Company Audit | Commerce & Accountancy Optional Notes for UPSC PDF Download

Audit of shares

• Auditors should verify the allotment of securities by a company by examining the contract and prospectus to determine the agreed-upon number and value of shares, as well as the nature of consideration. They should also confirm that the minimum subscription amount has been met, and payments have been made by check or other instrument. Auditors should ensure that allotments are used for the purpose specified in board minutes and that any unfulfilled subscriptions are refunded within the prescribed timeframe. Additionally, they should verify the filing of a return of allotment and check for any defaults in the allotment process.
• For alterations to share capital, auditors should confirm that these were authorized by the company's articles and verify the necessary meeting minutes and resolutions. They should also ensure that the company's memorandum and articles reflect the alteration and that proper accounting entries have been made.
• In the case of bonus shares, auditors should confirm that these were authorized by the articles, verify the related meeting minutes and resolutions, and ensure that only fully paid-up bonus shares were issued. They should also check for any defaults in payment of fixed deposits or statutory dues and confirm that partly paid-up shares were made fully paid-up.
• Regarding the purchase of its own securities, auditors should confirm that this was authorized by the company's articles and verify the necessary meeting minutes and resolutions. They should also ensure that the buy-back amount does not exceed certain limits, and that the buy-back is completed within the specified timeframe. Additionally, they should check for any defaults in payment of fixed deposits or statutory dues and ensure that the company's registers are updated accordingly.

In order to ensure the proper division of shares from a face value of 10 to 1 per share, the following steps should be taken:

• Verify that the amendment to the company's articles allowing for this division was authorized.
• Check the minutes of the Board meeting and the ordinary resolution passed during the general meeting where members' approval was obtained.
• Confirm that the amendment was made in copies of the Memorandum, Articles, etc.
• Ensure proper accounting entries were made and check the Register of Members to confirm necessary amendments.
• For the Share Transfer Audit, examine the Articles of Association to understand the prescribed form of transfer and other provisions, including time limits.
• Review notifications from transferors regarding lodgements made by transferees and any objections received.
• Confirm the proper execution of transfer forms, including stamp duty and company name accuracy.
• Verify that each transferor's signature matches their signature on the original application for shares or transfer form.
• Ensure none of the transferees are disqualified from holding shares.
• Verify entries in the Shares Transfer Journal and postings to the Register of Members.
• Inspect each transfer for accuracy and completeness.
• Check if transfers to firms have been rejected and if trust notes have been entered in the share register.
• Confirm old certificates were canceled and inspect power of attorney and specimen signatures if applicable.
• Inspect letters of indemnity for lost certificates and ensure duplicate certificates were issued with proper authorization.
• Confirm balance certificates were issued to transferors if part of the shares was transferred.
• Refer to the minutes book to ensure all transfers recorded in the share transfer journal were approved by the Board.
• Check counterfoils of new certificates.
• Reconcile transfer fees collected with the total number of transfers lodged and verify transfer fees were accounted for.
• Reconcile the total number of shares of different classes issued by the company with the total amount of capital issued.
• Confirm that, in the case of any share transactions by directors, corresponding entries were made in the Register of Directors' shareholding.

For the re-issue of forfeited shares:

• Verify the board of directors has the authority under the Articles of Association to re-issue forfeited shares.
• Check the relevant resolution of the Board of Directors.
• Verify amounts collected from persons to whom the shares have been allotted and the entries recorded from re-allotment.
• Confirm the total amount received on the shares, including received before forfeiture, is not less than the par value of shares.
• Confirm any surplus amount arising on the reissue of shares is credited to the Capital Reserve Account.
• If partly-paid shares are forfeited for non-payment of calls and re-issued as fully paid, ensure compliance with the provisions of Section 53.

