Share capital Audit | Role of Auditor in verifying issue of fresh share

Audit of Share Capital

How is authorized capital of a company verified?

Balance sheet of the previous year and the Memorandum of Association gives a detailed picture about the authorized capital of the company.

How is issued capital verified?

An auditor can verify the Issued capital from balance sheet of the previous year. If there is any increase in the number of shares due to loans or conversion of debentures, the same has to be verified whether all the formalities were as per law.

Role of Auditor in verifying issue of fresh share

For verifying fresh issue made during the year

1. The conditions laid to the issue of shares may be studied from

  1. Memorandum of Association.
  2. Articles of Association.
  3. Prospectus.
  4. Information Memorandum as the case may be.

2. An auditor should ensure that the application money received is deposited in a Scheduled bank until the minimum subscription is received and he should also verify whether the allotment is made only after receiving at least the minimum subscription.

3. Section 76 deals with the brokerage and underwriting commission payable to brokers and underwriters. A lower rate may be prescribed by the company in its prospectus / Articles of Association. Here, the auditor should ensure that only the authorized rates of commission or brokerage are paid to the brokers and underwriters.

4. The auditor should ensure whether the Rights shares (Section 81) are duly offered to the existing shareholders and the company has complied with the legal requirements in this regard.

Company (Amendment) Bill 2003, recognizes stock option under a scheme to employees, officers or working directors and the scheme is to be approved by SEBI.

5. The prospectus lays down conditions for entering into preliminary contracts. The auditor should ensure that all the conditions are satisfied while entering into such preliminary contracts which may be purchase of business or property, etc.

6. The auditor should also ensure whether the guidelines issued by SEBI are followed by the company and the reports of the lead managers of the issue may be studied by the auditor for confirmation about the compliance.

7. In the case of shares issued to the public, the auditor should ensure that the company has applied to one or more recognized stock exchanges seeking permission for the issue of shares. The company should obtain permission from the stock exchange at least ten weeks before the date of the closing of the subscription list.

8. The auditor should confirm that the prevailing internal check of the company for the issue of shares is adequate and effective.

9. Companies Act prescribes various conditions to be followed by the company with regard to issue of shares. Section 78 deals with the issue of shares at premium, Section 79 controls the issue of shares at a discount and Section 79A prescribes provisions relating to sweat equity shares. The auditor should ensure that the company has complied with all the required legal provisions relating to the issue of shares.