ABSTRACT

Share capital is the most common way of determining the ownership of a company.
In relation to a company limited by share capital, the share capital will be issued to
the shareholders when the company is first set up. However, further share capital
can be issued at a later date if necessary. share capital is shown in the balance
sheet. there are two types of share capital.1.equityshare capital 2.preference share
capital

Key words
share capital, equity share capital, preference, share capital ,audit

Research methodology
This research is primarily based on secondary data collection. The data is collected
through various websites, newspapers, journals, books and articles.

Objectives of study
To understand the meaning of share capital
To study audit of share capital
To know types of share capital

INTRODUCTION
Meaning
A joint stock company should have capital in order to finance its activities. It raises its
capital by issue of shares. The Memorandum of Association must state the amount
of capital with which the company is desired to be registered and the number of
shares into which it is to be divided. When total capital of a company is divided into
shares, then it is called share capital. It constitutes the basis of the capital
structure of a company. In other words, the capital collected by a joint stock
company for its business operation is known as share capital. Share capital is the
total amount of capital collected from its shareholders for achieving the common goal
of the company as stated in Memorandum of Association .Share capital is the sum of
money received by a company by selling its share to the investors. When a company
issues fresh share to the investors and raises fund, it directly increases the value of
share capital. he amount of total share capital cannot be more than the amount of
authorized share capital of a company. Increase in share price does not affect the
value of share capital. It is because the value is calculated based on par value of
shares and not on the basis of market price. Share capital is shown on the balance
sheet of a company.
A private limited company has two types of share capital:
1.Equity share capital
2.Preference share capital
EQUITY SHARE CAPITAL
This type of share capital is that part of capital that is not a preferential. In other
words it is the basic kind of capital or an ordinary share capital.
PREFERENTAL SHARE CAPITAL
This part of capital has the following characteristics:
It carries a preferential right as to the payment of dividend over other type of capital.
It carries the preferential right as to payment of capital in case of winding up or
repayment of capital over the over the other type of capital.

SPECIAL POINTS IN AUDIT OF SHARE CAPITAL

In case of share capital issued by the company following points merit consideration
of the auditor:
Authorization of the issue Auditor should check the minutes of the meeting of the
board of directors to check the authorization of the terms of the terms of the issue of
share capital.
Vouching share applications Auditor should test check the share application forms
and vouches their respective entries in the cashbook.
Legal requirement It should be checked that the legal requirements as laid down by
the companies act, sebi and other regulatory bodies are met.
Compilation requirements Auditor should check that various compilation requirement
of various statements with the registrar of companies are met with.
While doing the audit of share capital auditor should vouch the following carefully
o Memorandum of association
o Articles of association
o Minutes of the directors meetings
o Prospectus
o Share application form
o Letters of allotment
o Letters of refund
o Share registers
o Cashbook
o Ledger accounts.
ISSUE OF SHARES AT A PREMIUM
When a company issues its share at a premium, auditor should take care of the
following points:
He should check the prospectus
He should check the articles of association
He should check the minutes of the meetings of the board of directors.
All the above should authorize the issue of shares at a premium.
The receipt of premium should be vouched with the respective entries in the books of
accounts
It should be vouched that the share premium account should be used for the
authorized purposes only.

Types Of Share Capital

Share capital of a company can be divided into the following different categories:
The share capital of a company limited by shares shall be of two kinds, namely:
(a) equity share capital
(i) with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in
accordance
with such rules as may be prescribed; and
(b) preference share capital:
Provided that nothing contained in this Act shall affect the rights of the preference
shareholders who are entitled to participate in the proceeds of winding up before the
commencement of this Act.
Explanation.For the purposes of this section,
(i) equity share capital, with reference to any company limited by shares, means all
share capital which is not preference share capital;
(ii) preference share capital, with reference to any company limited by shares,
means that part of the issued share capital of the company which carries or would
carrya preferential right with respect to
(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed
rate, which may either be free of or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the amount of
the share capital paid-up or deemed to have been paid-up, whether or not, there is a
preferential right to the payment of any fixed premium or premium on any fixed scale,
specified in the memorandum or articles of the company;
(iii) capital shall be deemed to be preference capital, notwithstanding that it is entitled
to either or both of the following rights, namely:
(a) that in respect of dividends, in addition to the preferential rights to the amounts
specified in sub-clause (a) of clause (ii), it has a right to participate, whether fully or
to a limited extent, with capital not entitled to the preferential right aforesaid;
(b) that in respect of capital, in addition to the preferential right to the repayment, on
a winding up, of the amounts specified in sub-clause (b) of clause( ii), it has a right to
participate, whether fully or to a limited extent, with capital not entitled to that
preferential right in any surplus which may remain after the entire capital has been
repaid. The term share capital denotes the amount of capital raised or to be raised
by the issue of shares by a company and is used in many expressions. The usual

different expressions of share capital found in the capital structure of a company are
popularly known as kinds of share capital.

1. Authorized, registered, maximum or normal capital

The maximum amount of capital, which a company is authorized to raise from the
public by the issue of shares, is known as authorized capital. It is a capital with which
a company is registered, therefore it is also known as registered capital. It is the
maximum amount of share capital stated in a companys memorandum which the
company is, for the time being, authorized to raise. As the memorandum is
registered with the Registrar it is also called the Registered capital. Again, as the
actual issued capital of the company is usually different (i.e. less) from the
authorized capital, it is also known as Nominal capital. Authorized share capital
refers to the total capital that a company is authorized to accept from investors by
issuing shares. In simple terms, a company cannot raise capital more than its
authorized capital.It represents the capital with which a company is registered thats
why it is also known as registered capital.
2.Issued Capital
Generally, a company does not issue its authorized capital to the public for
subscription, but issues a part of it. So, issued capital is a part of authorized capital,
which is offered to the public for subscription, including shares offered to the vendor
for consideration other than cash. The part of authorized capital not offered for
subscription to the public is known as 'un-issued capital'. Such capital can be offered
to the public at a later date. It represents to the part of total authorized share capital
which has been issued by a company for subscription by investors. It means the
nominal value of that part of the authorized capital which is allotted for cash or for
consideration other than cash and includes the shares subscribed by the signatories
to the memorandum. It may be noted that the term Issued Capital is often defined in
textbooks as the nominal value of that part of the authorized capital which is offered

for subscription to the public. The phrase offered for subscription to the public has
been dropped and other necessary modifications have been made in the customary
definition to meet the following objections:
(i) that, the customary definition which connotes only the nominal value of shares
offered for subscription to the public does not provide any useful information to an
analyser of a companys Balance Sheet. What is important to him is the nominal
value of shares actually allotted by the company because it is this amount which can
be taken as the ultimate fund out of which the creditors are to be paid, even though
the actual paid up capital for the time being may be less than this amount. Moreover,
the term Issued Capital literally means that part of share capital which has been
actually issued or allotted by the company:
(ii) that, if shares offered for subscription to the public are taken as Issued Capital, a
private company which cannot make offer to the public can never have Issued
Capital;
(iii) that, the following types of allotments of shares cannot be treated as shares
offered for subscription to the public:

shares issued to the: (1) subscribers to the memorandum, (2) friends and
relatives of the directors, and (3) vendors for consideration other than cash.

shares reserved and allotted to the: (i) employees of the company, and, (ii)
specialized institutions like Life Insurance Corporation of India, Unit Trust of India
and Industrial Finance Corporation of India.

the Rights Issue and the Bonus Issue.

These allotments, therefore, cannot be included under Issued Capital as
traditionally defined.
3.Subscribed Capital
It can not be said that the entire issued capital will be taken up or subscribed by the
public. It may be subscribed in full or in part. The part of issued capital, which is
subscribed by the public, is known as subscribed capital. It refers to that part of

issued share capital, which has been subscribed by investors. It means when a
company issues shares to raise some capital, it may or may not receive
subscriptions for all of its shares. The part of issued share capital which has been
subscribed by investor is known as subscribed share capital. It means the paid up
value of that part of the authorized capital which is allotted for cash or for
consideration other than cash and includes the shares subscribed by the signatories
to the memorandum. Thus, in a company where shares are fully paid up, the
Subscribed Capital would be equal to the Issued Capital. The Subscribed Capital
sub-heading is of significance only if the shares are partly paid up or certain calls on
shares are unpaid or some shares have been forfeited for non-payment of the call
money. In any of these situations the Issued Capital denotes the nominal value of
shares actually allotted and the Subscribed Capital denotes the paid up capital of
the company .It is under the above heads that the Companies Act requires the share
capital of a company to be exhibited in its Balance Sheet. However, some other
terms relating to share capital are in prevalence, as such it will be proper to deal with
them in brief here.

