Corporate Accounting and Auditing · Audit of Various Items of Financial Statements

Audit of Share Capital, Reserves and Borrowings

Updated 10 October 2026 · Fact-checked

Audit of share capital, reserves and borrowings means checking that these equity and liability balances exist, are complete, are properly authorised, are correctly recorded and disclosed, and follow the Companies Act, 2013. You vouch to documents such as the MOA, AOA, board and shareholder resolutions, registers, bank records, trust deeds and lender confirmations.

Understand Audit of Share Capital, Reserves and Borrowings

Share capital, reserves and borrowings sit on the Equity and Liabilities side of the Balance Sheet. They show how the company is funded. An auditor checks them because errors here change the picture of ownership, distributable profit and obligations to lenders.

Start with share capital. The main risks are issue beyond authorised capital, wrong receipt of money, wrong treatment of calls, premium and forfeiture, and incorrect disclosure. The auditor checks the Memorandum and Articles for authorised capital and class rights. Then the auditor compares the shares issued with board resolutions, the application and allotment records, bank statements, the register of members and share certificates. The money received should reach the company's bank account and be recorded correctly.

Next, reserves and surplus. Reserves arise from profits or from specified sources such as securities premium. The auditor checks that each transfer and each use has proper authority and follows the law. For example, securities premium can be used only for the purposes the Companies Act allows. The auditor also checks that capital reserves are not treated as freely distributable, and that the closing surplus agrees with the Statement of Profit and Loss and the Statement of Changes in Equity.

Finally, borrowings, which include debentures, term loans, deposits and working capital loans. The auditor checks the authority to borrow (board resolution, and shareholder approval where the law requires it), the loan or trust deed terms, security given, interest charged, repayment, and current or non-current classification. Confirmations from banks, lenders and debenture trustees are strong external evidence. The auditor also checks that charges on assets are registered with the Registrar and that defaults are disclosed.

Key rules to remember

Share capital checking chain: Authority (MOA/AOA, resolutions) → Application and allotment records → Bank receipt → Register of members and certificates → Disclosure; Use this order to structure any answer on shares. Every link must agree with the next.
Closing reserve reconciliation: Closing reserve = Opening reserve + Transfers in − Utilisations; Vouch each transfer and utilisation. The result must match the Balance Sheet and the Statement of Changes in Equity.
Loan balance reconciliation: Closing loan = Opening loan + Fresh drawals − Repayments (principal); Agree to the lender's confirmation. Interest accrued but unpaid is shown separately from principal.
Debenture interest check: Interest = Face value × Coupon rate × Period ÷ 12; Recompute using the period in months. Check any tax deducted at source on the payment against the tax rules applicable.
Forfeiture of shares check: Amount forfeited = Amount actually received on those shares (credited to Forfeited Shares or Share Forfeiture Account); If shares are reissued, the profit on reissue goes to Capital Reserve after adjusting any loss on reissue.

How to solve Audit of Share Capital, Reserves and Borrowings questions

Use this method for any question that asks what an auditor does for share capital, reserves or borrowings.

1Identify the item: share capital, reserves, debentures or loans. Name the main assertions at risk, such as existence, authorisation, completeness, accuracy and disclosure.
2State the authority documents the auditor reads first: MOA, AOA, board and shareholder resolutions, trust deed or loan agreement.
3List the transaction records to vouch: application forms, allotment records, call money records, bank statements, share certificates, debenture certificates and registers.
4Add external evidence: bank confirmation, trustee or lender confirmation, Registrar of Companies records for charges and filings.
5Check the accounting and calculations: premium, calls in arrears, forfeiture entries, reserve transfers, interest and repayments.
6Check legal compliance and restrictions: limits on issue, use of securities premium, creation of charge, and required filings.
7Check presentation under Schedule III: classification, notes, reconciliation of share numbers, shareholders holding more than 5%, security and default details.
8Conclude with the report effect: if a problem is found, say whether it needs adjustment, disclosure or a modified opinion.

Quickest way: Authority – Evidence – Law – Disclosure

When to use it: Use this for short notes and 5-to-7 mark theory answers where you have limited time.

Write one line on why the item matters to the financial statements.
Write four short headings: Authority, Evidence, Compliance, Disclosure.
Under each heading, put two or three specific documents or checks for the item asked about.
Close with one line on what the auditor does if a misstatement is found.