Auditor’s Duties in the Audit of Debentures (Section 71)

• The auditor must ensure that the company's prospectus was filed with the registrar before debenture allotment.
• The auditor should verify the amount collected in the cash book against the receipts issued to applicants and cross-check it with the application and allotment book.
• The auditor must examine the debenture trust deed and note the conditions for issuance and repayment.
• If debentures are secured by a mortgage or charge, the auditor must verify that the charge is correctly recorded in the register of mortgages and charges and has been registered with the registrar of companies. Compliance with SEBI guidelines must also be checked.
• When debentures are issued as fully paid-up to vendors as part of the purchase consideration, the auditor should review the contract regarding this matter.

Interest on Debentures (Section 71):

• A fixed rate of interest is payable on debentures, regardless of whether the company has made a profit or not. Debenture holders are creditors of the company and have no voting powers.
• The auditor must verify the payment of interest with the acknowledgement of the debenture-holders, endorsed warrants, or coupons surrendered for bearer debentures.
• The auditor should reconcile the total amount paid with the total amount due and payable, including outstanding interest.
• Interest paid on debentures, like other fixed loans, must be disclosed as a separate item in the profit and loss account.

Redemption of Debentures (Section 71):

• A company may issue debentures with an option to convert them into shares at the time of redemption.
• Debentures can be redeemed through periodical drawings, payments on fixed dates, or whenever the company desires.
• The auditor should inspect the debentures or trust deed for terms and conditions regarding redemption.
• The auditor must verify the director's minute book authorizing the redemption of debentures.
• The auditor should vouch the redemption using cancelled debenture bonds and the cash book.
• The auditor must examine the accounting treatment thoroughly.

Auditing of Divisible Profit (Section 123)

Declaration of Dividend:

• The final dividend is declared in a general meeting, and the Board of Directors must recommend a dividend.
• Declaration of dividend is considered "Ordinary Business" in a general meeting.
• No dividend can be declared or paid unless it is from the company's profits for that year, after providing for depreciation, or from undistributed profits of previous years. It can also be from funds provided by the Central or State Government.
• The company may transfer a percentage of its profits to reserves before declaring dividends.
• In case of inadequate profits, dividend can be declared from accumulated profits transferred to reserves, subject to prescribed rules.
• Dividends cannot be paid from reserves other than free reserves.
• Companies cannot declare dividends unless previous losses and depreciation not provided in previous years are set off against current year's profit.
• Depreciation should be provided in accordance with Schedule II.
• The Board may declare interim dividends from surplus in the profit and loss account or from profits of the financial year.
• If the company has incurred losses in the current financial year up to the end of the preceding quarter, the interim dividend shall not exceed the average dividends declared in the preceding three financial years.

Entitlement of Dividend:

• Dividends can only be paid to registered shareholders or their authorized representatives, and must be in cash.
• Dividends can be paid by cheque, warrant, or electronic mode.

Non-Compliance Consequences:

• A company that fails to comply with sections 73 and 74 cannot declare dividends on its equity shares.

Unpaid Dividend Account (Section 124)

Transfer of Unpaid Dividends:

• If a shareholder does not claim or receive a declared dividend within 30 days, the company must transfer the unpaid amount to a special account in a scheduled bank called the Unpaid Dividend Account.
• The company must prepare a statement with the names, addresses, and unpaid dividend amounts of each person, and post it on its website or an approved website within 90 days of transferring the amount.

Interest on Unpaid Dividends:

• If the company fails to transfer the unpaid amount to the Unpaid Dividend Account, it must pay interest at 12% per annum on the unpaid amount.

Transfer to Investor Protection Fund:

• Any unpaid dividend remaining unclaimed for seven years must be transferred to the Investor Protection Fund.
• Shares in respect of which dividends have not been paid or claimed for seven consecutive years will also be transferred to the Investor Education and Protection Fund.
• Shareholders can claim transferred shares from the Fund according to prescribed procedures and documents.

Punishment for Non-Compliance:

• Failure to comply with Section 124 can result in fines for the company and its officers.

Investor Education and Protection Fund (Section 125)

Establishment and Credits:

• The Central Government will establish the Investor Education and Protection Fund (IEPF).
• The Fund will be credited with grants from the Central Government, donations, unpaid dividends, revenue from the Central Government's general account, and other prescribed amounts.
• Certain amounts, such as those related to unclaimed dividends, matured deposits, and matured debentures, will only be credited to the Fund if they remain unclaimed and unpaid for seven years.
• The Fund will be used for various purposes, including the refund of unclaimed amounts, promoting investor education and awareness, and reimbursing legal expenses for pursuing class action suits.