4.Called Up Capital
It is that part of subscribed capital, which is called by the company to pay on shares
allotted. It is not necessary for the company to call for the entire amount on shares
subscribed for by shareholders. The amount, which is not called on subscribed
shares, is called uncalled capital. Called up share capital is the amount of capital
which is called by company for payment by investors. Put it simple, a company
collects the full amount of share in more than one lot. So, called up capital share
capital is that part of subscribed share capital which is called by company for
payment. : Called up capital is that part of the allotted share capital which has been
called up by the company.

5. Paid-up Capital
It is that part of called up capital, which actually paid by the shareholders. Therefore
it is known as real capital of the company. Whenever a particular amount is called
and a shareholder fails to pay the amount fully or partially, it is known an unpaid calls
or calls in arrears.
Paid-up Capital = Called up capital - calls in arrears
It represents that part of called up share capital which has been paid by investors.
Paid up capital = Called up capital Call in arrears.
Example:
Suppose ABC Ltd. is registered with a capital of Rs 1 crore divided in shares of Rs
10 each. It issued 8 lakh shares to raise a fund of Rs 80 lakh but the investors
subscribed only for 6 lakh shares. The company called for Rs 4 per share out of Rs
10 (Nominal value of shares) and it received full amount only for 5 lakh and 50
thousands shares. Now,
Authorized capital (10 lakh shares of 10 each) = 1 crore
Issued capital (8 lakh shares of 10 each) = 80 lakh
Subscribed capital (6 lakh shares of 10 each) = 60 lakh
Called up capital (6 lakh 4) = 24 lakh
Paid up capital (5 lakh and 50 thousand 4) = 22 lakh
Call in arrears (50 thousand 4) = 2 lakh
6. Reserve Capital
It is that part of uncalled capital which has been reserved by the company by passing
a special resolution to be called only in the event of its liquidation. This capital can
not be called up during the existence of the company. It would be available only in
the event of liquidation as an additional security to the creditors of the company
Share capital refers to the funds a company receives from selling ownership shares
to the public. A company that issues 1,000 shares of stock at $50 per share receives
$50,000 in share capital. Even if the value of the shares increases or decreases, the
value of the share capital remains as what the company received from the initial

sale, or $50,000.Common stock and preferred stock are the two types of share
capital.
Companies that issue ownership shares in exchange for capital are called joint stock
companies. A joint stock company can be a corporation, which is a separate legal
entity from any person involved with the company, or a limited liability company,
which protects shareholders by limiting their risk to the amount invested in the
company.
The legal provisions about reserve capital may now be seen. Reserve capital can
only be created under Section 99 which states that a limited company may, by
special resolution, determine that any portion of its uncalled share capital shall not
be capable of being called up except in the event of winding up. Such a step is
usually taken by a company with the object of affording additional security to the
creditors.
Once the company has created reserve capital in this way, it cannot charge it as
security for loans unlike the uncalled capital. Moreover, reserve capital cannot be
turned into ordinary capital without leave of the court nor can it be cancelled in
reduction of capital (Natal Land Company vs Paul in Colliery Syndicate). This type of
share capital is also known as the reserve liability of the shareholders because it is
that portion of the value of each share which cannot be called up except in the case
of winding up of the company.

Re issue of forfeited share

Reissue of forfeited shares is not the allotment of shares, but it is only a resale. A company can reissue forfeited shares in accordance with the
provisions contained in the articles. The forfeited shares can be reissued at a
discount, but the maximum discount should not exceed the amount available
in the share forfeited account.

When shares are reissued at a loss should not exceed the amount available
in the share forfeited account.

If the shares are reissued at a price more than face value, then the excess
should be credited to the securities premium account.

Joint stock companies raise share capital by selling ownership shares to the general
public. The most common type of ownership share in a company is common stock.
The company's memorandum of association defines the characteristics of its
common stock, such as:
Shareholders are allowed to form a board of directors and vote on company
decisions.
Shareholders may vote to determine a course of action in the event of a hostile
takeover.
If the company is liquidated, holders of common stock are entitled to their share of
company assets if there is money left after the company pays its creditors and
preferred stock holders.
Companies also procure share capital from selling preferred stock. Like common
stock, this type of stock also allows members of the public to take ownership of a
company. However, preferred stock confers different benefits. Owners of preferred
stock typically cannot vote on company decisions or elect board members. However,
they have a higher claim than common stock owners on company assets. They also
receive fixed cash payments, known as dividends, at regular intervals.
A preferred stock pays a cash dividend to shareholders. Its amount, known as the
dividend yield, is expressed as a percentage of share value. For example, a
preferred stock with a 3% dividend yield that trades for $100 pays a shareholder $3
for every share he owns. This money is paid while he owns the stock, in addition to
the proceeds he receives when he sells it.
If a company is forced to declare bankruptcy or liquidate its assets, preferred stock
owners receive their share of company assets before common stockholders.
Additionally, no dividends may be paid to common stockholders until all preferred
stockholders have received their agreed-upon dividend.
Selling stock and receiving share capital in return is known as equity financing. This
type of financing is a popular alternative to debt financing, in which companies obtain
capital by seeking loans that must be paid back with interest. Those who provide
share capital to a company do not receive repayment with interest on a fixed
schedule. Instead, they share in the company's profits (and losses) when they own
company stock.
7). Uncalled capital:
is that part of the allotted share capital which has not been called up by the
company.

The Auditing and Assurance Standards Board of India has issued Guidance Note on
Audit of Capital and Reserves in order to keep the members abreast in resolving the
technical intricacies involved in auditing of capital and reserves. The Guidance Note
discusses the auditing aspect of capital and reserves separately. It deals in detail,
with different principle related aspects dealing with the audit of capital and reserves
including implications of key legal requirements. This Guidance Note not only gives
special consideration to companies but partnerships and sole proprietary concerns
as well. The Guidance Note also incorporates circulars issued by the Government
and other regulatory authorities wherever applicable.
The Guidance Note on Audit of Capital and Reserves discusses significant aspects
of their audit such as evaluation of internal controls and verification, the audit
evidence, the auditing procedure to be followed in case of issue of shares for
consideration other than cash and in case of issue of Sweat Equity shares etc. The
Guidance Note also deals with various types of reserves and their accounting
treatment while discussing auditing aspects. It also lays down the documentation
requirements for the audit of capital and reserves.

Guidance note on audit of capital and reserves issued by

the ICAI
Guidance Note on Audit of Capital and Reserves

Guidance Note on Audit Reports and Certificates for Special

Purposes
Introduction Government authorities may, under various statutes or notifications,
require reports or certificates from auditors in support of statements or other
information prepared by an enterprise. Reports or certificates on specific matters
may also be required from auditors by an enterprise, for its own special purposes.
These reports or certificates cater to specific requirements of the individual users
unlike a 'general purpose report' e.g. an auditor's report on financial statements
which is intended for general use. An audit report or certificate for special purpose is
one to which the format of general purpose audit report is not applicable. This note
is intended to provide guidance to members who way be called upon to give audit
reports or certificates for special purposes (herein referred to as 'reporting auditors').
Reports on profit and/or financial forecasts and on tax audit do not fall within the
scope of this guidance note. Scope of Special Purpose Audit Reports and
Certificates Audit reports or certificates for special purposes may be issued in
connection with:
a. financial statements which are prepared in addition to general purpose financial
statements;

b. specified elements, accounts or items of a financial statement;