Common mistakes in Audit of Share Capital, Reserves and Borrowings

Writing only general audit steps such as 'verify the records' without naming documents.
Students memorise the idea of vouching but not the documents.
Fix: Name the actual documents: resolutions, register of members, bank statement, trust deed, lender confirmation, charge records.
Forgetting to check the authorised capital before checking the issue.
Students jump to receipts and allotment.
Fix: Always begin with the MOA and AOA. An issue beyond authorised capital needs prior alteration of capital.
Treating forfeiture as a loss to the company.
Students think of the amount unpaid instead of the amount received.
Fix: Remember that the amount already received is retained. Check that the entry reverses only the called-up share capital and keeps the money received in the forfeiture account.
Ignoring restrictions on the use of securities premium and capital reserves.
Reserves are seen as free profits.
Fix: State that the auditor checks the permitted use under the Companies Act before accepting any utilisation.
Not checking the classification of borrowings as current or non-current, and missing default disclosure.
Students focus on vouching the receipt of the loan.
Fix: Add a step on repayments due within twelve months, security details, and any default in principal or interest.
Relying only on internal records for loans.
Students forget that external evidence is stronger.
Fix: Always include confirmation from the lender or debenture trustee and a reconciliation to the ledger.

Worked examples

Example 1

State the audit procedure for the issue of equity shares by a company during the year. (Answer in the format an examiner expects.)

Show the solution

Authority: read the MOA and AOA to confirm that authorised capital covers the issue. Read the board resolution and, where needed, the shareholders' resolution approving the issue and its terms.
Compliance: check the offer and allotment process against the Companies Act, 2013 and the applicable rules, including minimum subscription where applicable, and that allotment was properly made.
Receipts: vouch application and allotment money with application forms and bank statements. Confirm that money from applicants reached the company's bank account and unsuccessful applicants were refunded.
Records: agree the register of members, share certificates issued and return of allotment filed with the Registrar.
Accounting: check the entries for share capital, securities premium, calls in arrears and calls received in advance. Recompute premium on the shares allotted.
Disclosure: check the Schedule III note for authorised, issued, subscribed and paid-up capital, the reconciliation of share numbers, and holders of more than 5% shares.
Conclude: raise any shortfall or non-compliance with management and consider the effect on the audit report.

Answer: The auditor checks authority, compliance with law, receipts in the bank, statutory records and filings, correct accounting and Schedule III disclosure, and reports any unresolved issue.

Example 2

A company has 10,000 equity shares of ₹10 each, ₹10 called up. 200 shares were forfeited for non-payment of the final call of ₹3 per share; ₹7 per share was received. The company has recorded the following: Share Capital debited ₹2,000, Calls in Arrears credited ₹600, Forfeited Shares Account credited ₹1,400. Check the entry.

Show the solution

Called-up amount on 200 shares = 200 × ₹10 = ₹2,000. So the Share Capital debit of ₹2,000 is correct.
Unpaid final call = 200 × ₹3 = ₹600. So the Calls in Arrears credit of ₹600 is correct.
Amount received = 200 × ₹7 = ₹1,400, which also equals ₹2,000 − ₹600. So the Forfeited Shares credit of ₹1,400 is correct.
Check that debits equal credits: ₹2,000 debit against ₹600 + ₹1,400 = ₹2,000 credit. This agrees.
Also verify the board resolution, the notice given to the defaulting shareholders, the register of members, and that the balance in the forfeited shares account appears in the Balance Sheet until reissue.

Answer: The entry is correct: Share Capital Dr ₹2,000; Calls in Arrears Cr ₹600; Forfeited Shares Account Cr ₹1,400. The auditor then checks the board resolution, prior notice and the register of members.

Exam tips

Write documents, not slogans. Words like 'resolution', 'register of members', 'bank statement' and 'trust deed' earn the marks.
For MCQs, remember the pattern: external confirmation is stronger than internal records, and authority is checked before transactions.
For numerical checks on forfeiture or interest, recompute each figure and show the arithmetic. Step marks depend on it.
Link the audit finding to Schedule III disclosure and, where relevant, to the effect on the audit report.
Keep answers in short headed points. Four headings with two or three points each is enough for most 7-mark questions.

Practice questions from Audit of Various Items of Financial Statements

Audit of Share Capital, Reserves and Borrowings in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit of Share Capital, Reserves and Borrowings: frequently asked questions

What is the first thing an auditor checks in the audit of share capital?

The auditor first checks the authorised capital and class rights in the MOA and AOA. Then the auditor checks that the board and members approved the issue. Only after that are the receipts and records vouched.

How does an auditor verify debentures?

The auditor reads the trust deed and the resolutions, checks receipts in the bank, and compares the debenture register and certificates with the ledger. The auditor also checks the interest calculation, security and charge registration, and obtains a confirmation from the debenture trustee.

What does the auditor check in reserves and surplus?

The auditor checks the opening balance, every transfer in and every use, and the authority for each. The closing figure must agree with the Balance Sheet and the Statement of Changes in Equity. The auditor also checks that use of securities premium and capital reserves follows the law.

How is forfeiture of shares audited?

The auditor checks the Articles, the call notice, the board resolution and the register of members. Then the auditor checks that the amount received on the forfeited shares is retained and the entries are correct. On reissue, the auditor checks the transfer of any gain to capital reserve.