WHAT IS VERIFICATION?

Verification means a careful checking of the value

ownership and the title of assets.
It includes determination of actual possession and
existence and the presence of any charge on it.
According to Spices and Pegler, ‘Verification of assets
means an inquiry into the value, ownership and title,
existence and possession, the presence of any charge on
the assets.’
‘The main objective of an audit is to give an opinion on
the financial statements. The verification is a process
incurred to derive the opinion.
Verification is an important activity that the auditor
must do carefully. As was observed in the case of London
Oil Storage Co. Ltd Vs. Scar Has Luck Co. (1904), “it is the
duty of the auditor to verify the existence of assets stated
in the Balance Sheet and he will be liable for any damage
suffered by the client if he fails in his duty.”

INTANGIBLE ASSTES
*These represent company’s ownership of such assets
which is evidenced by legal documents or otherwise.
*These are valued at fair values and any amortization is
appropriately recorded and presented.
*These are properly described and classified in the
balance sheet, and disclosures have been made for any
restrictions against the assets and adequate disclosures
have been made in accordance with the Companies
Ordinance, 1984 and the relevant IASs.
*Obtain the schedule of all intangible assets and its
amortization. Foot and trace ending balances to the lead
schedule. Tie the additions, retirements and amortization
provision for the year to supporting schedules.
*Discuss with appropriate client personnel the company’s
policies for capitalizing and amortizing intangible assets.
Consider the acceptability of the stated policies and the
relationship of the intangible assets to the client’s
business. Evaluate any changes in policy as to whether
they constitute a change in accounting principles or
otherwise require disclosure in the financial statements.
*For all major additions, obtain a listing of additions and
review whether the intangible assets are acquired or self
generated.
*Ensure that internally generated goodwill, brands,
masthead, publishing titles, customers list and items
similarly substance have not been recognized as an
intangible asset.

VERIFICATION OF LOAN AND BOROWING

1. VERIFY EXISTENCE,OBLIGATION AND COMPLETENESS

a) Examine whether the loans obtained are within the

borrowing powers of the entity.
b)Examine the relevant records and documentation
supporting the transactions to assess the validity
and accuracy of loans. The auditor should keep the
following into consideration while doing so-

* The loans and borrowings are valid and have

been properly authorized. For eg, in case of a
limited company the auditor should examine board
of directors authorization. In case the enterprise
has accepted deposits, the auditor should ensure
compliance with directives issued by the reserve
bank of India.

* In case of loans and advances from banks,

financial institution and others, whether balance as
per books and statement of lenders tally. In case of
difference between the two amounts, reconciliation
statement prepared by the client should account
for the reasons.

* Examine loan agreements to gain knowledge

about important terms affecting the financial
statements and ensure their compliance. For eg ,
restrictions as to dividend payment , maintenance
of debt equity ratio , retained earning restrictions,
restrictions on the issuance of additional debt ,etc
should be adhered to.
 * Examine documents to ensure that statutory
requirements, if any, for creation and registration
of charges in respect of loans and advances have
been met.
c) Confirm loans and borrowings outstanding and interest
payable on them directly with the lender.
d) Incase the enterprise has acquired assets under hire –
purchase agreements the auditor should ensure that
future installments have been shown as secured loans.

VALUATION OF LOANS AND

BORROWINGS
 The auditor should examine whether liabilities are
classified and disclosed in the Balance Sheet in
accordance with recognized accounting principle and
relevant statutory requirements, if any.
 Examine whether installments of long term loans
falling due within next 12 months have been
disclosed in the Balance Sheet as a foot note or in
parentheses.

 Where the market value of an asset offered as a

security against loans has fallen below the amount of
loan outstanding, the auditor should ensure that the
loan is classified as secured only to the extent of
market value of security.
  Ensure that the assets hypothecated as security in
case of a company are duly registered with registrar
of companies and are recorded in the register of
charge as required under Section 125 of the
Companies Act 1956.

