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

In auditing reserves and surplus of Delta Ltd, which of the following would the auditor most appropriately verify regarding the capital redemption reserve?

The auditor should verify that the capital redemption reserve was created by transfer from free reserves or securities premium on redeeming preference shares or buying back shares, and that it is used only for permitted purposes like issuing fully paid bonus shares, not for dividends.

  1. AThat it arose from transfer out of free reserves or securities premium on redemption of preference shares or buy-back, and is used only for permitted purposes such as bonus sharesCorrect
  2. BThat it can be freely distributed as dividend
  3. CThat it is created from revaluation of land
  4. DThat it represents trade payables outstanding

Explanation

Capital redemption reserve is created on redemption of preference shares out of profits or on buy-back of shares from free reserves, and it can be applied only to issue fully paid bonus shares. It is not distributable as dividend and is not related to revaluation or payables.

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