AUDITING EQUITY AND OTHER STATUTORY MATTERS
EQUITY AND OTHER STATUTORY MATTERS
Auditing equity and other statutory matters
Page 1
AUDITING EQUITY AND OTHER STATUTORY MATTERS
AUDIT OBJECTIVE
To test whether:
• equity transactions are authorized and recorded correctly as to account,
amount, and period and give effect to all transactions such as share
issuance, share buy-backs, dividends, etc. (existence, completeness,
valuation).
• the equity section of the balance sheet is properly described and disclosed
in accordance with accounting standards and legal requirements
(presentation and disclosure).
• the client has complied with the required rules and regulations in the
preparation of financial statements.
Auditing equity and other statutory matters
Page 2
AUDITING EQUITY AND OTHER STATUTORY MATTERS
GENERAL AUDIT PROCEDURES
Prepare a lead sheet showing equity line items by category (e.g ordinary
share capital, preference share capital, revaluation reserve, non-
distributable reserve, etc).
Agree the opening balances to prior year working papers
Agree closing balances to general ledger
Check casting and extensions
Auditing equity and other statutory matters
Page 3
AUDITING EQUITY AND OTHER STATUTORY MATTERS
EQUITY
SHARE CAPITAL
Agree the authorised share capital to the Memorandum of association
Ensure that any special resolution increasing the authorised share capital
has been registered in the statutory register
Agree the issued share capital, by class of share, with the Register of
Members.
Verify share transactions to minutes of Board of Directors’ meetings or
shareholders’ meetings.
Trace the transfer of shares to the shareholder register.
For disposal of shares, ensure that the relevant share certificates are
cancelled.
Auditing equity and other statutory matters
Page 4
AUDITING EQUITY AND OTHER STATUTORY MATTERS
SHARE CAPITAL
Valuation
Ensure that the value of the shares issued are correctly taken up in the
financial statements.
Trace the proceeds from the issue of new shares to supporting documents
(e.g. cash receipt documents, bank transfers).
Disclosure
Ensure proper disclosure in the financial statements, as follows:
a) No. of shares authorised.
b) No. of shares issued & fully paid.
c) Par value per share.
d) No. of shares outstanding at the beginning & the end of the period.
Auditing equity and other statutory matters
Page 5
AUDITING EQUITY AND OTHER STATUTORY MATTERS
SHARE PREMIUM
When a company issues its share at a premium, the auditor should inspect
the following:
• the prospectus
• the articles of association
•the minutes of the meetings of the board of directors.
All the above should authorize the issue of shares at a premium.
The receipt of premium should be vouched with the respective entries in the
books of accounts
It should be vouched that the share premium account is used for the
authorised purposes only.
Auditing equity and other statutory matters
Page 6
AUDITING EQUITY AND OTHER STATUTORY MATTERS
RESERVES
Confirm that a proper distinction has been made between distributable and
non‑distributable reserves, and between capital and revenue reserves.
Prepare a schedule identifying all movements (increases and decreases) in
reserves and verify the sources and applications of these changes with the
minutes or other appropriate evidence.
Ensure that any surplus arising on any revaluation of assets is transferred
directly to a non‑distributable reserve and that any application of such a
reserve is in accordance with the Memorandum and Articles of Association.
Ensure that all movements in reserves are correctly disclosed in the
financial statements in accordance with the requirements of the Companies
Act and IFRSs.
Auditing equity and other statutory matters
Page 7
AUDITING EQUITY AND OTHER STATUTORY MATTERS
DIVIDENDS
Verify the amount disbursed with the amount authorised by the Board of
Directors.
Ensure that dividends are paid out of profits available for dividends, and in
terms of the Articles of Association.
Recompute the dividend by multiplying the number of shares outstanding
on the record date by the amount/rate of dividend approved by the Board of
Directors. This amount should agree to the dividend amount in the financial
statements.
Ensure the correct calculation and disclosure of tax on dividends.
Auditing equity and other statutory matters
Page 8
AUDITING EQUITY AND OTHER STATUTORY MATTERS
STATUTORY MATTERS
DIRECTORS, SECRETARIES AND OFFICERS
Agree details of directors, secretaries and other officers with the Register of
Directors and Officers and ensure that this is up‑to‑date.
Inspect for the following:
• any changes in directors or officers during the year have been registered
and acknowledged by the Registrar.
• that appointments of directors during the year have been made in
accordance with the Companies Act and the Articles of Association.
• if any director has resigned during the year, check whether a letter of
resignation has been received.
• that directors’ emoluments and loans to directors have been dealt with
under the Payroll section and disclosed appropriately in the financial
statements.
Auditing equity and other statutory matters
Page 9
AUDITING EQUITY AND OTHER STATUTORY MATTERS
MINUTES AND RESOLUTIONS
Check that:
• minute books have been properly maintained
• a quorum was present at all meetings.
• all matters dealt with by resolution have been agreed to and signed by all
members or directors, whichever is applicable.
•all minutes of meetings and resolutions are approved and are affixed to the
minute book within one month of the date thereof
•no minutes are missing.
Prepare extracts of directors/shareholders minutes/resolutions which are
relevant to the audit and cross‑reference these to the appropriate working
papers.
Check that minutes of directors’ meetings have been confirmed and signed
by the Chairman.
Auditing equity and other statutory matters
Page 10
AUDITING EQUITY AND OTHER STATUTORY MATTERS
MINUTES AND RESOLUTIONS (Cont’d)
Check that for the Annual General Meeting:
•no more than 15 months has elapsed since the previous meeting and that
the time period (either 6 or 9 months) for the holding of the AGM in terms of
the Articles has been adhered to.
• a quorum was present.
•the previous AGM minutes were signed.
•the financial statements were approved and adopted.
•any rotating directors were re‑elected.
•new directors appointed during the year were re‑elected.
•directors’ remuneration was fixed.
•directors were authorised to determine the auditors remuneration.
•dividends declared were confirmed.
•unissued shares were placed under the control of the
directors.
•the auditors have been re‑appointed.
•directors who have any interests in contracts have declared such interests
at a meeting of directors.
Auditing equity and other statutory matters
Page 11
AUDITING EQUITY AND OTHER STATUTORY MATTERS
STATUTORY REGISTERS
Check, where applicable, that registers have been maintained for:
•cessions, pledges and bonds
•directors and officers
•debenture holders
•members
•directors' interests in shares (public companies only).
•transfers
•directors' interests in contracts
•fixed assets register
DIRECTORS’ REPORT
Review the directors' report and ensure that it:
•is not misleading.
•correctly states figures extracted from the financial information.
•complies with the disclosure requirements of the Companies Act.
Auditing equity and other statutory matters
Page 12