Administration:

• The Central Government will appoint an authority to administer the Fund, consisting of a chairperson, members, and a chief executive officer.
• The authority will maintain separate accounts and records for the Fund and submit annual reports and audited accounts to the Central Government.

Books of Accounts:

• The Fund's accounts will be audited by the Comptroller and Auditor-General of India at specified intervals, and the audit report and annual report will be submitted to both Houses of Parliament.

Loans to Directors (Section 185)

• Companies are prohibited from directly or indirectly advancing loans, including those represented by book debts, to their directors or any other individuals in whom the director has an interest.
• The company cannot provide any guarantee or security for a loan taken by the director or such other person.
• Exceptions to this rule include loans to managing or whole-time directors as part of their service conditions or pursuant to a scheme approved by the members through a special resolution.
• The prohibition does not apply to companies that, in the ordinary course of business, provide loans or guarantees for loan repayment, provided they charge interest at a rate not less than the bank rate declared by the Reserve Bank of India.
• Loans made by a holding company to its wholly owned subsidiary or guarantees provided by a holding company for loans to its wholly owned subsidiary are also exempted, provided the subsidiary uses the loans for its principal business activities.
• The expression "to any other person in whom director is interested" includes directors of the lending company or its holding company, or any partner or relative of such directors, among others.
• If a loan is advanced, or a guarantee or security is provided in contravention of this provision, the company may face a fine ranging from five lakh rupees to twenty-five lakh rupees, and the director or other person involved may face imprisonment up to six months or a fine of five lakh rupees to twenty-five lakh rupees, or both.

Inter-corporate loans and investment [section 186]

• The Companies Act of 2013, Section 186, outlines regulations concerning inter-corporate loans and investments. "Free reserves" are reserves available for dividend distribution as per the latest audited balance sheet of a company. Unrealized gains, notional gains, revaluation of assets, or changes in the carrying amount of an asset or liability recognized in equity, including surplus in the profit and loss account, are not considered free reserves.
• Companies are generally limited to investing through not more than two layers of investment companies, unless otherwise prescribed. However, there are exceptions for companies acquiring others incorporated outside India or subsidiaries needing investment subsidiaries to comply with specific laws or regulations.
• There are also limits on investments, loans, and guarantees. For instance, a company cannot exceed 60% of its paid-up share capital, free reserves, and securities premium account or 100% of its free reserves and securities premium account, whichever is more. If these limits are exceeded, prior special resolution approval at a general meeting is required. The company must disclose loan details in its financial statements, including the purpose of the loan.
• No investment, loan, guarantee, or security can be made without unanimous board approval. Additionally, prior approval from a public financial institution is needed if a term loan is outstanding. However, this approval is not required if the aggregate of loans and investments made so far, along with proposed loans, investments, guarantees, or security, does not exceed the specified limit, and there is no default in repayment of loan installments or payment of interest.
• Companies registered with SEBI are subject to specific limits on inter-corporate loans or deposits, and such companies must disclose these details in their financial statements.
• Interest on loans under this section must not be lower than the prevailing yield of government securities closest to the loan's tenor.
• Companies in default regarding repayment of deposits cannot give loans, guarantees, security, or make acquisitions until the default is resolved.
• Companies must maintain a register of loans, guarantees, security, and acquisitions made under this section, which is open to inspection by members.
• Exceptions to these restrictions include loans, guarantees, or security provided by banking, insurance, or housing finance companies in the ordinary course of business or by companies engaged in financing or providing infrastructure. Certain acquisitions are also exempt.
• Violations of these provisions can result in fines or imprisonment for officers in default.

