Ch-5 Items of f.st Flashcards
DEFINITION OF ASSERTION
It refers to the representations by management,
explicit or otherwise, that are embodied in the financial statements, as used by the
auditor to consider the different types of potential misstatements that may occur.
Assertions of income statement
- Occurrence - Transactions recognized in the financial statements have occurred and relate to the entity.
- Completeness - All transactions that were supposed to be recorded have been recognized in the financial statements. Transactions have not been omitted.
- Cut-off - Whether all income and expenses are reported in the- correct accounting period. Cut-off is a separate assertion because the substantive procedures to verify it are typically different from those applied to the other components of completeness.
- Measurement - Transactions have been recorded accurately at their appropriate amounts in the financial statements. There have been no errors while preparing documents or in posting transactions to ledger. The figures and explanations are not misstated.
- Presentation and Disclosure - Transactions have been classified and presented fairly in the financial statements. Presentation and disclosure assertions are considered during the course of the audit to determine that the disclosures are complete and accurate.
Assertions of balance sheet items
- Existence - Assets, liabilities and equity balances exist as at the period end.
- Completeness - All assets, liabilities and equity balances that were supposed to be recorded recorded have been recognized the financial statements.
- Cut-off - Whether all assets and liabilities are reported in the appropriate period.
- Valuation - Assets, liabilities and equity balances have been valued appropriately i.e. the amounts at which they are recorded are appropriate.
- Rights & Obligations - Entity has the right to assets i.e. (whether the entity has ownership and legal title to assets) and the liabilities recognized in the financial statements represent all the entity’s obligations to repayment as at a given date.
- Presentation and Disclosure - Whether particular items in the financial statements are properly classified, described and disclosed.
Sec 52 Shares Issued at Premium states what
Section 52 of the Companies Act, 2013 provides that a Company shall transfer the amount received as premium to securities premium account and state the purpose for which the amount in the account can be applied.
Application of securities premium account
or
what does The auditor needs to verify
The securities premium account may be applied by the Company for the following purposes:
(a) towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares;
(b) in writing off the preliminary expenses
of the Company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or
(e) for the purchase of its own shares or other securities under Section 68. (Buyback)
(i) whether the premium received on shares, if any, has been transferred to a “securities premium account” and
(ii) whether the application of any amount out of the said “securities premium account” is only for the purposes mentioned above.
Shares issued at a discount: what does The auditor needs to verify
According to Section 53 of the Companies Act, 2013,
(1) a company shall not issue shares at a discount, except in the case of an issue of sweat equity shares given under Section 54 of the Companies Act, 2013.
(2) any share issued by a company at a discounted price shall be void.
(2A) Notwithstanding anything contained in sub-sections (1) and (2), a company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the Reserve Bank of India under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949.
(3) Where any company fails to comply with the provisions of this section, such company and every officer who is in
default shall be liable to a penalty which may extend to an amount equal to the amount raised through the issue of shares at a discount or five lakh rupees, whichever is less, and the company shall also be liable to refund all monies received with interest at the rate of twelve per cent. per annum from the date of issue of such shares to the persons to whom such shares have been issued.
The auditor needs to check
(i) the movement in share capital during the year and wherever there is any issue,
(ii) he should verify that the Company has not issued any of its shares at a discount by reading the minutes of meeting of its directors and shareholders authorizing issue of share capital and the issue price.
(iii) Further, auditor should also verify that whether the company has issued shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the Reserve Bank of India under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949.
Issue of Sweat Equity Shares:
According to Section 54 of the Companies Act, 2013, the employees may be compensated in the form of ‘Sweat Equity Shares”.
“Sweat Equity Shares” mean equity shares issued by the company to employees or directors at a
i. discount or
ii. for consideration other than cash
for providing know-how or making available right in the nature of intellectual property rights or value additions, by whatever name called.
The auditor needs to verify that the Sweat Equity Shares issued by the company are of a class of shares already issued and following conditions have been complied with (as per Section 54):
(a) the issue is authorized by a special resolution passed by the company;
(b) the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;
(c) omitted
(d) where the equity shares of the company are listed on a recognised stock exchange, the sweat equity shares are issued in accordance with the regulations made by the Securities and Exchange Board in this behalf and if they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.
Reduction of Capital
Section 66 deals with the reduction of share capital.
(i) Verify that the meeting of the shareholders held to pass the special resolution was properly convened and that the proposal was circularized in advance to all the shareholders;
(ii) Verify that the Articles of Association authorises reduction of capital;
(iii) Examine that there has been no default
w.r.t repayment of deposits accepted by company or payment of interest on such deposits. Reduction of capital shall not be affected if such default exists.
(iv) Examine the order of the Tribunal confirming the reduction and verify that a copy of the order and the minutes have been registered and filed with the Registrar of Companies;
(ix) Confirm that the words “and reduced”, if required by the order of the Tribunal, have been added to the name of the company in the Balance Sheet.
(x) Check if the company have complied with all the terms and conditions imposed by the tribunal while confirming reduction of share capital.
(xi) Verify that the Memorandum of Association of the company has been suitably altered.