BANK BALANCE AND CASH IN HAND

Bank Balances
1. Check entries from case book to bank statements,
and compare the bank balances with the
corresponding case book balances or bank account
balances, if separately maintained.
2. Check the bank reconciliation statement and
ascertain how outstanding entries have been cleared
both at the beginning and at the end of the year.
3. While checking balances at the year-end, note down
the last number of cheque drawn and see at time of
audit that no further cheques have been issued.
4. Obtain directly bank confirmation letter stating the
balance in the account as on the year-end date and
 see whether any charge or similar other restrictions
exist in making use of the balance amount.
5. In respect of fixed deposits with the bank, vouch
such deposits with bank advice and verify such
accounts with the certificates from the bank. See
that the interest has been received or accrued as per
the terms of the certificate.

Cash in Hand
1. Attend year-end cash count, if possible. If not,
count cash on any other day close to the date of
the year-end & work it backward or forward to the
date of the balance sheet & see whether the
balance so found agrees with the balance in the
cash book. He should see that there is no
unauthorized IOU to cover up the cash shortage.
2. Make surprise cash count on any day & compare
the same with the balance of that day as per the
cash book.
3. Test the accuracy of cash book totals, balancing &
carry-forward etc.
4. See that the cash is kept in secured place. Also see
that there is adequate insurance cover for cash
movements between office & the bank & vice-
 versa & even for the cash in hand if that is usually
heavy.
5. In case of a petty cash book is maintained, the
above mentioned procedure should be applied in
verifying petty cash also.
6. Examine that there is no over-writing in the Cash
Book & entries are made on a day-to-day basis.

VERIFICATION OF PROVISION FOR

TAX
According to International Financial Reporting
Standards (IFRS), provision for income taxes means
liability for Income taxes payable. Provision for income
tax means or refers to line items in profit and loss
statement.
Provision for income tax may be shown on the
Liabilities side of the Balance sheet or on the debit side of
the profit and loss account.
Thus, provision for income tax is a liability and
should be verified from time to time.
Audit Procedures for Verification of Provision for
Income Tax
Various audit procedures are adopted by the
auditor for verifying of provision for income tax. These
procedures are as follows:
1) Recalculate the provision for tax liability for the
year as per the provisions of the income-tax Act,
1961 and rues made under AS-22.

2)Examine the records and documents such as

receipted challans, bank statements and demand
notices to gain knowledge about payment of
advance tax, self assessment tax and any other
demand raised by Income tax department

3) Review the assessments completed revised or

rectified up to the time of audit and ensures
suitable adjustments have been made in respect of
additional demands or refunds.

4)Compute tax payable as per the latest applicable

rates in the finance act.

5)Ensure that overall provisions on the date of the

balance sheet is adequate in regard to current
year provisions, advance tax paid, assessment
orders, etc.

6)In case of any disputed liability with regards to

demands raised, examine whether there is a
positive evidence of action by the enterprise to
 show that it has not accepted the demands, eg., it
has gone to appeal against the demand or had
made an application for rectification of a mistake.

7)The auditor should also examine whether disputed

tax liability requires a provision or suitable
disclosure. The probability of such a provision can
be assessed after making appropriate enquiries of
management, examining the correspondence
relating to dispute and obtaining management
representation.

8)Review adjustments, expenses, disallowed special

rebates, etc with reference to the last available
completed assessment.

9) Ensure proper disclosure along with accounting

policy adopted as per AS-22 requirements.

WHAT IS VOUCHING?

Vouching in auditing means verification of any

transaction with supporting documents attached with the
voucher And verification refer complete checking system.
It can be represented by the four Vowels:
A stand for Authority
E stand for Existence
I stand for Importance
O stand for Object and
U stand for value

