Investments are assets held by an entity for accretion of wealth by way of interest, royalties, dividends and rentals, for capital appreciation or for other benefits to the investing entity. It constitutes a significant portion of the total assets. An investment may be represented by Government securities, shares, debentures etc. The following procedure should be adopted for verifying the investments :-
- Obtain schedule of securities and share in hand at the beginning of the audit period containing description, date of purchase, face value, book value (also the amount paid up if it differs from the book value), market value, rate of interest, date of payment of interest, date around which dividend is normally declared etc. In separate columns enter the amounts of interest and dividend received during the period, interest or dividend accrued or outstanding at the close of the period, tax deducted out of the first mentioned amount and deductible out of the second.
- Add to the above list, securities and shares purchased and sold during the year, giving the same description in regard to both.
- Balance this schedule and compare the closing balance with the control account in the General Ledger.
- The auditor should ascertain whether the investments made by entity are within its authority.
- The auditor himself should also be satisfied that the transaction for the purchase/sale of investments are supported by due authority and documentation.
- The acquisition/disposal of investments should be verified with reference to the brokers’ contract note, bill of costs, etc. special attention should be paid to investments purchased or sold cumdividend, ex-dividend, cum-interest/ex-interest, cum rights/ex-rights or cum bonus/ex-bonus.
- Where the amount of purchases or sales of investments are substantial, the auditor should check the prices paid/received with reference to stock exchange quotations.
- The auditor should also physically inspect investments. The investments should be physically verified at the last date of the accounting year. In case investments are not held by the entity in its own custody – then certificate should be obtained from the relevant authority to the effect of
holding of investments.
- In case investments are held otherwise than in the name of the entity, e.g. in the name of nominees/trustees, the auditor should ascertain the reasons for the same and examine relevant documentary evidence.
- The auditor should also examine the relevant provisions of section 227(1A) and see that a company not doing an investment or banking company whether so much of the assets of the company as represented by shares and debentures have been sold at a price less than that at which they were purchased by the company.
- The auditor should see title deeds of immovable properties and see that same have been properly classified.
- The auditor should satisfy that the investments have been valued and disclosed in the financial statements in accordance with the recognised accounting policies and parties and relevant statutory requirements. Reference to principles laid down in AS-13 on “Accounting for Investments” relating to valuation of investments will be necessary.
- The auditor should examine whether in computing the cost of investments, the expenditure incurred on account of transfer fees, stamp duty etc. is included in the cost of investments.
- The auditor may also see that any money raised through share issue to the extent remains unutilised has been shown under the head “Investments” and the manner in which the same has been invested should also be indicated.
Note : About accounting of dividend income by companies, the Company Law Board has prescribed a procedure. In terms of the procedure, dividend declared during the accounting year even though not received should be accounted for in the same year. If dividend is declared after the year is over, but
before the annual accounts are finalised and if the dividend relates to the accounting year, the same also should be accounted for in the year itself.
Section 49 of the Companies Act, 1956 requires that all investments made by a company on its own behalf shall be made and held by it in its own name except in cases which are specifically exempt. Clause (IA) of section 108 states that every instrument of transfer, before it is signed by or for the
transferor should be presented, in a prescribed form, to a prescribed authority. The instruments should be stamped or the date of presentation or otherwise endorsed thereon by the prescribed authority. Such an instrument should be delivered for registration to the company :
- In the case of shares which are dealt in or quoted on a recognised Stock Exchange at any time before the date on which the Register of Members is closed for the first time after the date of such presentation or within twelve months of such presentation whichever is later; and
- in any other case, within two months from the date of such presentation.
Its effects on the validity of the title to the shares held under bank transfer should be examined. Further, sections 108A to 108H should also be referred to.
Investment in the shares or debentures of a subsidiary : The auditor should obtain a complete schedule of all such investments held, showing particulars as regards the name of the subsidiary company, class of shares or debenture, date of purchase, number of units and denoting numbers, book value, dividend
received etc. All the particulars entered in the schedule should be verified with the relevant account in the General Ledger. He should, at the same time, examine all the investments by inspection of the securities, share scrips or certificates, debenture bonds, etc. If any of the securities are held by bankers, he should verify them with their certificate which should disclose the charge, if they are subject to any such charge. The provisions contained in Part I, Schedule VI to the Companies Act, 1956 require that shares held in a subsidiary should be shown separately. The shares or debentures of a subsidiary are valued at cost. If the subsidiary has suffered a loss a provision for the proportionate part of the loss should be made in the accounts of the holding company.
Refer to Appendix III for Guidance Note on Audit of Investments This has now got to be disclosed separately. To establish the authenticity of this item the auditor should go through the partnership deed, noting the capital contributed by the company, and the latest Balance Sheet and the Profit and Loss Account, duly audited. The amount of the loss, if any, falling to the share of the company should be debited to the profit and loss account; the share of profit should be similarly credited to the Profit and Loss Account. The auditor should see whether the firm has been duly registered and he will do well to note the particulars sent for registration.