The audit procedure in case of audit of shares issued for cash can be studied in three stages, as below:
1. Application Stage:
At application stage, application money is received along with application. The auditor should proceed to audit in the following manner:
1. The auditor should examine the original application sent by the investors and vouch the entries made in the Application and Allotment Book with these applications.
2. He should also compare entries in the Application and Allotment Book with those in the Cash Book.
3.. He should ensure that the application moneys received were deposited into a Scheduled Bank until the certificate of commencement of business is obtained /are returned as per the provisions of Section 69(5).
4. He should see whether the amount received on application is not less than five percent of the nominal value of shares issued.
5. He should vouch the amounts refunded to applicants to whom shares are not allotted with copies of letters of regret sent to them.
6. If the prospectus specifies that application shall be made for quoting shares on a Stock Exchange, he should see whether the permission to deal has been granted by the Stock Exchange. In case the permission has been refused, he should see that the application money have been returned to the applicants as per the provisions of the Companies Act.
7. He should check the totals in the Application and Allotment Book and see whether appropriate journal entry is duly passed by debiting Share Application Account and crediting Share Capital Account.
2. Allotment Stage:
In order to verity the share allotment, the auditor should follow the audit procedure:
1. The auditor should examine the Director’s Minute Book and verify whether they approved the allotment.
2. He should vouch the entries made in the Application and Allotment Book with copies of letters of allotment and letters of regret.
3. He should check the money received on allotment by comparing the entries in the Application and Allotment Book with the Cash Book /Bank Statement.
4. He should check the postings made as to the amount received on application and allotment in the Share Register.
5. He should ensure that the total of shares issued does not exceed the total authorized capital specified in the Memorandum.
6. He should see that the amount has been correctly totaled and that the relevant journal entry is passed.
3. Call Stage:
The audit procedure at call stage is as follows:
1. The auditor should examine the Director’s Minute Book and see whether Board approved the making of calls.
2. He should check the entries in the Calls Book with the help of copies of call letters.
3. He should compare the total amount due on calls with the entries made in the Cash Book or Bank statement, which will give the figures of calls in arrears.
4. He should also verify the calls received in advance.
5. He should see that the relevant journal entry is passed.
6. He should check the postings made from the Calls Book and the Cash Book into the Share Register.
General Duties of the Auditor
Besides the above duties at each specific stage, the auditor should perform the following general duties also:
l. The auditor should ensure that the nominal value of shares allotted does not exceed the authorized and issued capital.
2. He should see whether the allotment has been made in conformity with the conditions mentioned in the Prospectus.
3. He should compare the balance in the Shareholders’ Account with that in the share Capital Account.
4. In case the issue has been underwritten, he should see that the terms of the underwriting contracts have been duly complied with. He should also see that the commission paid t0 the underwriters does not exceed the statutory maximum, of five percent on the nominal value of the shares.
5. Payments on account of underwriting commission and brokerage should be verified by reference to the underwriting contract and stamps of brokers on application forms respectively.
The above procedure shall be relevant in the first year of the company’s existence and thereafter when the company issues further shares. In subsequent years, he need not repeat the detailed examination. He may simply verify the figures by test checking.