Vouching is an important procedure for obtaining audit

evidence. Normally entries in the books of accounts are
made on the basis of documentary evidence such as bills,
receipts, and pay in slips and so on. Such documentary
evidence is called a voucher. Vouching means critical
examination of such vouchers.
The term vouching in the context of auditing has been
defined by prof Dicksee as “Vouching consists of
comparing entries in the books of accounts with
documentary evidence in support thereof”
According to Spicer and Pegler “the examination by the
auditor of all documentary evidence which is available to
support the authencity of the transactions entered in the
client’s records”
It is clear that vouching is the process of inspecting the
documents that supports the recorded transactions in
order to verify the authencity and authority of such
transactions
VOUCHING OF PURCHASE AND
PURCHASE RETURNS:
Vouching of purchase transactions
Credit purchase: the auditor should vouch credit purchase
by following the audit procedures mentioned below.
• Examine purchase book: the auditor should examine
the transaction recorded in the purchase book with
reference to related purchase invoice and other
supporting documents attached to it-purchase
requisition, purchase order and receiving report or
goods received notes
• Examine purchase invoices: the auditor should select
a small sample of vendor’s invoice at random and
should conduct audit in depth on them i.e, trace the
transaction from placing the order to the entries in
inventory goods for actually receipt and payment
made to the suppliers the auditor should ensure that
subsidies, rebates, duty drawbacks or other similar
items have been properly accounted for.
• Examine the numerical sequence of source
documents: the auditor should ensure that numerical
sequence of source document such as purchase
requisition, purchase orders, receiving reports and
vouchers have been maintained and missing
numbers have been duly accounted for
 • Examine cut-off points: in order to ensure the
purchase were recorded at the point of time when
title was passed to the client, the auditor should
examine cut-off points on prenumbered purchase
requisition, purchase orders and goods received
notes. The auditor should, then trace the goods
received notes pertaining to a few days before the
end of the period under audit to the related purchase
invoices such a comparison would ensure that
purchase represented by such invoices have been
recorded as the purchases of the period under audit.

Vouching or purchase returns

• Examine purchase return book: the auditor should
examine purchase return book with reference to
copies of debit notes issued to suppliers and outward
return notes
• Examine debit notes: the auditor should examine the
copies of debit notes with reference of goods
outward return notes, original purchase invoice and
advice note for returns. He should also examine
whether returns have been properly authorized and
debit notes are prepared by the person authorized to
do so.
• Examine cut-off points: he should trace the outward
returns notes and transporters receipts pertaining to
a few days before the end of the period under audit
 to the related debit notes, such an examination
would reveal whether returns represented by debit
notes have actually been recorded as the purchase
returns of the period under audit.

VOUCHING OF SALES AND SALES

RETURNS

The auditor should check the following points while

vouching the sales<cash and credit>
I. supporting documents: the sales transactions should be
supported by copy of cash memo or sales bill of the client
2. Copy of delivery challan, excise gatepass
3. Transporter’s bill or octroi receipt if paid by client. In
case of export items bill of lading, customs duty receipt
and bank advise showing the remittances received in
rupees. After conversion at foreign exchange rate
ii.Name: name of the concern on the sales bill in the sales
register & in the supporting documents should be of
client
iii.date: date on sales bill in the sales register &
supporting document should tally and pertain to the
current year.
iv.amount: amount in figures & words in the sales bill
should tally with that in the supporting documents and
entries
v.quantity: the quantity mentioned in the sales bill should
tally with that in supporting documents & entry in the
books.
Vi.signature on the books: The sales bill should by an
authorized official of the client to indicate approval &
person preparing bills and making entries in the sales
register to fix responsibility for any error.
vii.Check the serial number
viii.to check errors and frauds
ix.check whether sales are properly accounted has been
maintained in the books
X. Compliance with guidelines of ICAI and Indian
companies act.

Auditor should vouch sales return in the

following manner.
1. Supporting documents: the sales returns should be
supported by 1.copy of credit note of the client or
debit note of the customer.2 copy of delivery challan
etc.
 2. Name: name of the concern on credit notes on the
sales return register and in the supporting
documents should of the client.
3. Date: date on the credit notes in the sales return
register and in the supporting document should
tally.
4. Sr.no: sr. number on the credit notes should be
continuous and tally with those in the books.
5. Amount: amount in figures and words on the credit
notes should be the same and tally with the amount
in the book and the supporting documents.
6. Quantity: the quantity mentioned in the credit notes
should tally with the supporting documents and the
entry in the books.
7. Signatures on credit notes and GRN: the credit note
should be signed by an authorized official of the
client to indicate approval similarly the goods
received note should be signed by the storekeeper to
indicate receipt of goods.
8. Signature and stamp of party.