c. compliance with requirements of any agreement or statute or regulation;
d. financial information given in special purpose formats or schedules;
e. compilation of statistics or ascertainment of basic figures e.g., for the purpose of
fixing quotas or levies.
A reporting ' auditor Should appreciate the difference between the terms certificate'
and 'report'. A certificate is a written confirmation of the accuracy of the facts stated
therein and does not involve any estimate or opinion. A report, on the other hand, is
a formal statement usually made after an enquiry, examination or review of specified
matters under report and includes the reporting auditor's opinion thereon. Thus,
when a reporting auditor issues a certificate, he is responsible for the factual
accuracy of what is stated therein. On the other hand, when a reporting auditor gives
a report, he is responsible for ensuring that the report is based on factual data, that
his opinion is in due accordance with facts, and that it is arrived at by the application
of due care and skill. Responsibility for Preparation of Special Purpose Statements
The primary responsibility for the contents of a special purpose statement rests with
the enterprise and this would be evidenced by a suitable declaration or
authentication by the management on the face of the statement. Scope of a
Reporting Auditor's Function A reporting auditor should have a clear understanding
of the scope and nature of the terms of his assignment. It is desirable for him to
obtain the terms in writing to avoid any misunderstanding, A reporting auditor is not
an expert on purely technical matters and as such, when he is required to report on
or certify such matters (e.g., composition or quality of a product) which are of
paramount importance and constitute the very basis of the figures contained in the
statement, he should state his limitations clearly in the report or certificate. At the
same time he should indicate the extent to which he has been able to exercise his
own professional skill and judgement with regard to the matter being reported upon.
For instance, he may state that, for the purpose of forming his opinion, he has relied
upon a certificate from technical experts. He should, of course, satisfy himself about
the technical qualifications of the expert, and subject the expert's certificate to a
reasonable review. Contents of Reports and Certificates for Special Purposes In
many cases, a reporting auditor can choose the form and contents of his report or
certificate. In other cases the form and contents of the report or certificate are
specified by statute or notification and cannot be changed. Where a reporting
auditor is free to draft his report or certificate, he should consider the following:
a. Specific elements, accounts or items covered by the report or certificate should be
clearly identified and indicated.
b. The report or certificate should indicate the manner in which the audit was
conducted, e.g., by the application of generally accepted auditing practices, or any
other specific tests.

c. If the report or certificate is subject to any limitations in scope, such limitations

should be clearly mentioned.
d. Assumptions on which the special purpose statement is based should be clearly
indicated if they are fundamental to the appreciation of the statement.
e. Reference to the information and explanations obtained should be included in the
report or certificate. In certain cases, apart from a general reference to information
and explanations obtained, a reporting auditor may also find it necessary to refer in
his report or certificate to specific information or explanations on which he has relied.
f. The title of the report or certificate should clearly indicate its nature, i.e., whether it
is a report or a certificate. Similarly, the language should be unambiguous, i.e., it
should clearly bring out whether the reporting auditor is expressing an opinion (as in
the case of a report) or whether he is only confirming the accuracy of certain facts
(as in the case of a certificate). For this, the choice of appropriate words and phrases
is important.
g. If the special purpose statement is based on general purpose financial
statements, the report or certificate should contain a reference to such statements.
However, the report or certificate should not contain a reference to any, other
statement unless the same is attached herewith. It should be clearly indicated
whether or not the statutory audit of the general purpose financial statements has
been completed and also, whether such audit has been conducted by the reporting
auditor or by another auditor. In case the general purpose financial statements have
been audited by another auditor, the reporting auditor should specify the extent to
which he has relied on them. He nay communicate with the statutory auditor for
securing his co-operation and in appropriate circumstances, discuss relevant matters
with him, if possible.
h. Where a report requires the. interpretation of a statute, the reporting auditor
should clearly indicate the fact that he is merely expressing his opinion in the matter.
He should take sufficient care to ensure that in respect of matters which are capable
of more than one interpretation, his report is not misconstrued as representing a
settled legal position.
i. An audit report or certificate should ordinarily be a selfcontained document. It
should not confine itself to a mere reference to another report or certificate issued by
the reporting auditor but should include all relevant information contained in such
report or certificate.
j. The reporting auditor should clearly indicate in his report or certificate, the extent
of responsibility which he assumes. Where the statement on which he is required to
give his report or certificate, includes some information which has not been audited,
he should clearly indicate in his report or certificate the particulars of such
information. In certain cases, the form and/or contents of the report or certificate, as
prescribed by a statute or a notification, may not be appropriate or adequate. In such

situations, the reporting auditor may consider modifying the report or certificate on
the basis of the suggestions made in para supra, to the extent applicable. In case
this is not possible, he should clearly indicate the limitations in his report or certificate
itself. 6. Extent of Reliance on General Purpose Audit Report Where a special
purpose engagement is undertaken after the statutory audit has been completed, a
reporting auditor should invariably review the statutory audit report to ascertain
whether there are any matters which have a bearing on his report or certificate. In
cases, where a reporting auditor is required to report or certify certain specific
matters arising from the financial statements taken as a whole, he should not
normally issue his report or certificate until the statutory audit has been completed.
For instance, a reporting auditor may be required to state whether, in the case of an
Indian branch of a foreign company, the profit shown in the accounts represents the
remmitable surplus of the branch, or he may be asked to report on the computation
of ,gross profit for the purpose of bonus under the Payment of Bonus Act, MS. In
such cases, it would normally not be proper for bun to give his report or certificate
until the statutory audit has been completed, since he would not really be in a
position to state whether the profit shown in the accounts itself has been properly
computed. Where an audit report or certificate is required before the statutory audit
is completed, a reporting auditor should clearly state in his audit report or certificate
that he is reporting on or certifying specific matters arising out of the financial
statements of the enterprise, the statutory audit of which has not been completed.
Where the reporting auditor prepares his report or certificate on the bash of duly
audited general purpose financial statements, he may take the following precautions:
i. He may clearly state in his report or certificate that the figures from the audited
general purpose financial statements, have been used and relied upon. ii. He may
include in his report or certificate a statement showing the reconciliation between the
figures m the general purpose financial statements and the figures appearing in his
report or certificate. Limited Review Report In certain circumstances, a reporting
auditor may be called upon to give a special report based on a limited review of the
accounts rather than on a complete audit, e.g., review of interim financial information
for the purpose of ascertaining their compliance with the generally accepted
accounting principles or a quick review of the accounts to help an intending buyer of
a business in taking a final decision in this regard. The scope of a limited review is
substantially narrower as compared to to an examination in accordance with the
generally accepted auditing standards for the expression of an opinion on the
financial statements. A limited review primarily consists of the following steps: i.
Obtaining an understanding of the system of preparation of the information contained
in the special purpose statement on which the reporting auditor is required to give his
report; ii. Applying analytical review procedures to data under examination; and iii.
Making such enquiries and obtaining such information as is considered necessary.
In addition to the reporting requirements discussed in para above, the limited review
report should containa. a description of the procedures used for the review; b. a
statement that the scope of the review was substantially narrower as compared to an
examination made in accordance with the generally accepted auditing practices for

expressing an opinion whether the statements show a true and fair view; c. an
opinion that the statements give the information in accordance with the books of
account, records and other statements produced and that they have been drawn up,
in accordance with the applicable and generally accepted accounting principles; and
d. in appropriate circumstances, a qualification or disclaimer so as to dispel any
doubt about the conclusions which may he arrived at on the basis of the report.
Reports and Certificates on Specified Accounts or Items of Financial Statements The
test of materiality which a reporting auditor uses in connection with special purpose
reports may he different, depending upon the circumstances, from the test he would
use in connection with a general purpose report. For example, where he is required
to express an opinion on specified accounts or items of financial statements, he may
judge the materiality of an item solely in relation to such individual accounts of items
rather than to the aggregate there of or to the financial statements as a whole. A
reporting auditor's examination of certain records 'for an audit report or certificate for
special purpose may also he more intensive than the examination of the same
records by the statutory auditor for the purpose of expressing an opinion on the
general purpose financial statements as a whole. Certain accounts or items of
financial 9Wernents are inter-related, e.g., sales and debtors, purchases and
creditors, fixed assets and depreciation, etc. Therefore, where reporting auditor is
required to examine and report upon or certify a specified account or items of
financial statements, he may also need to examine the related accounts or items to
discover the inconsistencies, if any, between these inter-related accounts or items.
Other Engagements In some cases, a member. may be required merely to compile
financial statements or to report whether the financial statements are in conformity
with the books of account. The association of the name of a member with the
statements my be misconstrued by a user of the statements as the same having
been audited by him. Therefore, it is essential) that the member clearly brings out the
nature of his association with the financial statements. The following precautions are
suggested In this regard: i. The title of the report should be 'Chartered Accountant's
Report' rather than 'Auditor's Report'. ii. The report should clearly state that the
statements were not audited. iii. In describing the engagement, ambiguous terms
such as 'review', 'general review', 'check, etc., should be avoided. iv. The client
should be requested not to use the word 'audit' in describing the nature of services of
the members. Similarly, his fee should not be described as 'audit fee' in the
accounts, correspondence, or any other document. Communication of Report or
Certificate The reporting auditor may address his report or certificate to client or to
the public authority or person requiring it, as me may be. In appropriate
circumstances, a certificate may be issued without reference to any particular person
or by using the words, "To whomsoever it may concern". The report or certificate
should normally be issued to the client who should he responsible for forwarding the
same to the concerned authority, where so required. Communication with the
Previous Reporting Auditor It, would he a healthy tradition if the practice of
communicating with the member who had done the work previously is followed in