Remuneration of Directors

• As per Section 2(78) of the Companies Act, 2013, "remuneration" refers to any money or its equivalent given or passed to any person for services rendered by them, and includes perquisites as defined under the Income-tax Act, 1961.
• Overall Maximum Managerial Remuneration and Managerial Remuneration in Case of Absence or Inadequacy of Profits (Section 197)

Ceiling of Total Managerial Remuneration:

• The total managerial remuneration payable by a public company to its directors, including the managing director and whole-time director, and its manager, in respect of any financial year, shall not exceed eleven per cent of the net profits of that company for that financial year, computed in the manner laid down in Section 198, except that the remuneration of the directors shall not be deducted from the gross profits.
• Provided that the company in a general meeting may, with the approval of the Central Government, authorize the payment of remuneration exceeding eleven per cent of the net profits of the company, subject to the provisions of Schedule V.
• Provided further that, except with the approval of the company in a general meeting, the remuneration payable to any one managing director, whole-time director, or manager shall not exceed five per cent of the net profits of the company, and if there is more than one such director, remuneration shall not exceed ten per cent of the net profits to all such directors and manager taken together. The remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed one per cent of the net profits of the company, if there is a managing or whole-time director or manager, or three per cent of the net profits in any other case.
• The percentages aforesaid shall be exclusive of any fees payable to directors under sub-section (5).
• If, in any financial year, a company has no profits or its profits are inadequate, the company shall not pay to its directors, including any managing or whole-time director or manager, by way of remuneration any sum, exclusive of any fees payable to directors under sub-section (5), hereunder except in accordance with the provisions of Schedule V, and if it is not able to comply with such provisions, with the previous approval of the Central Government.

Remuneration to Director in Professional Capacity:

• The remuneration payable to the directors of a company, including any managing or whole-time director or manager, shall be determined, in accordance with and subject to the provisions of this section, either by the articles of the company, or by a resolution or, if the articles so require, by a special resolution, passed by the company in a general meeting, and the remuneration payable to a director determined aforesaid shall be inclusive of the remuneration payable to him for the services rendered by him in any other capacity.
• Provided that any remuneration for services rendered by any such director in another capacity shall not be so included if the services rendered are of a professional nature, and in the opinion of the Nomination and Remuneration Committee, if the company is covered under sub-section (1) of section 178, or the Board of Directors in other cases, the director possesses the requisite qualification for the practice of the profession.
• A director may receive remuneration by way of a fee for attending meetings of the Board or Committee thereof or for any other purpose whatsoever as may be decided by the Board.
• Provided that the amount of such fees shall not exceed the amount as may be prescribed.
• Provided further that different fees for different classes of companies and fees in respect of an independent director may be such as may be prescribed.

Remuneration to Non-Executive Directors Based on Profits:

• A director or manager may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other.
• An independent director shall not be entitled to any stock option and may receive remuneration by way of fees provided under sub-section (5), reimbursement of expenses for participation in the Board and other meetings, and profit-related commission as may be approved by the members.
• The net profits for the purposes of this section shall be computed in the manner referred to in section 198.

Recovery if Excess Remuneration Drawn:

• If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without the prior sanction of the Central Government, where it is required, he shall refund such sums to the company, and until such sum is refunded, hold it in trust for the company.
• The company shall not waive the recovery of any sum refundable to it under sub-section (9) unless permitted by the Central Government.

Disclosure by Listed Company in Board Report:

• Every listed company shall disclose in the Board's report, the ratio of the remuneration of each director to the median employee's remuneration and such other details as may be prescribed.

Insurance against Civil Liability on Behalf of Managerial Person:

• Where any insurance is taken by a company on behalf of its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer, or Company Secretary for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty, or breach of trust for which they may be guilty in relation to the company, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel.
• Provided that if such person is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration.

MD/WTD can receive remuneration or commission from holding or subsidiary company:

• Subject to the provisions of this section, any director who is in receipt of any commission from the company and who is a managing or whole-time director of the company shall not be disqualified from receiving any remuneration or commission from any holding company or subsidiary company of such company subject to its disclosure by the company in the Board's report.

Recovery from Director if Financial Statement Restated Due to Fraud:

• If any person contravenes the provisions of this section, he shall be punishable with a fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.