audit of share capital

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joint stock company issues shares to the public to raise their capital is called as share capital.

Text of audit of share capital

ABSTRACTShare 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 ,auditResearch methodologyThis research is primarily based on secondary data collection. The data is collected through various websites, newspapers, journals, books and articles.Objectives of studyTo understand the meaning of share capitalTo study audit of share capitalTo know types of share capital

INTRODUCTIONMeaningA jointstock companyshould 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 beregisteredand 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 structureof a company. In other words, the capital collected by a jointstock companyfor its business operation is known as share capital. Share capital is the total amount of capital collected from itsshareholdersfor 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 capitalEQUITY SHARE CAPITALThis 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 CAPITALThis 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.


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 carefullyo Memorandum of associationo Articles of associationo Minutes of the directors meetingso Prospectuso Share application formo Letters of allotmento Letters of refundo Share registerso Cashbooko Ledger accounts.

ISSUE OF SHARES AT A PREMIUMWhen 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 CapitalShare 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 accordancewith 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 capitalThe 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 isregistered, therefore it is also known asregisteredcapital. 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 asNominal capital. Authorized share capital refers to thetotal 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 CapitalGenerally, 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