every case where a member is required to give a report or certificate for a special
purpose.
Illustrations
The appendices to this Note give certain illustrations of audit reports and certificates
for special purposes. Appendix I contains certain statutory certificates while Appendix
II comprises of specimen certificates of non-statutory nature. It may be noted that
there are a large number of other certificates - statutory and non-statutory - which a
Chartered Accountant may be called upon to issue under specific circumstances.
APPENDIX I
Illustrations of Statutory Audit Reports and Certificates for Special Purposes.
Auditors' certificate in the application for consent to the issue of bonus shares made
to the Controller of Capital Issues : "We have verified the information furnished by
the company, for issue of bonus shares and find the same as correct. We also certify
that we have received all the information required by us for the verification. We
hereby certify that the proposal contained in the application for the issue of bonus
shares meets all the requirements of the bonus issue guidelines, including the
guidelines contained in paragraphs 8, 9, 11 and 13 in force issued by the
Government in this regard according to the information furnished to us and to the
best of our knowledge." Auditors' certificate in the application form2 for issue of
securities other than bonus shares under the Capital Issues Control Act, 1947. "We
have verified the information furnished in the above application of the company for
issue of fresh capital and find the same as correct. We also certify that we have
received all the information required by us for the verification. We herefy certify that
the requirements of clause 5 of the Capital Issues (Exemption) Order, 1969, have
been fully met by the company for the issue of acknowledgment/ consent by the
Controller of Capital Issues to the information furnished to us and to the best of our
knowledge."

The following is the text of the Guidance Note on Audit of Capital and
Reserves, issued by the Council of the Institute of Chartered
Accountants of India.
The Guidance Note should be read in conjunction with the Standards on Auditing
issued by the Institute. Introduction
1. Capital and reserves constitute the owners funds. Capital comprises both the
amounts contributed by the owners and the profits capitalised over a period of time
(by way of issue of bonus shares in case of corporate entities or by way of crediting
the retained earnings to the capital account in case of non corporate entities).
2. Capital may consist of various classes of shares with varying voting rights in case
of corporate entities.

3. Reserves are the portion of earnings, receipts or other surplus of an enterprise

(whether capital or revenue) appropriated by the management for a general or a
specific purpose other than a provision for depreciation or diminution in the value of
assets or for a known liability. Reserves comprise both capital and revenue reserves.
Ordinarily, revenue reserves are retained earnings, whereas the capital reserves
may constitute both retained capital profits and owners contribution in the form of
premium on issue of shares and surpluses resulting from re-issue of forfeited shares.
Revaluation reserve arising from revaluation of fixed assets is also a capital reserve.
4. The auditor, in many audit engagements, particularly those relating to corporate
entities, may find very few changes in the capital account and/ or reserve accounts.
However, the transactions in the capital and reserve accounts are normally material
in amount in addition to being significant in nature and, therefore, each transaction in
these accounts requires careful attention.
5. In any auditing situation, the auditor employs appropriate procedures to obtain
reasonable assurance about various assertions (see Standard on Auditing (SA) 500,
Audit Evidence). In carrying out the audit of capital and reserves, the auditor is
particularly concerned with obtaining sufficient appropriate audit evidence to
corroborate the managements assertions regarding the following: Handbook of
Auditing Pronouncements-II 574 Existence: that the recorded amounts of capital and
reserves exist at the given date Occurrence: that the transactions recorded in the
capital and reserve account(s) occurred during the period under audit Obligation:
that the amounts appearing in the capital and reserves account(s) are in fact a
liability of the entity Completeness: that there are no unrecorded transactions in
respect of capital and reserves account(s) Measurement : that the transactions in the
capital and reserves account(s) have been recorded at the proper amount Valuation:
that the amounts recorded in the capital and reserve account(s) are recorded at
appropriate carrying value Presentation and disclosure: that the items of capital and
reserves have been disclosed, classified, and described in the financial statements
in accordance with recognised financial reporting framework applicable to the client.
6. The principal objectives of the auditor in the examination of capital and reserves,
therefore, are:
(a) to ascertain that amounts shown in capital and reserve account(s) as at the
balance sheet date are correct;
(b) to determine that all transactions during the year, affecting owners funds were
properly authorised and recorded;
(c) to examine whether the applicable laws and regulations and terms of issue/
agreement, if any, have been complied with; and
(d) to verify whether these amounts have been properly classified and disclosed in
the financial statements. Internal Control Evaluation

7. Paragraph 2 of the Standard on Auditing (SA) 400, Risk Assessments and Internal
Control, requires the auditor to obtain an understanding of the accounting and
internal controls relating to capital and reserves sufficient to plan the audit and
develop an effective audit approach. Paragraph 1 of the SA 500 requires the auditor
to obtain sufficient appropriate audit evidence through Audit of Capital and Reserves
575 the performance of compliance and substantive procedures to enable him to
draw reasonable conclusions there from on which to base his opinion on the financial
information. Paragraph 1 further states: Compliance procedures are tests designed
to obtain reasonable assurance that those internal controls on which audit reliance is
to be placed are in effect. Substantive procedures are designed to obtain evidence
as to the completeness, accuracy and validity of the data produced by the
accounting system. In certain cases, the client may employ a third party to carry out
any of its transactions in respect of capital and/ or reserves. For example, it is quite
common for listed companies to outsource the administrative aspects related to
allotment, issuance of share certificates, share transfer, maintenance of records of
shareholders, etc. In such situations, the auditor, as required by Standard on
Auditing (SA) 402, Audit Considerations Relating to Entities Using Service
Organisations, should also consider how such arrangements affect the clients
accounting and internal control system so as to plan and develop an effective audit
approach.
8. In the case of non-corporate entities, the auditor needs to ascertain general terms
and conditions regarding contribution of capital, interest payable on capital, interest
chargeable on withdrawals, limits imposed on withdrawals, etc. In respect of
corporate entities, the auditor should particularly review the following aspects of
internal controls relating to capital and reserves:
(a) Proper authorisation of transactions: All transactions in the capital and reserves
accounts such as issue of fresh shares and allotment, buy back of shares, forfeiture,
making calls on the shares, should be properly authorised as required by the
Companies Act, 1956. Outsourcing of any services, e.g., depository services should
also be with the proper authorisation of a competent authority. The authority to sign
the share certificates may be delegated to a person as per the laws applicable to the
entity.
(b) Proper control over issue and custody of share certificates: In case where shares
are in the physical form, the auditor is required to examine that proper internal
control system exists to ensure that the share certificates are pre-numbered, proper
accounts are maintained for certificates cancelled due to defacement, wear out,
exhaustion of cages to record Handbook of Auditing Pronouncements-II 576 transfer
particulars, dematerialisation. The auditor should examine whether blank share
certificates are under the lock and control of the company secretary or some other
responsible officer of the entity. He should also examine whether at least one officer
of the entity personally signs the share certificates issued, though other signatures
can be facsimile type and whether such a signing officer also verifies the register of

share certificates, wherein the issue particulars are recorded. It may be noted that
share certificates are generally issued for a fixed lot of shares (marketable lot, or
some other predetermined denomination).
(c) Allotment and call intimations etc. The auditor should examine whether allotment
of shares and calls is done pursuant to a resolution of the Board and that proper
internal controls exist for despatch of allotment advices and call letters.
(d) Internal control on receipts and accounting of application, allotment and call
money: Internal controls applicable for receipt and accounting of money received on
application, allotment and calls need to be evaluated. Proper records should be
maintained for recording the said transactions. Periodical reconciliation of bank
accounts opened specially for transactions in capital account have to be made.
(e) Maintenance of adequate records: The auditor should verify whether proper
system of internal controls for documentation is in operation. It includes maintenance
of proper and adequately detailed records in respect of the details of members,
share certificate stock ledger, duplicate certificates, cancelled certificates, etc.
(f) Proper control over issue of instructions to depository participants: There should
exist proper controls over issue of instructions to and for execution of requests
received from the depository participants for the dematerialisation/re-materialisation
of shares and proper records are required to be maintained for recording such
transactions. Internal Controls relating to Outsourced Activities.
9. For the efficient carrying out of the day to day transactions like issue of share
certificates/instructions to depository participants for the credit of shares on
allotment, either on public issue or rights issue, issue of call letters, etc., authority
may be delegated, at the general meeting, to registrars and share transfer agents. In
such cases, the auditor should follow the procedures described by the SA 402. Audit
of Capital and Reserves 577 Verification 10. Verification of capital and reserves may
be carried out employing the following procedures:
(i) examination of records;
(ii) examination of compliance with laws and regulations and terms of issue/
contract, if any; and
(iii) examination of presentation and disclosure.
11. The nature, timing and extent of substantive procedures to be performed is,
however, a matter of professional judgment of the auditor which is based, inter alia,
on the auditors evaluation of the effectiveness of the related internal controls.
Entities Other Than Partnerships and Sole Proprietorships Examination of Records
Capital Authorised Capital