PREPAID EXPENSES:
For vouching the prepaid expenses, the auditor should
examine the nominal accounts, the demand notes,
relevant receipts etc. and make sure that proper
adjustments have been made in the books of account at
the date of balance sheet. He should also satisfy himself
that calculations in respect of prepaid expenses are
correct.
i. Accrual Accounting: Accrual is the fundamental
basis of accounting. A limited company must
maintain its accounts on accrual basis. Under this
basis amounts which are paid in advance are treated
as pre-paid expenses. This gives rise to pre-paid
expenses.
ii. Scrutiny of Expenses Accounts: Auditor should
scrutinize all expense accounts(esp. accounts like
service charges paid, interest, rent, salaries,
royalties.etc) to ascertain the amounts prepaid.
iii. General Rule: As a general rule, expenses should
be booked when they have accrued as per the terms
of agreement between the parties.
iv. Service Charges: Service charges accrue when the
service is performed and complete. Thus, charges for
job work (i.e., processing by outsiders of material
supplied by the concern) accrue when the job or the
processing is complete. If any amount is paid but the
job is not complete as at year end, it should be
shown as prepaid expenses.
v. Interest Due: Interest accrues on time basis at the
rate agreed. Thus, if a loan agreement states that
interest or a loan of Rs. 1, 00,000 is payable @ 20%
 per year, interest for a year would be Rs.20, 000. If
interest paid is Rs. 25,000, Rs. 5,000 is paid in
advance and pertains to the next year. Auditor
should scrutinize the interest account to ascertain
the amount of interest pre-paid.
vi. Rent: Rent also accrues on time basis at the rate
agreed. Thus, if a rent agreement states that rest of
Rs. 1000 is payable per month, rent for a year would
be Rs. 12,000. If Rs. 15,000 is paid during the year,
Rs. 3000 should be shown as pre-paid expenses.
vii. Royalty: Royalty means the charges for use of
know-how, patents, trademarks and copyrights.
Royalties accrue as per the terms of the concerned
agreement.
viii. Closing Balance: Auditor should check that the
closing balance in the pre-paid expenses account is
disclosed under the head loans and advances in the
asset side of the balance sheet as per requirements
of Schedule VI, Part I of the Companies Act.
1956.
ix. Opening Balance: Auditor should check that the
opening balance brought forward from the previous
years in the pre-paid expenses account is squared off
during the current year.

TRAVELING EXPENSES
The auditor should adopt the following procedures to
verify the payment of travelling expenses:
1. Examine the cash book: The auditor should
examine the cash book for payments made for
travelling expenses with reference to standard form
for such reimbursement filled in by the claimant with
his and designation clearly indicated.

2. Examine the standard form for claimant

reimbursement: The auditor should examine the
standard form to verify details such as-

a. Whether the tour was sanctioned by proper

authority.

b. Whether claim for travelling expenses is

supported by the relevant vouchers such as
travelers copy of the air ticket in case of air
travel, hotel bills, etc.

c. Whether travelling expenses such as boarding

and lodging expenses, daily allowance,
conveyance, etc. have been claimed and paid as
per rules, if any, framed by the entity in this
regard. For example, entitlement of employees
working at different levels of authority may vary
with regard to mode of travel, class of travel,
boarding and lodging facilities, etc.
 d. Whether amount claimed for sundry expenses
such as porter age, tips, etc. and not supported
by bills, is reasonable.

3. Examine the adjustment for advances, if any:

In case some amount has been given as advance to
the claimant, the auditor should ensure that a proper
adjustment has been made for it at the time of
payment.

