To ensure that share capital is legally valued and accounted for, the shareholder capital audit critically compares the entire capital assets of an organization with the legal position on that count. The audit of share capital is one of the most critical internal controls over the financial records to ensure compliance with the law and correctness for share capital transactions. In other words, it checks the legality and accuracy of the company’s share issuance, transfer, and record-keeping in the books. Share capital may be the amount raised from shareholders to fund the company’s operations. The whole idea of permutation auditing is directed towards ensuring that transparency prevails in all transactions about shares being issued and traded to have any possibility of avoiding fraud.
As a part of a company’s financial affairs, share capital financing raised from the issuance of shares will consider itself a long-term financing source to the company, as it is converted into an actual ownership interest of end shareholders. Share capital may have different classifications based on the nature of the issue and the rights attached to it. The scope of the share capital audit includes issues shares, subscribed capital, paid-up value, and all capital changes in the audit period. This process guarantees that the company will also retain its position as compliant with regulatory authorities and, thus, ensures the interests of shareholders and the esteem of prospective investors.
What is Share Capital?
Share capital is the total sum of money a company raises by issuing shares to investors. Share capital is very important financing-wise and may be employed comprehensively, referring to money for business operations. The company typically determines share capital in its articles, but it may vary by the issuance of further shares or by their purchase back.
In aided issuance of shares, a company gains cash from investors to an ownership interest in the company. Shareholders are entitled to dividend payments based on the company’s performance and voting rights in some corporate affairs. The share capital greatly impacts net dependence and is a mirror that expresses the company’s financial well-being, as mentioned earlier.
Types of Share Capital
An audit of share capital is the backbone of financial honor, as it minimizes swapping concerns of fraudulent share issuance, unlawful allotments, and spurious disclosures in the financial statements. The auditors will reconcile share capital and audits and verify documents to secure the authenticity of transactions involving capital.
The share capital can be classified into the following categories based on its characteristics and usage. Learning about the components of share capital will assist in shedding light on a company’s financial stability and investment acceptance.
- Authorized Share Capital: It represents the highest share capital that the company can issue according to the company’s constitutional documents.
- Issued Share Capital: This is part of authorized capital issued to shareholders.
- Subscribed Share Capital: The issued capital that investors have agreed to buy.
- Paid-up Share Capital: The portion of subscribed share capital for which shareholders have made payment.
- Reserve Share Capital: This consists of that share capital reserved to issue in special situations, like company liquidation.
Audit of Share Capital
Auditing share capital involves ensuring the correctness and legitimate formation of the transactions to enter company shares. This is where errors, frauds, or non-compliance with regulatory requirements will likely be picked up.
An audit of share capital will always confirm
- The number of shares issued and outstanding.
- Existence of legal and regulatory obligations.
- Proper documentation of share transactions.
- Accuracy of records maintained in the company’s books.
Key Steps in Audit of Share Capital
Audits contribute significantly to giving investors confidence and maintaining corporate governance standards. Also, it helps hinder the fraudulent issuance of shares, illegal transfers, and misstatements in financial reporting.
- Review of Company Documents: Auditors review the memorandum and articles of association for share capital provisions.
- Verification of Share Issuance: Checking if shares are issued according to regulations and adequately documented.
- Checking Payment Records: Ensure share payments are received and correctly recorded.
- Reconciliation with Financial Statements: Comparison between capital records for shares and the company’s financial statements.
- Assessing Compliance with Laws: It involves checking compliance with corporate law and the rules of stock exchanges. The audit procedure of share capital
- Audit Procedure for Share Capital: Such conditions are document verification, reconciliation, and compliance checks.
- Company Checks the Share Issuance: The share issuance by the company is checked within the limit of the authorized capital.
- Share Transfer Records: The transfers of shares are verified to determine whether there are any unauthorized transactions.
- Receipts for Payment Verification: Verify cash receipts from shareholders.
- Reconciliation Audit of Share Capital: Share capital records are reconciled with accounts maintained in the company.
- Identify irregularities: Any irregularities found will be noted, and suggestions will be made on corrective action.
- Final Reporting: The auditor will prepare a report outlining findings and recommendations once the process is complete.
Objectives of the Audit of Share Capital
The share capital audit is designed to ascertain openness in management and correctness and compliance in managing share capital.
- Verify Accuracy: To ascertain the correctness and completeness of share capital records.
- Ensure Compliance: To check compliance with various corporate laws and regulations.
- Detect Fraud: To identify all unauthorized or fraudulent transactions in shares.
- Protect Shareholder’s Interests: To secure the rights of shareholders.
- Assess Financial Impacts: To scrutinize the impact of any changes to share capital in the company’s financial position.
- Improve Corporate Governance: Increase transparency in share capital management to improve corporate governance at the organizational level.
Reconciliation of Share Capital Audit
Reconciliation of share capital audit proves share capital records by matching financial statements and statutory reporting.
- Collecting Data: Getting data from the company’s financials concerning share capital.
- Comparison with Stock Exchange Records: Comparison of the shares issued with stock exchange records.
- Verification of Shareholder Particulars: Making sure that shareholder particulars in the record of a company would agree with those in external records.
- Discrepancy Detection: Aiming to detect errors, duplicates, or unauthorized transactions.
- Reporting the Findings: A reconciliation report should be prepared with the issues and recommended corrective measures.
Audit of Share Capital FAQs
1. What is share capital?
Share capital is the amount to be raised by a company in consideration of issuing shares to investors. It gives ownership to the shareholders and financially supports the company in conducting business operations.
2. What is an audit of share capital?
An audit of share capital is an audit of all the transactions involving shares concerning financial records’ accuracy, compliance, and transparency.
3. The audit of shares capital is very important because
It enforces the law that everything about the issuance of shares, transfer of shares, or capital structure should comply with the legal provisions and protect against fraud and mismanagement.
4. What is reconciliation of Shares Capital Audit?
The reconciliation of share capital audit is that of a company’s share capital records matched with financial statements and statutory reports to inquire into discrepancies.
5. How does the audit of share capital protect investors?
It assures investors that a company’s share capital records are valid and sound according to the law, creating trust and confidence for investors.
