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Unit 9: Audit of Limited Companies

11. If there is any premium on …………………………. that was provided from either out of Notes
the Share Premium Account or out of divisible profits of the company.

9.6 Issue of Bonus Shares

A company, subject to certain conditions, may decide to capitalize its undistributed profits or
reserves by issue of fully paid-up bonus shares. Audit procedure in this regard is as under:
1. Ascertain whether the articles of association permit capitalization of profits.

2. Inspect resolution passed by the board of directors and shareholders authorizing the issue
of bonus shares.
3. Confirm that all statutory requirements relevant to the issue of shares have been complied
with.
4. Ensure that SEBI Guidelines in respect of listed companies relating to issue of bonus shares
have been complied with.

5. Examine the sources from which bonus shares have been issued i.e. general reserves,
capital redemption reserve, share premium account, etc.

Notes It may be noted that bonus shares cannot be issued out of revaluation reserve.

9.6.1 Alteration of Share Capital

Section 94 of the Act empowers a company having share capital to alter its share capita by
passing an ordinary resolution’ without confirmation of the Court. Alteration of share capital
may involve (i) increase of share capital by issuing new shares; (ii) consolidate and divide share
capital into shares of larger amount; (iii) convert fully-paid up shares into stock or vice versa;
(iv) sub-divide its shares into smaller amount; or (v) cancel its share capital not called up.
Whatever the form the audit procedure to be followed is as under:
1. Verify that the alteration of capital is authorized by the Articles.

2. Inspect the minutes of the shareholders meeting authorizing the alteration.
3. Obtain allotment lists containing details of the new holdings of share or stock by each
member and verify the same with the entries.
4. Inspect the directors’ resolution with regard to allotment, consolidation, conversion or
sub-division passed pursuant to the resolution of the members.
5. Examine the cancelled share certificates, if any, and tally the same with the counterfoils of
new certificates issued;

6. See that the procedure, prescribed by the Articles in this regard, has been complied with;
7. Verify that the share capital account is correctly shown in the Balance Sheet;
8. Ensure that the necessary intimation has been sent to the Registrar of Companies.

9. Ensure that each alteration made should be noted in every copy of the Memorandum and
Articles of Association issued subsequent to date of the alteration.

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