OUTSTANDING LIABILITIES:
UNEARNED INCOME REFERS TO THE INCOME RECEIVED IN
THE CURRENT YEAR BY WAY OF AN ADVANCE, BUT
PERTAINS TO THE SUBSEQUENT YEAR. THE AUDITOR
SHOULD VOUCH SUCH ITEMS VERY CAREFULLY AND
MAKE SURE THAT ALL INCOMES, WHICH RELATE TO THE
SUBSEQUENT YEARS, SHOULD BE TREATED AS
UNEARNED INCOME AND ARE SHOWN IN BALANCE SHEET
LIABILITY SIDE.
SOME OF THE COMMON UNPAID OR OUTSTANDING
EXPENSES ARE O/s WAGES AND SALARIES, O/s RENT,
RATES, TAXES, O/s AUDIT FEES, O/s FREIGHTS AND
CARRIAGE, O/s TRAVELLER’S AND AGENTS COMMISSION
ETC. TO VOUCH THE O/s EXPENSES AUDITOR SHOULD
SCRUTINIZE ALL NOMINAL ACCOUNTS REPRESENTING
EXPENSES, RELEVENT RECEIPTS, DEMAND NOTES AND
INVOICES. HE SHOULD ALSO CHECK THAT THESE HAVE
BEEN DEBITED TO CURRENT YEAR’S PROFIT AND LOSS
A/c AND SHOWN AS a LIABILITY IN THE BALANCE SHEET.
GENERALLY PURCHASE MADE AT THE COLSE OF THE
YEAR IS ENTERED IN THE STOCK REGISTER BUT NO
ENTRY IS MADE IN THE PURCHASE BOOK. THE RESULT OF
SAME IS THAT PURCHASE IS UNDERSTATED AND PROFITS
GET INFLATED. THE AUDITOR SHOULD CHECK THAT
PURCHASE ACCOUNTS IS DEBITED WITH THE TOTAL
PURCHASES MADE DURING THE YEAR AND THE UNPAID
AMOUNT IS SHOWN AS A LIABILITY IN THE BALANCE
SHEET. TO DETECT UNRECORDED PURCHASES, THE
AUDITOR SHOULD COMPARE STOCK REGISTER WITH
PURCHASE BOOK AT END OF CURRENT YEAR.

DIVIDEND
AUDITORS DUTY RELATING TO DIVIDENDS

 Verify that if the company has any contractual

obligation towards financial institution or other party
limiting the distribution of dividend or laying any
condition on distribution the co. has complied with
those obligations. For eg while granting a loan to the
co. the lending financial institution may stipulate that
the dividend cannot exceeds a certain rate unless
the co. satisfies the stipulated terms .
  Examine whether the procedural requirements
relating to declaration and distribution have been
followed.
 Examine the minutes of BOD meeting in which the
dividend was recommended or not.
 Examine that the co. has paid the dividend within the
prescribed period to its registered members.
 Check the gross amt of dividend with paid up capital
to satisfy that it matches with % of declared
dividend.
 Check reconciliation with bank statement in regards
to net dividend paid, transferred to unpaid amt and
TDS.etc.
 Obtain letter of representation containing the views
of the BOD on all compliances.
 Satisfy that in case of shares held jointly, the
dividend was paid to the first named holder unless
any other instruction was there.

Verification and valuation of stock

What is inventory stock?
The ICAi has defined inventory as, “Tangible property
held for sale in the ordinary course of business or in the
process of production for such sale or for consumption in
the production of goods or services for sale including
maintenance supplies and consumables other than
machinery spares”
Techniques of verification of stock
Stock can be verified by physical verification, observation
or confirmation.
1 verification means physical inspection
2 Observation means observing or witnessing the
inspection of assets done by others
3 confirmation means obtaining written evidence from
outside parties regarding the existence of an asset
Duty of the auditor is to ascertain that the
procedures for stock taking done by the
management
Were effective and that they were actually followed. The
statement on auditing practices has made the following
recommendations in this respect.
1 Written instruction
2 Note quantities on tags
3 No stock movements
4 Test check
5 Check all tags
6 Stock sheets
7 Up-to-date stock books
8 Reconciliation.
 Verification of share capitals

Capital: Capital is the main source of funds for any organization. The capital
is the amount of money invested in the concern by its owners. ‘The capital is
the amount of money invested in the concern by its owners.’

Share Capital: It may be defined as the capital rose by the issue of shares.

Kinds of Share Capital:

Section 85 to 90 of Companies Act 1956, deal with the provisions relating

to the kinds of share capital of a company. These are not applicable to a
private company unless it is a subsidiary of a public company. According to
Sec 86, share capital of company will be following two types:

(a) Equity Share Capital

(b)Preference Share Capital

Equity Share Capital

According to Sec 85 means that share capital, which is not preference

share capital. Equity Share Capital may be:

i. With voting rights

ii. With differential rights as to dividend, voting or otherwise in

accordance with such rules and subject to such conditions as may be
prescribed.

Preference Share Capital

According to Sec 85, Preference Share Capital means that part of share
capital which:

i. Carries a preferential right as to payment of dividend, which may be

either a fixed amount or an amount calculated at a fixed rate and

ii. Carries a preferential right on winding up a repayment of capital, to be

repaid the amount of the capital paid up a deemed to have been paid
up.