12. The authorised capital shown in the balance sheet should be checked with the
Memorandum of Association in case of a company, registered byelaws in case of a
co-operative society, relevant statute or the Government Order in case of a statutory
corporation or other body corporate. The auditor may also refer the audited balance
sheet of the immediately preceding year.
13. The minutes of the general meeting and/ or Board should be examined to see, if
any, change in the capital structure has taken place since the last balance sheet and
whether it is properly authorised. A company, having a share capital, in terms of the
provisions of section 94 of the Companies Act, 1956 may change its share capital as
follows:
(i) increase its share capital by such amount as it thinks expedient by issuing new
shares
(ii) consolidate or divide all or any of its share capital into shares of larger amount
than its existing shares
(iii) convert all or any of its fully paid up shares into stock, and reconvert that stock
into fully paid-up shares of any denomination Handbook of Auditing
Pronouncements-II 578
(iv) sub-divide its shares, or any of them, into shares of smaller amount than is fixed
by the memorandum
(v) cancel shares which, at the date of passing of the resolution in that regard, have
not been taken or agreed to be taken by any person, and diminish the amount of its
share capital by the amount of the shares so cancelled In such cases, the auditor
should also examine the copy of the documents filed with the Registrar of
Companies in relevant form along with the specified fee pursuant to the
requirements of section 97 of the Companies Act, 1956. In addition to the situations
envisaged in section 94 of the Companies Act, 1956, the auditor should also enquire
whether the Central Government has, under Section 81(4) ordered or directed under
Section 94A(2) of the Companies Act, 1956, the conversion of debentures or loans
into share capital, resulting in an increase in the authorised capital of the company.
The authorised capital may also undergo a change, as a consequence of a merger
or a demerger. Similarly, in case of statutory corporations, amendments made to the
statute governing the entity or the Government Order in case of other public sector
bodies should be enquired into. Issued and Subscribed Capital
14. Issued Capital:
The following records/documents would ordinarily provide necessary evidence for
issued capital:
(a) The minutes of the general and/ or board meetings for further issue of shares,
e.g., under section 81 of the Companies Act, 1956;

(b) Offer documents, if any, filed with the Securities and Exchange Board of India
(SEBI)/Registrar of Companies (ROCs) and Reserve Bank of India (RBI) in respect
of permission in case of ADR/GDR issue.
(c) Return of allotment filed with the Registrar of Companies.
15. Subscribed Capital: Shares subscribed in response to the issue of capital can be
verified by reviewing the applications received for the subscription of shares. The
subscribed capital is the capital for which the application money is received. The
subscribed share capital cannot exceed the issued capital. Paid up capital
16. Periodical reconciliation of outstanding shares held in demat and physical form
as on book closure/ record date should also be done. Audit of Capital and Reserves
579
17. The auditor should review the minutes books of Board of Directors and the
members and also any amendments made to the statutory register to ascertain
whether any changes have taken place in the capital of the entity, for example A.
Increase in capital due to:
i) Fresh issue of shares/ADR/GDR.
(ii) Allotment of shares pursuant to merger/amalgamation or acquisition of property
or services.
(iii) Part/full conversion of loans or debentures
(iv) Allotment of shares pursuant to exercise of option either by the promoters or the
employees or other option holders.
(v) Allotment of Bonus shares
(vi) Rights issue B. Decrease in capital due to:
Forfeiture (ii) Buy-back of shares Redemption of redeemable preference shares(iv)
Reduction of capital (v) Surrender of shares as in the case of Co-operative societies
(vi) De-merger
18. A list of members, together with shares held by them and the amounts paid-up
thereon, should be available with the company/entity as at the balance sheet date
and the aggregate of these should agree, with the details of capital shown in the
balance sheet. A copy of the annual return for the previous year filed under the
Companies Act, 1956 or any other statue or a list of members prepared for issuing
dividend warrants may also be examined. If the auditor chooses to verify the list of
members as per the annual return or list of members prepared for issuing dividend
warrants, he should also check the reconciliation with the amount as at the balance
sheet date, with the changes occurred during the period from the date of balance
sheet and record date/ book closure date. Where the registration work is carried out

by independent specialised agencies, a certificate, containing the list of members,

the number Handbook of Auditing Pronouncements-II 580 of shares held, including
those in the demat form and physical form and amount paid up on these shares and
calls in arrears, if any, should be obtained and reconciliation of the particulars with
the amount credited as paid up in the share capital account of the General Ledger be
checked on a test basis.
19. If a change in the capital has taken place during the year under audit, inquiries
should be made to ascertain that it is properly authorised in the manner prescribed
by the Articles and appropriate resolutions have been passed with requisite majority.
20. The auditor should enquire whether the Central Government has passed any
order under Section 108 or Section 250 of the Companies Act, 1956 freezing the
voting rights of any shareholders. It may be noted that there are provisions in the
Banking Regulation Act, 1949 limiting the voting rights of a person. Similarly, the Cooperative Societies Act, 1912 provides for issue of two types of shares, one having
voting rights and other not having voting rights. The Companies Act, 1956 also
provides for issue of shares with non voting rights. These matters have a bearing
while examining the validity of the resolutions passed by the members of the entity.
The auditor should, therefore, also check that the classes of shares have been
appropriately disclosed. Subscription in Cash and Kind
21. The law requires a distinction to be made between shares subscribed for in cash
and shares subscribed for consideration other than in cash. Shares subscribed for in
cash should include only the following kinds of subscription: - (a) where the
subscription amount is received either in cash or by cheque; (b) where the amount is
adjusted against a bona fide debt payable in money at once by the company. There
might be situations where a company has taken a loan under a stipulation that in
case of default in repayment of the loan, the loan would get converted into shares. In
such a situation, on a default in repayment of the loan by the company, if the loan
gets converted into shares in the company, such shares would be considered as
having been allotted for cash. Where shares are allotted against credit balance in a
persons account, inquiry should be made as to how the credit balance in that
account has arisen, whether it was for a valid consideration and whether the amount
was due for payment at the time of issue. Audit of Capital and Reserves 581
22. The Department of Company Affairs2 has clarified through its circular No.
8/32(75) 77-CL-V dated 13th March, 1978, that a genuine debt adjusted against the
amount receivable towards share capital can be treated as amount paid in cash. The
extracts from the advice received from an eminent Counsel in this regard are given
as Appendix A to this Guidance Note.
23. Where the subscription for share capital is paid into a bank account in a foreign
country, it should be verified that the amount deposited in the foreign currency is in
accordance with the terms of issue and such an amount as, if remitted into India on
the day on which the deposit is made in the foreign country, would have realised in

