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Auditing - Verification of Capital | 12th Auditing : Chapter 6 : Verification of Liabilities

Chapter: 12th Auditing : Chapter 6 : Verification of Liabilities

Verification of Capital

The amount invested by the owner in a business concern is called as Capital.

Verification of Capital

The amount invested by the owner in a business concern is called as Capital. The owner may be a sole proprietor or partner or shareholder. It is an internal liability of the business concern and the auditor is required to verify the genuiness and correctness of it in the Balance Sheet.


1. Verification of Capital in a Partnership Firm

The auditor should take into consideration the following while verifying capital of a partnership firm.

Verify Partnership Deed:

The auditor should verify the partnership deed to find out the original capital contributed by each partner and the rate of interest payable on capital.

Verify Capital Accounts:

He should verify all the transactions affecting the capital accounts of the partner.

Examine Books of Accounts:

He should examine the cash book, pass book and withdrawals of the partner.


2. Verification of Capital in a Company

While verifying the capital of a company, the auditor should verify the share capital and the level of reserves and surplus maintained by the company.

Meaning of Share Capital

Share capital means the capital raised by issue of shares. It is the amount invested by shareholders towards the face value of shares are collectively known as Share Capital.

Types of Equity Share Capital

Authorised Capital: It is the maximum amount of capital which a company is authorised to raise and is stated in the Memorandum of Association. It can also be called as “Registered Capital” or “Nominal Capital”.

Issued Capital: This represents a part of the authorized capital, which is issued to public for subscription.

Unissued Capital: The difference between authorised capital and the issued capital represents unissued capital.

Subscribed Capital: It refers to that part of the issued capital which has been subscribed by the public.

Unsubscribed Capital: The difference between issued capital and subscribed capital represents unsubscribed capital.

Called-up Capital: This refers to that part of the subscribed capital which has been called up by the company for payment.

Un-called Capital: The difference between subscribed and called-up capital is called un-called capital.

Paid-up Capital: It is that part of called-up capital which has been actually paid-up by shareholders.

Unpaid Capital: The un-paid balance in the called-up capital is known as “calls in arrears” or “un-paid capital”.

Reserve Capital: A company can reserve part of its un-called capital and will be called only at the time of winding up. A special resolution has to be passed for this purpose. It is not disclosed in the company’s balance sheet.


Auditor's Duty in Verification of Share Capital

The auditor’s role in verifying the Share Capital is listed below:

1. Verify Memorandum of Association and Register of Members: In case of first audit the auditor should check the Memorandum of Association, list of share holders and register of members for verification of share capital.

2. Vouch Entries: He should examine the pass book, cash book, and Minute book of directors in order to find out the number of shares issued, different types of shares issued and the amount received on each shares.

3. Compliance with the Provisions of Companies Act: In case of subsequent audits, the auditor should ensure that share capital balance is the same as at the end of last year. If he finds that the capital stands altered by fresh issue of shares, the auditor should ensure that relevant provisions of the Companies Act have been complied with.

4. Disclosure in Balance Sheet: He should ensure that ‘authorised capital’ and each class of issued and subscribed capital has been shown separately in the Balance Sheet.

5. Examine Rights of Shareholders: He should examine the rights attached to various shares in the Articles of the company.

6. Issue at Premium: Where the shares are issued at premium, he should verify that they are shown separately in the Balance Sheet.

7. Issue of Shares for Consideration other than Cash: Where the shares were allotted for consideration other than  cash,  he  should  examine  the contract constituting with the vendor share and minutes book of the board.

8. Verify RBI’s Approval: Where shares are allotted to foreign nationals, the auditor should verify RBI's permission in this regard.

9. Forfeiture and Reissue of Shares: The auditor should ensure that Articles of Association permit for forfeiture shares of and check the entries regarding forfeiture and reissue of shares.

10. Transfer of Capital Profit: He should verify that capital profit if any on reissue of forfeited shares has been transferred to Capital Reserve.


3. Verification of Reserves and Surplus


Reserves and Surplus is that portion of current profits or of accumulated profits which is not distributed as dividend, but is kept separate for purposes of meeting some known or unknown liabilities or for fulfillment of future needs.

Auditor's Duty

Reserves and surplus are appropriation out of profits. The auditor should verify that the reserves and surplus are

shown on the liability side of Balance Sheet with footnotes and verify entries in the Profit and Loss Appropriation Account.


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