Explain about the duties of an auditor on issue of share and reissue of forfeited share. [5+5]

Duties of an Auditor on Issue of Shares

The issue of shares is a critical activity for any company, as it involves raising capital while ensuring compliance with legal and regulatory requirements. The auditor plays a pivotal role in verifying the legality, accuracy, and transparency of share issuance. The primary duties of an auditor in this context are as follows:

1. Verification of Legal Compliance

The auditor must ensure that the issue of shares complies with the Companies Act 2063 (2014) and the company’s Articles of Association (AOA). Key checks include:

• Authorization of Directors: The auditor verifies whether the directors have proper authority to issue shares, as per the company’s AOA and the Companies Act.
• Validity of Share Application: The auditor examines whether the share applications are properly received, processed, and recorded in the share application register.
• Allotment and Call Money Receipts: The auditor ensures that allotment letters are issued only after receiving the application money and that call money (if any) is properly collected and accounted for.

2. Ensuring Proper Valuation of Shares

The auditor must confirm that shares are issued at:

• Par Value: If shares are issued at par, the auditor checks that the amount received matches the par value.
• Premium (if applicable): If shares are issued at a premium, the auditor verifies that the premium amount is correctly credited to the Share Premium Account and not misused.
• Discount (only in special cases): The Companies Act permits share issuance at a discount only in the case of underwriting or private placement, and the auditor must ensure compliance with these provisions.

3. Examination of Share Capital Accounts

The auditor performs the following checks on share capital accounts:

• Proper Maintenance of Share Register: The auditor ensures that the share register is accurately maintained, showing the names of shareholders, their addresses, and the number of shares held.
• Issuance of Share Certificates: The auditor verifies that share certificates are issued only after the allotment is finalized and that they are properly numbered and signed by the authorized directors.
• Transfer and Transmission of Shares: The auditor checks whether the company has complied with legal procedures for share transfers and transmissions (due to death or insolvency) and that the share transfer register is properly updated.

4. Compliance with Securities Exchange Board (SEB) Regulations

If the company is listed or intends to list its shares, the auditor must ensure compliance with SEB regulations, including:

• Prospectus Disclosures: If shares are issued through a prospectus, the auditor verifies that all material information (financial statements, risk factors, management details) is accurately disclosed.
• Underwriting Agreements: If shares are underwritten, the auditor checks whether the underwriting agreement is properly documented and that the underwriter’s commission is correctly accounted for.
• Public Offering Compliance: For public issues, the auditor ensures that the minimum subscription requirement (as per SEB rules) is met before allotment.

5. Verification of Share Capital in Financial Statements

The auditor examines the Balance Sheet to ensure that:

• Authorized, Issued, and Subscribed Share Capital are correctly stated.
• Share Premium Account (if applicable) is properly credited.
• Reserve Capital (if any) is legally created and disclosed.
• No Overvaluation or Misstatement exists in the share capital accounts.

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Duties of an Auditor on Reissue of Forfeited Shares

When a company forfeits shares due to non-payment of call money, it may later reissue those shares under specific conditions. The auditor’s role in this process is crucial to prevent fraud and ensure compliance with legal provisions.

1. Verification of Forfeiture Procedure

The auditor checks whether the forfeiture of shares was done in accordance with the Companies Act 2063 and the company’s AOA. Key checks include:

• Proper Notice and Opportunity to Pay: The auditor ensures that the company gave due notice to the defaulting shareholder and provided a reasonable opportunity to pay the outstanding amount before forfeiture.
• Legal Validity of Forfeiture: The auditor verifies that the forfeiture was not done arbitrarily and that all legal procedures were followed.
• Accounting Treatment of Forfeited Shares:
  • The forfeited share account is debited with the called-up amount (including calls in arrears).
  • The share capital account is reduced by the unpaid amount.
  • Any share premium (if applicable) is adjusted accordingly.

2. Revaluation of Forfeited Shares (If Applicable)

Before reissuing forfeited shares, the company may revalue them (if issued at a premium). The auditor’s duties include:

• Checking Revaluation Basis: The auditor ensures that the revaluation is done at fair market value (not arbitrarily inflated).
• Adjustment of Share Premium Account: If the revaluation results in a gain, it is credited to the Share Premium Account; if a loss, it is debited to the Profit and Loss Account.
• Compliance with Accounting Standards: The auditor verifies that the revaluation follows Nepal Accounting Standards (NAS) and International Financial Reporting Standards (IFRS) where applicable.

3. Ensuring Proper Reissue Procedure

The auditor must confirm that the reissue of forfeited shares complies with legal and regulatory requirements:

• Minimum Subscription Requirement: If reissued to the public, the auditor checks whether the minimum subscription condition (as per SEB rules) is met.
• Issue at Par or Premium: The auditor ensures that reissued shares are not issued at a discount (except in special cases like underwriting).
• Proper Documentation:
  • The forfeited share account is closed after reissue.
  • The share register is updated with new shareholders.
  • New share certificates are issued if required.

4. Verification of Accounting Entries for Reissue

The auditor examines the journal entries for reissue to ensure correctness:

• If Reissued at Par:

  Forfeited Share A/c (Dr) → Share Capital A/c (Cr)
  

• If Reissued at Premium:

  Forfeited Share A/c (Dr) → Share Capital A/c (Cr)
  Forfeited Share A/c (Dr) → Share Premium A/c (Cr)
  

• If Reissued at Discount (Special Cases): The auditor ensures that the discount is credited to the Share Forfeiture Account and not to the Profit and Loss Account.

5. Compliance with Disclosure Requirements

The auditor checks whether the company has properly disclosed the following in its financial statements:

• Amount of Forfeited Shares and their treatment.
• Revaluation Gain/Loss (if any) and its impact on reserves.
• Reissue Details (number of shares, amount received, and accounting treatment).

6. Prevention of Fraud and Misappropriation

The auditor ensures that:

• Forfeited shares are not reissued to promoters or related parties at undervalue (which could be a fraudulent transfer).
• Proceeds from reissue are not misused (e.g., diverted to personal use).
• All transactions are supported by proper vouchers and approvals.

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Conclusion

The auditor’s role in share issue and reissue of forfeited shares is multifaceted, involving legal compliance, valuation checks, proper documentation, and fraud prevention. By performing these duties diligently, the auditor ensures that the company’s capital structure remains transparent, accurate, and in accordance with Nepal’s corporate laws. Failure to fulfill these responsibilities may lead to legal penalties, financial misstatements, or reputational damage for the company.