Indian rupees a sum equal to the amount credited as paid up and premium, if any, on
the shares. The auditor should verify that the guidelines issued by SEBI for inviting,
collecting and recording of foreign capital have been complied with by the company.
The foreign exchange fluctuations, if any, should be accounted for in the balance
with bank in accordance with the provisions of Accounting Standard 11, Accounting
for the Effects of Changes in Foreign Exchange Rates.
24. Issue of Shares for Consideration Other than Cash: Shares may also be issued
for a consideration other than cash, e.g., for supply of machinery or technical knowhow. The auditor should examine the underlying agreement in respect of the same
and verify whether the agreement has been properly approved. The auditor should
treat the shares issued for consideration other than cash separate from those issued
against cash in his audit approach. He needs to verify that the consideration for
which shares are issued, viz., supply of machinery or technical know-how is prima
facie fully received.
25. Further, as per the provisions of section 75 of the Companies Act, 1956,
whenever company having a share capital makes any allotment of its shares, the
company has to comply with the following conditions: i. It has to file with the
Registrar of Companies, a return of the allotment, stating the number and nominal
amount of shares comprised in the allotment, the names, addresses and
occupations of the allottees, and the amount if any, paid or due and payable on the
shares. ii. In case of shares allotted for other than cash, it has to produce before the
Registrar, inter alia, a contract in writing, constituting the title of the allottee to the
allotment together with any contract of sale, or a contract 2 Now known as the
Ministry of Company Affairs. Handbook of Auditing Pronouncements-II 582 for
services or other consideration in respect of which allotment was made.
26. The auditor may examine the following records to the extent they are applicable
to the particular circumstances, in case of increase in paid-up capital: (a) Final price
determined in case of offer through book building process3. (b) Scheme of
compromise or arrangement as referred to in section 394 of the Companies Act,
1956, approved by the Court. (c) Compromise proposal with creditors and the
consequential Order of the Court or an Order of Central Government under Section
397 of the Companies Act, 1956. (d) Procedure and terms of reissue of forfeited
shares.
27. In case the payment is allowed to be made on allotment and/ or also in
instalments of one or more calls, the auditor has to verify the resolution of the Board
for making calls, amount received against the calls and the posting of the amount to
the correct members account/folio. A schedule of allotment money and a schedule
for each call have to be verified on test check basis and reconciled with total amount
received and due on allotment and each call. If the accounting work relating to the
share capital is outsourced to a Registrar and Share Transfer Agent, the auditor
should follow the principles enunciated in SA 402. If the Articles of Association permit

and the terms of issue state that in the event of delay in payment of either allotment
money or calls, the investor has to pay interest, the auditor should verify whether
such interest is collected and properly accounted for in the books of account. The
auditor should review the schedules of calls in arrears and calls in advance, and
ensure that interest is provided in accordance with the Articles of Association, Offer
Documents/Terms of Issue. The auditor may verify the Board Resolution, if any, for
waiver of interest on calls in arrears. Interest on calls in arrears may 3 Book Building
Process: Listed companies can also issue shares through Book Building Process.
Book Building is a process wherein the issuer of securities asks investors to bid for
his securities at different prices. These bids are within an indicative price-band,
decided by the issuer. Here, investors bid for different quantity of shares, at different
prices. Considering these bids, the issuer determines a cutoff price, which is the
price at which the securities are allotted. SEBI has issued guidelines on issue of
shares through Book Building Process. The auditor has to verify whether the
company has complied with all the guidelines issued by SEBI in this regard and also
that the basis of determination of the floor price and the final price by the company is
consistent with the provisions in that regard. Audit of Capital and Reserves 583 be
accounted at the time of receipt, with proper disclosure in the balance sheet for
deviating from the accrual principle. The schedule of calls in arrears should show
separately the amounts, if any, due from the directors. Similarly, the auditor should
also examine the payment of interest on calls received in advance, if any, made by
the company. He should verify whether any such payment of interest on calls
received in advance is permitted by the articles of association of the company. He
should also examine the Board resolution in this regard.
28. In case shares are issued at discount, the auditor has to verify the compliance of
Section 79 of the Companies Act, 1956.
29. Generally, employees are offered shares at a price lesser than the market rate.
Sections 79 and 79A of the Companies Act, 1956 and SEBI (Employee Stock Option
Scheme and Employees Stock Purchase Scheme) Guidelines, 1999 (ESOS and
ESPS), Employee Stock Option Scheme for Public Sector Enterprises and others
statues governing the entity have to be complied with. Transactions relating to
options are to be accounted as required by the said scheme or the Accounting
Standards and provisions of any relevant statute, if any, in force, on treatment of
discount etc., on ESOS/ESPS.
30. Issue of Sweat Equity: Section 79A of the Companies Act, 1956 deals with the
issue of sweat equity by the company to its employees and directors, at a discount or
for consideration other than cash for providing know-how or making available rights
in the nature of intellectual property rights or value additions, by whatever name
called. SEBI has also issued SEBI (Issue of Sweat Equity) Regulations, 2002 for
issue of the sweat equity by the listed companies. The issue of sweat equity by
unlisted companies is governed by Unlisted Companies (Issue of Sweat Equity
Shares) Rules, 20034.. The auditor must verify that if the company has issued any

sweat equity, whether the provisions of Section 79A of the Companies Act, 1956 and
the Rules applicable to the company, depending whether listed or not, have been
complied with.
31. Companies are now allowed to buy-back their own shares. Sections 77A and
77B of the Companies Act, 1956 lay down the conditions and procedures for buyback of the shares of a company. In case of private limited and unlisted companies,
the Private Limited Company and Unlisted Public Limited 4 Issued by the Ministry of
Company Affairs vide Notification number GSR 923E dated 4th December, 2003.
Handbook of Auditing Pronouncements-II 584 Company (Buy-back of Securities)
Rules 1999, and in case of listed companies, SEBI (Buy-back of Securities)
Regulations, 1998 have to be complied with. The auditor should verify particularly
that the funds employed for the buy-back are from the resources as permitted by the
law. The reconciliation of entries in escrow account or the bank account separately
opened for payment of purchase consideration have to be verified with the number of
shares bought back and price paid. The auditor should also verify the entries made
in the concerned books/registers with regard to destruction of share certificates and
extinguishments of dematerialised shares and a reconciliation of these two to arrive
at the total number of securities purchased under buy- back process.
32. Registered Byelaws of the Co-operative Societies specify the terms and
conditions for surrender of all or certain class of shares. Generally, surrender of
shares is allowed only at par. The auditor has to verify the certificates surrendered
vis--vis the payment made and the entries made in the Register of members, share
certificate ledger etc.
33. In case of reduction of capital is by way of reduction of the nominal value of the
shares, either by cancelling unpaid portion of the partly paid shares, or extinguishing
some part of the paid up capital, the auditor has to verify that the High Court Order
under Section 100 of the Companies Act, 1956 for reduction of capital has been
complied with. Further, he has to verify the share certificates surrendered and the
statement of corresponding new share certificates issued. In case reduction is
achieved by cancelling fully paid shares proportionately, the auditor should also
verify the surrendered shares/issue of stickers/intimation to the depositories vis--vis
the amount reduced.
34. It may be noted that the buy-back of shares under Section 77A and redemption
of redeemable preference shares under Section 80 do not attract the provisions of
Section 100 of the Companies Act, 1956. Application Money
35. Schedule VI to the Companies Act, 1956 does not prescribe the manner of
disclosure of share application money. However, as a matter of prudence and better
disclosure, share application money should be shown separately between Share
Capital and Reserves & Surpluses in the Balance Sheet till the time share
application money is transferred to the Share Capital Account. However, in the
following situations, the share application money would be disclosed separately

under the head Current Liabilities in the Balance Sheet: Audit of Capital and
Reserves 585 invalid or revoked applications; excess application money received
due to over subscription; and when minimum subscription stated in the offer
document is not received.
36. The auditor has to verify whether application money stated is fully backed by the
share application forms/certificate from the Share Transfer Agent and applications
are received pursuant to a resolution of the appropriate authority for issue of capital.
Amount received without satisfying any of the above conditions should be refunded
by the company
. 37. Share application money accepted by the company, if not backed by the
application form/Registrars certificate along with the resolution of the Board as
stated above, should be treated as unsecured loan. The auditor should verify that the
application money received in excess of capital offered for subscription, if any, has
been stated under Current Liabilities. The auditor may examine the reasonableness
of the period for which the share application money remains pending allotment.
38. In case of refund of excess application money/revoked applications, the auditor
should verify the same and apply the similar audit procedures as applied for audit of
any other liability. The auditor should also verify whether the company has complied
with the Guidelines prescribed by SEBI with regard to time schedule and payment of
interest in case of delay in such refunds. Calls Received in Advance
39. The auditor should examine whether the calls received in advance and payment
of interest, if any, thereon is in accordance with the provisions contained in the
Articles of Association in this regard. Schedule of calls received in advance is to be
reviewed with reference to the amounts deposited in the bank.
40. Interest, if any, paid on the amount received in advance of calls should be
verified and the audit procedure to be employed is same as in case of payment of
interest on borrowings. General
41. The auditor should examine whether proper accounts have been maintained
with regard to amounts received on application, allotment and calls and the
payments by way of refunds/interest and all other relevant accounts are duly
reconciled. Where shares are issued at a premium, the auditor should Handbook of
Auditing Pronouncements-II 586 ensure that such sums are accounted for
separately. In case of buy back, reissue or redemption of preference shares and
reduction of capital by payment of money, the auditor should examine whether these
have been properly accounted and duly reconciled with payments made for the
same.
42. Proviso to section 383A of the Companies Act, 1956 requires certain companies
to obtain a certificate of compliance with the provisions of the Companies Act, 1956