Verification of Capital
 The auditor should keep the guidance note on audit of capital,
summarized below, in mind during the verification of capital:

1. Authorized Capital

a. Closing Balance: The authorized capital shown in the balance

sheet should be checked with the Memorandum of Association in
case of the company. The auditor may also refer the audited
balance sheet of the immediately preceding year.

b. Changes during the Year: The changes in authorized capital

during the year should be verified in the following manner:

i. Minutes: 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 & whether it is properly authorized.

ii. ROC Forms: A company, having a share capital, in terms

of the provision of Sec 94 of the Companies Act, 1956 may
change its share capital as follows:

• Increase its share capital by such amount as it thinks

expedient by issuing new shares.

• Consolidate or divide all or any of its share capital

into shares of larger amount than its existing shares.

• Convert all or any of its fully paid-up shares into

stock, and reconvert that stock into fully paid-up
shares of any denomination.

• Sub-divide its shares, or any of them, into shares of

smaller amount that is fixed by the memorandum.

• 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 forms along with the
specified fee pursuant to the requirements of Sec 97 of the Companies Act,
1956.

2. Issued Capital
 The following records/documents would ordinarily provide necessary
evidence for issued capital:

a. Minutes: The minutes of the general and/or board

meetings for further issue of shares, e.g., under Sec 81 of the
Companies Act, 1956.

b. Offer documents: Offer documents, if any, filed with the

Securities and Exchange Board of India (SEBI)/Registrar of
Companies (ROC) & Reserve Bank of India (RBI) in respect of
permission in case of ADR/GDR issue.

c. Return with ROC: Return of allotment filed with the ROC.

3. Issue of Shares for Cash

While vouching the issue of shares for cash, the auditor should:

a. Check the application forms for shares with application

books.

b. Check the amount received in cash or by cheques with the

cashbooks or bank passbooks to ensure receipt of application of
money.

c. Check that the application money was kept in a separate

account with a scheduled bank.

d. Check the resolution passed by directors in Directors’

Minute books, to ensure that all the allotments have been
properly approved.

e. Check that allotment of shares is as per the basis of

allotment recommended by the stock exchange.

f. Check that the allotment has been made only after

receiving the minimum subscription.

g. Check that the shares allotted do not exceed the

authorized capital of the company.

h. Check the allotment letters with allotment books.

i. Check the cash refunded to applicants to whom shares

have not been allotted, with the copies of letters of regret,
cashbook, and the application & allotment books.

j. Check the payee’s acknowledgement receipt.

 k. Check the postings from application & allotment books into
the share register.

l. Check the journal entries & ledger postings in the

application/allotment/share capital account etc.

m. Check that the return of allotment of shares was filed with

the ROC within 30 days of allotment.

n. If shares were issued to non-residents, check that RBI

formalities have been complied with.

4. Issue of Shares for Consideration other than Cash

a. Cases: While vouching issue and allotment of shares

auditor should inquire whether any shares have been issued for
consideration other than cash, e.g. in the following cases:

• To promoters of the company against services rendered or

reimbursement of preliminary expenses incurred by them
on formation of company etc.

• To vendors from whom business is purchased.

• To underwriters in lieu of commission.

• To shareholders of company being absorbed or

amalgamated.

b. Agreement: The auditor should verify whether the

agreement has been properly approved. The auditor needs to
verify that the consideration for which shares are issued, viz.,
supply of machinery or technical knowledge is prima-facie fully
received. The auditor should verify the numbers of shares, which
have been allotted under the agreement. These shares may be
either fully paid or partly paid.

c. Minute Book: He should examine the minute book of the

board of directors to confirm that the agreements were properly
approved and to ascertain the basis of issue of shares.

d. Prospectus: He should see whether this fact has been

mentioned in the prospectus.

e. ROC: Further, as per the provision of Sec 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:
 • It has to file with the ROC, a return of the allotment, within
30 days, stating that 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.

• 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 allotted to the
allotment together with any contract of sale, or a contract
for services or other consideration in respect of which
allotment was made.

5. Issue of Shares at a Premium

a. Law: Auditor should check that the following provisions of

Sec 78 of the Companies Act, 1956 are complied with:

• A company may issue shares at a premium, i.e., at a

price higher than their face value.

