Examine that dividend has been declared only out of:
 Profits of current FY
 Undistributed profits of previous FY(s)
 Moneys provided by CG or SG
 Dividend can also be paid out of Capital profits subject to following condition:
 It should be authorised by AoA.
 Such profits are realized in cash
 Profits remains even after revaluation of assets & liabilities.
 Ensure compliance with following:
 Profits for every FY shall be arrived at after providing for depreciation.
 CG may allow a company to declare dividend for any FY without providing for depreciation.
 If in any previous FY, depreciation has not been provided, it shall be provided before declaring dividend
 Companies (Transfer of Profits to Reserves) Rules, 1975. Before declaration or payment of dividend, profits shall be compulsorily
transferred to reserves at the following rates:
Rate of proposed dividend Minimum amount to be transferred to
Reserves
Not exceeding 10% Nil
Exceeding 10% but not exceeding 12.5% 2.5% of current profits
Exceeding 12.5% but not exceeding 15% 5% of current profits
Exceeding 15% but not exceeding 20% 7.5% of current profits
Exceeding 20% 10% of current profits

 Dividend shall be only payable in cash or by cheque

 Examine whether it has been deposited in a separate bank account within 5 days declaration of dividend. Check bank statement w.r.t.
same.
Rathore Institute Auditing & Assurance CA. Nitin Gupta

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