Verification Of Equity-Fundamentals of Auditing-Lecture Notes, Study notes of Auditing

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Lesson 35

VERIFICATION OF EQUITY

Equity consists of share capital and reserves. This part of the balance sheet represents interest of the owners in net assets of the entity. To verify the owners’ equity the auditor verifies following aspects:

 Share capital is properly classified and described in the accounts

 Movement in share capital is properly authorized and correctly presented

 Reserves are properly classified and presented

 Movements in reserves are properly authorized

Verification Methods Share capital is properly classified and described in the accounts in accordance with the Companies Ordinance, 1984

1. Check disclosure using Company Accounts Checklist.
2. Agree authorized capital with memorandum of association.
3. Agree issued capital with form A, or obtain certificate from registrar.
4. Obtain list of shareholders. Movement in share capital is properly authorized and correctly shown and described in accordance with the Companies Ordinance, 1984
5. Ensure shareholders’ pre-emption rights have been respected.
6. Check that directors were authorized to allot shares.
7. Ensure proper authorization for share redemption.
8. Check authority for share capital reductions.
9. Agree all movements to statement in lieu of prospectus, board minutes, memorandum and articles of association.
10. Consider special rules for allotments of public company shares.
11. Test allotments with supporting evidence and trace entries in register.
12. Test payments with supporting evidence and trace entries in register.
13. Check additions to allotment lists and cash records and agree totals to recorded movements.
14. Ensure correct treatment of share premiums.
15. Vouch issue expenses. Reserves are properly classified and described in the accounts in accordance with the Companies Ordinance, 1984
16. Ensure disclosure complies with Companies Ordinance, 1984.
17. Ensure whether it is clear, which reserves are distributable. Movements in reserves are properly authorized and currently shown and described in accordance with the Companies Ordinance, 1984
18. Check movements to minutes of Board’s meeting.
19. Check movements do not contravene statutory restrictions and articles of association.
20. Ensure disclosure of movements and related tax treatment.

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