• The total amount of the premium on such shares

must be transferred to an account known as the security
premium account.

• Such a premium can be regarded as capital and

should not be mixed up with the share capital of the
company.

• The premium cannot be treated as profit and hence

cannot be distributed to the shareholders of the company
as dividend. In no case it should be transferred to the
credit side of the P/L A/C of the company.

• However, the amount of share premium may be used

for- Writing down fictitious assets, i.e., preliminary
expenses, brokerage or underwriting commission on issue
of shares and debentures; Issue of bonus shares; paying
premium on the redemption of redeemable preference
shares or debentures; or Writing off discount allowed on
any issue of shares or debentures of the company.

b. Authorization: Auditor should examine the prospectus,

the article of association and the minutes-book of the directors to
ascertain whether they permit the issue of shares at a premium
and if so at what rate.
 c. Supporting Documents: Auditor should examine the
supporting documents as mentioned in vouching shares issued
for cash.

d. Accounting: Auditor should see that the premium

received has been taken to the securities premium account and
shown on the liabilities side of the balance sheet.

e. Use of Premium: Auditor should ensure that the company

has complied with the provisions of Sec 78 of the Companies Act,
1956 regarding the use of premium money.

f. Return of Allotment: Auditor should check the return of

allotment, which should be filed with the ROC, within 30 days of
the allotment.
6. Issue of Shares at a Discount

a. Provisions: Section 79 of the Companies Act, 1956, permits a

company to issue shares at a discount only on the following
conditions:

i. The issue of shares at a discount must be of a class of

shares already issued by the company.

ii. The issue of shares at a discount must be authorized by a

resolution passed in the general meeting and sanctioned
by the Company Law Board (CLB).

iii. The maximum rate of discount must not exceed 10%

unless the CLB is of the opinion that a higher percentage of
discount may be allowed in special circumstances.

iv. The shares must be issued within 2 months from the date
of sanction by the CLB or within such extended time as the
Board may allow.

v. The issue of shares at a discount can be done by a

company only a year after the commencement of the
business by the company.

b. Auditor’s Duty

i. Auditor should see that such shares have been issued

according to the various provisions of the Companies Act,
1956.
 ii. Every prospectus relating to the issue of the shares must
contain the particulars of the discount allowed on the issue
of the shares or the amount not written off at the date of
the issue of the prospectus.

iii. Such discount until written off should be shown on the

asset side of the balance sheet under the head
“Miscellaneous Expenditure”.

iv. To check the Return of Allotment, which should be filed

with the ROC, within 30 days of the allotment?

Vouching Of Sale of Scrap

 Meaning of sale:

The transfer of ownership of an item or the

entitlement to a service in exchange for
money.

 Meaning of scrap:

A small piece of something that is left

over after the rest has been used.

 Vouching of Sale of scrap:

(1) Check whether the organization is
maintaining reasonable records for generation
of scrap.

(2) Ascertain and review internal control and

records for sale or disposal of scrap.

(3) Review production and\or cost records to

determine the scrap which may have generated
during given period, see if there are any norms
set by the management in this regard. If
material difference is there, make enquiries
from the management.

(4) Compare the sale proceeds of scrap during

the year with the previous two or three years
amount to see the reasonableness of the
amount after taking into account any material
change in the volume of production.

(5) Vouch sales, with invoices raised,

advertisement for tender, rate contract with
scrap dealers.

(6) Check that disposals of scrap were made

through proper procedures for outgoing
material and scrap is lifted during normal
business hours.

(7) Check that the company or concern had

raised proper invoice and issued receipt for
disposal of scrap and the sale proceeds were
duly accounted for.
(8) Check that there is proper procedure to
prevent other materials going out of the
premises under the garb of scrap.

(9) Check that scrap is sold only to the

competitive scrap dealers and apparently there
is no bias in selecting the buyer.

(10) Ensure that there exists a proper control

procedure to identify scrap and good units and
they are not mixed up and sold as scrap.

(11) Make an overall assessment of the value

of realization from scrap as to its
reasonableness.

(12) In case of a company, if there is

requirement to make a statement on
realization of scrap in the auditor’s report
under the Manufacturing and Other
Companies (Auditor's Report) Order, 1988
["MAOCARO"] see that the necessary
statement has been made in the audit report.