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

Verification of Debentures

Debenture means a document issued by a company to raise finance.

Verification of Debentures


Debentures ‚Äď Meaning

Debenture means a document issued by a company to raise finance. It is an acknowledgement of a debt which is given under the common seal of the company.


Types of Debentures

1. Registered Debentures: Registered Debentures are those which are transferable only by transfer deed names, address and particulars of the debentures possessed by holders are entered in the register. Interest is paid to one whose name appears in the register.

2. Bearer Debentures: Bearer Debentures are those which are transferred by mere delivery and company does not keep any record of debenture holders name and address. Payment of interest is made on submission on coupons attached to the debentures.

3. Secured Debentures or Mortgage Debentures: Mortgage debentures are those debentures that are secured either on a particular asset called fixed charge or on general assets of the company called floating charge. Mortgage debentures are also called collateral debentures. In this case, debentures may also be issued to banks and financial institutions as addition or subsidiary security along with certain principal security. Lending institutions can exercise their right as debenture-holders, if the company does not pay its loan and the principal security falls short.

4. Un-secured or Naked Debentures: Naked debentures are those which are not secured, companies of very good standing are able to issue Debentures of this type. They are not very common.

5. Redeemable Debentures: Redeemable Debentures are those debentures which are redeemed or the payment of which is made after a specified time.

Debentures are redeemable in the following manner:

(i) At the expiry of a specified period at par or at a premium.

(ii) Through purchase in the open market any time, at the price prevailing in the market.

(iii) By annual drawings.

6. Irredeemable Debentures: Irredeemable Debentures are those for which the issuing company does not fix any date by when they should be redeemed and the holders of such Debentures cannot demand payment from the company so long as it is going concern. Usually such Debentures are repayable after a long period of time or when the company is winding up.

7. Convertible Debentures: Convertible Debentures are those whose holders are given the option to convert the debentures fully or partly in to equity shares after a specified time. Those which are fully convertible are called fully Convertible Debentures and those which are partly Convertible are called partly convertible debentures.

8. Non-convertible Debentures: Non-convertible debentures are those whose holders have no right to convert them into equity shares.


Auditor's Duty in Verification of Debentures

The auditor should note the following points while verifying debentures:

1. Verify Borrowing Powers: The auditor should verify the Memorandum and Articles of Association of the company and verify whether the company has got the power to issue debentures and ascertain the borrowing limits of the company.

2. Verify Terms of Issue: He should ensure that the terms of the issue have been complied with.

3. Examine Debenture Trust Deed: He should examine the Debentures Trust Deed to know the amount of debenture issued and securities offered and he should obtain a certificate from the debenture holder to confirm the debenture amount.

4. Redemption of Debentures: He should make an inquiry regarding Debenture redemption and verify the Articles of Association for the Debenture redemption fund.

5. Issue at Premium or Discount: He should examine whether premium or discount on issue of Debentures are properly disclosed in the Balance Sheet.

6. Compare Register of Charges and Register of Debenture Holders: He should compare the register of charges and register of debenture holders and check whether it is recorded correctly and verify that the assets mortgaged or charged are clearly indicated in the Balance Sheet.


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