from a practicing company secretary. The auditor of such companies may review the
same. Reserves
43. Reserves should be distinguished from provisions. For this purpose, reference
may be made to the definitions of the expressions, provision and reserve, etc., in
the Guidance Note on Terms Used in Financial Statements issued by the Institute.
The definition of the term reserve as given in the said Guidance Note is explained
in paragraph 3. It is important to remember that any amount provided in excess of
the requirements is in the nature of reserve and should be shown as such.
44. It is also necessary to make a distinction between capital reserves and revenue
reserves in the accounts. A Revenue Reserve is ordinarily available for distribution
as dividend.
45. Reserves may also contain amount received from the Government. These
grants may be in the nature of promoters contribution or related to any specific fixed
asset. The auditor should verify that the principles of Accounting Standard 12,
Accounting for Government Grants for recognition, presentation, refund, if required,
and disclosure of the grant have been appropriately complied with.
46. A reserve account is styled as Reserve Fund only when such reserves are
represented by specifically earmarked assets or investments.
47. In case of amalgamations and mergers, reserves of the amalgamated /merged
company have to be treated as prescribed in Accounting Standard 14, Accounting for
Amalgamations issued by the Institute. However, the auditor, especially in cases of
amalgamations/ mergers, may come across a situation where the relevant Court/
Tribunal has made an order sanctioning an accounting treatment different from that
prescribed by an Accounting Standard. In such a situation, the attention of the
members is drawn to the announcement of the Council of the Institute in this respect.
The Council has recommended Audit of Capital and Reserves 587 that the following
disclosures be made in the financial statements for the year in which different
treatment has been given: (i) A description of the accounting treatment made
alongwith the reason that the same has been adopted because of the Court/ Tribunal
order. (ii) Description of the difference between the accounting treatment prescribed
in the Accounting Standard and that followed by the Company. (iii) The final impact, if
any, arising due to such a difference. Capital Reserves Capital Redemption Reserve
48. In terms of the provisions of sections 77A and 80 of the Companies Act, 1956, if
the company redeems the preferential share capital or buys back its own shares,
using the retained earnings, the amount equivalent to the nominal value of the
shares redeemed/bought back have to be transferred to the capital redemption
reserve, and such reserve can be utilised only for issue of bonus shares to the
members of the company. Securities Premium Account

49. Any premium realised on issue of securities should be transferred to Securities

Premium Account and utilised only for the purposes laid down in section 78 of the
Companies Act, 1956. Government Grants
50. Grants, contributions and subsidies received from Government specifically for
acquisition of assets have to be treated and disclosed in the financial statements as
laid down in Accounting Standard 12, issued by the Institute. Revaluation Reserve
51. Reserves arising out of revaluation of fixed assets are to be transferred to the
Revaluation Reserve account. The treatment and utilisation of these reserves is
governed by the Guidance Note on Treatment of Reserve Created on Revaluation
of Fixed Assets and Guidance Note on Availability of Revaluation Reserve for Issue
of Bonus Shares issued by the Institute. Handbook of Auditing Pronouncements-II
588 Statutory Reserves
52. Section 17 of the Banking Regulation Act, 1949 and certain provisions in the Cooperative Societies Act, 1912 provide for creation and utilisation of certain specific
reserves. Laws governing other entities may contain similar provisions as to the
creation and utilisation of such reserves. The regulators may also direct the entities
to create some specific reserves, for example, the Reserve Bank of India has
directed all banking companies to create and transfer certain amount of profits
earned on trading of investments to Investment Fluctuation Reserve and has also
stipulated the purpose for which such reserve can be utilised. The auditor should
familiarise himself with such regulatory directions with respect to creation and
utilization of such specific reserve and verify compliance therewith. Revenue
Reserves
53. A revenue reserve is a reserve, which is available for distribution as dividend.
The auditor should examine the legal provisions governing the entity with regard to
transfer of certain percentage of profits to reserves, for example, the requirements of
section 205 (2A) of the Companies Act, 1956, the Reserve Bank of India Directions
in case of Non Banking Financial Companies, etc.
54. Certain other statutes may require transfer of profits to reserves. For example,
the Income-tax Act, 1961 may require creation of certain reserves and provide for
rules for utilisation of such reserves to claim certain fiscal benefits. The auditor
should examine the need for transfer of profits to reserves and utilisation of such
transfers. Examination of Compliance with Laws and Regulations
55. Standard on Auditing (SA) 250, Consideration of Laws and Regulations in an
Audit of Financial Statements requires that when planning and performing audit
procedures and in evaluating and reporting the results thereof, the auditor should
recognise that non compliance by the entity with laws and regulations may materially
affect the financial statements. The auditor should therefore acquire sufficient
knowledge of the legal and regulatory framework within which the client operates.
This assumes added importance in cases of audit of capital and reserves of

companies since the matters relating to the share capital and reserves are governed
by the provisions of the Companies Act, 1956, especially the provisions contained in
sections 69 to 116, section 177C, section 205(2A) of the said Act. For example,
sections 69 to 116 of the Companies Act, 1956 regulate the matters relating to issue
and allotment of Audit of Capital and Reserves 589 shares, section 205 (2A) and
section 177C of the Companies Act, 1956 contain provisions relating to creation and
utilisation of certain reserves and section 187C deals with the situation where the
beneficial owner of the shares of the company is different from the person whose
name is appearing in the shareholders register of the company. Guidelines issued
by the Securities and Exchange Board of India from time to time also contain the
matters relating to the issue and allotment of shares in case of public offer and
substantial acquisition of shares in case of existing listed companies. Moreover, the
Articles of Association of the entity may also have provisions relating to share capital
and reserves. The Companies Act, 1956 requires compliance with the Articles of
Association in so far as they are not contradictory to the provisions of the Act. Hence,
it is very important to verify the compliance with the laws and regulations governing
the entity.
56. The State Co-operative Societies Acts may have conditions as to minimum paid
up capital and also minimum number of members for cooperative societies and with
regard to creation and utilisation of various reserves. Statutes governing the entity
may contain similar provisions with regard to the number of members and minimum
amount of capital. The auditor should be familiar with the laws governing the entity.
The auditor has to carefully examine the compliance of such legal requirements.
57. The auditor has to examine the compliance with the various rules and
regulations, for example: (a) Government Order, if any, the Memorandum and the
Articles of Association of the company or the Rules and Regulations governing the
entity. (b) Terms of issue attached or subsequently approved in case of conversion of
loans or convertible preference shares. (c) Issue of Foreign Currency Convertible
Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme,
1993 and Guidelines on Euro Issues. (d) Rules and Regulations relating to issue and
buy back of ADR/GDR. (e) Chapter XIII of SEBI (Disclosure and Investor Protection)
Guidelines 2000 in case of preferential issue. (f) Unlisted Public Companies
(Preferential Allotment) Rules, 2003. Handbook of Auditing Pronouncements-II 590
(g) Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003. (h) Any other
Rules and Regulations prescribed by Government/SEBI from time to time.
Examination of Presentation and Disclosure
58. The laws governing the entity may prescribe the format for disclosure of
information relating to the Capital and Reserves in its Balance Sheet. For example,
the Companies Act, 1956, the Banking Regulation Act, 1949, the Electricity Act, 2003
and Insurance laws prescribe the format of Balance Sheet and the manner of
disclosure of the capital and reserves in the financial statements. The auditor should
examine compliance with such disclosure requirements and adequacy thereof.

