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Advanced Auditing

Notes 5. A copy of the letter of engagement is also sent to the company for ……………….. as an
acknowledgement of agreement as to terms.

9.3 Audit of Share Capital

The audit of share capital assumes significance particularly in, the first year itself since a company
raises share capital immediately after incorporation and subsequently, in the later years when
it decides to further raise its share capital. It the intervening years, the auditor may perform
routine checks to verify authorized, issued and subscribed share capital.
An issue of share capital involves three stages, namely, the application stage, the allotment
stage and the call stage. However, a company is also required to comply with a number of
requirements before actually going for public subscription. In this context, the auditor should:

1. Study the conditions of issue contained in the Memorandum and Articles of Association,
Prospectus or Statement in lieu of Prospectus, and examine whether all of them have fully
been complied with.

2. Verify that the first allotment had not been made until the amount of minimum subscription
stated in the Prospectus had been subscribed and that until then the amount received was
kept deposited in a scheduled bank.
3. Confirm that the brokerage and underwriting commission had been paid only at the rates
authorized by the prospectus or the Articles of Association.
4. Verify that preliminary contracts, if any, for purchase of a property or business, for creating
an organization for management of the company, etc. had been carried out strictly according
to the terms stated in the prospectus.
5. Ensure that the company intending to offer shares to the public for subscription by the,
issue of a prospectus had, 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
exchanges or each exchange.
6. Confirm that the guidelines issued by the Securities and Exchange Board of India (SEBI)
had been duly followed.

Having taken the above steps, the auditor may specifically examine
(i) Shares issued for cash and
(ii) Shares issued for consideration other than cash, if any.

9.3.1 Shares Issued for Cash

As stated earlier, there are three stages in the issue of shares for cash viz., application stage,
allotment stage and calls stage. Each stage has its own peculiarities and involves the following
steps for their audit.

Application Stage

1. Check entries in the Application and Allotment Sheets with the original applications;
2. Check entries in the Application and the Allotment sheets as regards deposits of /honey,
received with the applications, with those in the Cash Book;
3. Check that the application money was deposited ‘in a scheduled bank till the grant of the
‘Certificate to Commence Business’;

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