Page 168 - DCOM509_ADVANCED_AUDITING

Unit 9: Audit of Limited Companies

Notes
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Caselet Judicial Rulings on Ascertainment of Profits
T he fact of the three cases given below should be studied carefully:

In Re. Spanish Prospecting Co. Ltd. (1911), the company had contracted to pay a certain
salary to some of its staff subject to the condition that they shall not be entitled to draw
their salary “except only out of profits” if any, arising from the business of the company.
The salary was cumulative. Any arrears were to be payable out of future profits. The
company dealt in shares and securities. The company went into liquidation and some of
the securities held were sold by the liquidator. It was contended that the proceeds should
be credited to the Profit and Loss Account (their book value was nil) in order to enable the
staff to receive their arrears to salary. This contention was rejected at first but was upheld
by the Court of Appeal. This case establishes the fundamental nature of profit (impliedly
the economist’s profit).
In Re. Crabtree Thomas vs. Crabtree (1912), the testator left his business to be carried on by
trustees and to pay thereof to his wife while she lived and on her death, to a residuary
legatee. The trustee charged in the accounts depreciation on machinery. It was contended
on behalf of the life tenant that the profits before charging depreciation were paid to her.
But it was ruled out on the ground that depreciation must be charged on the assets of a
business to arrive at the amount of profit.

Edwards vs. Saunton Hotel Co. Ltd. (1942), a director of the company was to be paid by
way of remuneration 20% of the profit “available” for distribution each year. It was held
that depreciation on assets calculated on the straight line, method must be deducted from
the surplus to arrive at the amount of profit, 20% whereof was payable to the director, but
the income tax payable by the company was not to be deducted.

Source: http://www.archive.org/stream/practicalauditin00spicuoft/practicalauditin00spicuoft_
djvu.txt

Self Assessment

Fill in the blanks:
16. The auditor needs to ensure that the procedure prescribed by the ……………….. regarding
transmission of shares has been strictly followed.

17. The auditor must confirm that the ……………… testifying the authority of the legal
representative have been properly verified.

9.9 Presentation and Disclosure of Share Capital

As per the established audit procedure, the auditor is also required to verify whether share
capital has been properly presented in the financial statements. Compliance with the
requirements of the Part I of Schedule VI to the Act required to be seen by auditor is given
below:
1. Authorized share capital should be shown separately stating the class of shares, the number
of shares and the face value, of each share.

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