Where the relevant statute lays down any disclosure requirements in this behalf, the
auditor should examine whether the same are complied with, for example, SEBI
requires that in case of public issue and preferential issue of shares and/or
partly/fully convertible debentures, purpose for which these monies are utilised and
the manner in which the unutilised money is invested should be disclosed.
Sometimes, it may be necessary to disclose the information either in the Significant
Accounting Policies and Notes on Accounts to clarify the matters, for example, any
employee options outstanding, etc. The auditor should examine such necessity and
consider whether appropriate disclosures such as those listed below have been
made: Aggregate number and class of shares allotted as fully paid up pursuant to
contract(s) with or without payment being received in cash Aggregate number and
class of shares allotted as fully paid by way of bonus shares Aggregate number and
class of shares bought back Source of issuance of bonus shares during the year, if
any Preference Share Capital, including terms of redemption or conversion
Shares with differential rights Special Considerations Applicable to Partnership
Entities
59. The most significant document underlying the partnership form of organisation is
the Partnership Deed.
60. The Partnership Deed generally provides the capital required to be contributed
by the partners and their respective share in profits and losses and Audit of Capital
and Reserves 591 interest, if any, on the capital contributed or balances to their
credit. The Partnership Deed may also provide for the treatment of excess capital
contributed by any partner and their respective rights relating to the withdrawals from
capital/drawing accounts.
61. It may be possible that one or more partners contributes the capital in kind rather
than in cash. For example, the premises required for the business may be provided
by a partner as his capital contribution. If such contributions are in kind at the time of
admission of the partners, the value of such assets is generally mentioned in the
Partnership Deed. If the value is not mentioned in the Partnership Deed, the auditor
may request for a declaration of the value in writing by all the partners. He should
also obtain necessary audit evidence for supporting the valuation.
62. The partnership deed may also provide for fixed capital contribution and timing of
contribution by each partner. The auditor should examine whether the capital
contributed by each of the partners is in accordance with the Partnership Deed and
the capital is maintained at the level mentioned in the Partnership Deed throughout
the period of audit.
63. If the Partnership Deed places any restrictions on the drawings of the partners,
the auditor should examine whether the drawings have been within the permissible
limit.

64. The auditor has to verify the correctness of the interest, if any, credited or
debited to the partners capital or drawings account.
65. Generally, remuneration, interest on capital, interest on drawings, profits or
losses are adjusted in the capital accounts or the drawing accounts of the partners,
and Reserve accounts are not maintained in case of partnership accounts. However,
if fiscal or any other law require any reserve has to be created for claiming any
benefit, a reserve with appropriate title may be created out of the profits of the firm.
The rules for utilisation of the reserve may be provided in the relevant laws. In such
event, the auditor should examine the compliance with the same. Sometimes, the
partners may decide to create and utilise certain reserves due the exigencies of the
business, in which case the auditor has to verify the compliance of the decision of
the partners. In case the entity has not complied with the prescribed reserve
utilization requirements, he should consider the effect of the same on his audit report
in terms of the principles laid down in the SA 250, Consideration of Laws and
Regulations in an Audit of Financial Statements. Hand book of Auditing
Pronouncements-II 592
66. Special Reserves, created to meet the requirements of any law, may be credited
to the Partners Capital Accounts on fulfillment of such statutory requirements or the
terms of creation of such reserves.
67. Government grants and subsidies received shall have to be accounted for in
accordance with Accounting Standard 12
68. Where either investments or drawings have come from Non Resident Indians or
foreign sources involving foreign currency, the auditor has to verify the compliance of
RBI regulations as well as the provisions of the Foreign Exchange Management Act,
1999 in this regard
. 69. All transactions in the partners capital account and drawings account have to
be vouched for their correctness.
70. The auditor has to verify that the distribution of profit/loss is as per the terms of
Partnership Deed. It may be noted that if any minor is admitted to the benefits of
partnership, no loss should be apportioned to the share of minor.
71. If a partner dies/retires during the year, the partnership entity may prepare
accounts up to the date of such death/retirement to ascertain the claim of
heirs/retiring partner. In such event, the auditor has to verify the apportionment of the
profit/loss for both the periods. Special Considerations Applicable to a Sole
Proprietary Entity
72. The audit of capital account of the sole proprietor poses considerable problems,
as the capital account is generally maintained as a current account. Generally, the
entries in the capital account are many, when compared with other forms of entities.
The capital introduced by the proprietor in the entity may be in cash or in kind. The

introduction of capital can take place at number of times, depending upon the need
for the working capital in the entity. Similarly, the drawings are made for various
personal expenses.
73. It may also be possible that the personal expenses of the proprietor are booked
in the accounts of the business without appropriately reflecting them in those
accounts.
74. Generally, internal control procedures are inadequate or absent in many sole
proprietary entities. Hence, the auditor should be careful while examining the
accounts of such entity. Though the auditor needs to obtain the same level of
assurance in order to express an unqualified opinion on the financial Audit of Capital
and Reserves 593 statements of both small and large entities, however, many
internal controls which would be relevant to large entities are not practical in the
small business. For example, in small businesses, accounting procedures may be
performed by a few persons who may have both operating and custodial
responsibilities, and therefore segregation of duties may be missing or severely
limited. Inadequate segregation of duties may, in some cases, be offset by a strong
management control system in which owner/manager supervisory controls exist
because of direct personal knowledge of the entity and involvement in transactions.
In circumstances where segregation of duties is limited and audit evidence of
supervisory controls is lacking, the audit evidence necessary to support the auditor's
opinion on the financial statements may have to be obtained entirely through the
performance of substantive procedures. He should apply his professional judgment
based on the knowledge of the business he has acquired to determine whether the
expenditure recorded is in fact relevant and appropriate to the business and also all
expenditures are recorded in the books of account.
75. The auditor should examine the nature of assets included in the balance sheet of
the entity and verify whether such assets are relevant and appropriate to the nature
of the business and recorded at fair value.
76. Generally profits or losses are adjusted in the capital account or the drawings
account of the proprietor, and reserve accounts are not maintained in case of sole
proprietorship accounts. However, if fiscal laws require any reserve to be created for
claiming any fiscal benefit, a reserve account with appropriate title may be created
out of the profits of the firm. The rules for utilisation of the reserve account may be
provided in the same fiscal laws. In such event the auditor should examine the
compliance with such laws.
77. Special Reserves created, if any, pursuant to fiscal laws, upon fulfillment of the
terms of such reserves, have to be transferred to the capital account of the sole
proprietor.
78. Government grants and subsidies received shall have to be accounted for in
accordance with Accounting Standard 12. Management Representations

79. The auditor should obtain from the management of the entity, a written
representation on significant aspects of capital and reserves accounts, viz., that all
the transactions in the capital and reserves have been recorded and Handbook of
Auditing Pronouncements-II 594 recorded at correct values; that there are no
unrecorded transactions in the capital and reserves accounts, that the year end
balances (including any notes to the accounts in respect thereof) of the capital and
reserves accounts have been appropriately presented and disclosed in accordance
with applicable financial reporting framework, in the financial statements, that the
management has complied with all the applicable rules and regulations while
undertaking transactions relating to capital and reserves. Documentation
80. The auditor should maintain adequate working papers documenting significant
aspects of audit such as:
(a) the nature, timing, extent and results of the audit procedures performed to comply
with Standards on Auditing and applicable legal and regulatory requirements; (b) the
audit evidence obtained; (c) the conclusions reached on significant matters ; and (d)
in relation to audit procedures designed to address identified risks of material
misstatement, conclusions that are not otherwise readily determinable from the
procedures performed or audit evidence obtained. However, it may be noted that the
extent of documentation is a matter of professional judgment since it is neither
necessary nor practical that every observation, consideration or conclusion is
documented by the auditor in his working papers. Audit of Capital and Reserves 595
APPENDIX A EXTRACTS FROM COUNSELS OPINION REFERRED TO IN PARA
22 SUBSCRIPTION IN CASH AND KIND The ratio of Spargos case is that if
there is on the one side a bona-fide debt payable in money at once by the company
(hereinafter called debt), and on the other side a bona-fide liability to pay money on
allotment of shares, so that if bank notes are handed from one side of the table to
other in payment of calls, they may legitimately be handed back in payment of the
debt. The law does not make it necessary that the formality should be gone through
of the money being handed over be taken back again, and if the two demands are
set off against each other the shares have been paid for in cash. This is still good law
and on facts similar to those of Spargos case it would be right for a company to
show in its accounts the shares as having been allotted for cash.

Conclusion
From this research it is concluded that share capital is issued by joint stock
companies to raise their finance. Their are two types of share capital namely equity
share capital and preference share capital.
In case of audit of share capital of company there are many guidance notes issued
by the institute of chartered accountants of india. While auditing the auditor takes
into consideration many points such as authorised, subscribed, issued, paid up,
called up capital etc.

Bibliography/Webliography
Text books reffered:
Book of advanced auditing (M.com)
Book of auditing (T.Y.B.com)
Websites reffered are:
www.wikipedia.com
www.investopedia.com
www.study.com
www.icai.org.in