Audit of Dividend – CA Final Audit Question Bank

Audit of Dividend – CA Final Audit Question Bank is designed strictly as per the latest syllabus and exam pattern.

Audit of Dividend – CA Final Audit Question Bank

Question 1.
Write short note on: Investor Education and protection Fund.
Answer:
Investor Education and Protection Fund
Sec. 125 of the Companies Act, 2013 empowers the Central Government to establish a fund known as Investor Education and Protection Fund. The purpose of this fund is to utilize the money for the promotion of investor awareness and protection to the interests of the investors.

The amount that are required to be credited in this fund are:
(a) Amount given by the C.G. by way of grants after due appropriation made by Parliament by law in this behalf;
(b) Donations given to the Fund by the C.G., State Governments, companies or any other institution;
(c) Amount in the Unpaid Dividend Account of companies;
(d) Amount in the general revenue account of the C.G. which had been transferred to that account u/s 205A(5] of the Companies Act, 1956, as it stood immediately before the commencement of the Companies (Amendment] Act, 1999, and remaining unpaid or unclaimed on the commencement of this Act;
(e) the amount lying in the Investor Education and Protection Fund u/s 205C of the Companies Act, 1956;
(f) the interest or other income received out of investments made from the Fund;
(g) the amount received under sub-section [4] of section 38;
(h) the application money received by companies for allotment of any securities and due for refund;
(i) matured deposits with companies other than banking companies;
(j) matured debentures with companies;
(k) interest accrued on the amounts referred to in clauses (h) to (i);
(l) sale proceeds of fractional shares arising out of issuance of bonus shares, merger and amalgamation for seven or more years;
(m) redemption amount of preference shares remaining unpaid or unclaimed for seven or more years; and
(n) such other amount as may be prescribed:
Provided that no such amount referred to in clauses (h) to (j) shall form part of the Fund unless such amount has remained unclaimed and unpaid for a period of seven years from the date it became due for payment.

Audit of Dividend – CA Final Audit Question Bank

Question 2.
While adopting the accounts for the year, the Board of Directors of Prima Ltd., decided to consider the Interim Dividend declared @ 12% as final dividend and did not consider transfer of profit to Reserves. As a statutory auditor, how would you deal with this? [Nov. 16 (4 Marks)]
Answer:
Declaration of Interim Dividend:
As per Sec. 2(35) of Companies Act, 2013 dividend includes interim dividend. Therefore, the procedures which are applicable to final dividend also applies to any interim dividend.

As per Sec. 123(3) of Companies Act, 2013 the Board of Directors of a company may declare interim dividend during any financial year or any time during the period from closure of financial year till holding of AGM
(a) out of the surplus in the profit and loss account or
(b) out of profits of the financial year in vvhich such interim dividend is sought to be declared or
(c) out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend.

In case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.

As per Sec. 123(4) of Companies Act, 2013 amount of dividend including interim dividend shall be deposited in a separate bank account within five days from the date of declaration of such dividend.

The provisions contained in sections 123, 124,125,126 and 127 shall, as far as may be, also apply to any interim dividend.

First proviso to Section 123(1) provides that a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profit for that financial year as it may consider appropriate to the reserves of the company. Therefore, company is not mandatorily required to transfer the profit to the reserves, it is an option available to the company to transfer a percentage of profit to reserves.

Conclusion: Assuming that the company has complied with the depreciation requirement, the interim dividend can be declared without transferring profits to reserves.

Audit of Dividend – CA Final Audit Question Bank

Question 3.
A company has paid interim dividend at 10% based on its half-yearly performance while at the end of the year suffered a net loss. How you will deal with the matter in your audit report as a statutory auditor?
Answer:
Payment of Interim Dividend:
As per Sec. 2(35) of Companies Act, 2013 dividend includes interim dividend. Therefore, the procedures which are applicable to final dividend also applies to any interim dividend.

Section 123(1) of the Companies Act, 2013 provides that dividend cannot be declared or paid by a company for any financial year except out of profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of Section 123(2), or out of the profits or the company for any previous financial year or years arrived at after providing for depreciation in the manner aforementioned and remaining undistributed, or out of both.

In the present case, the company has suffered a net loss at the end of the year, which signifies that the directors have not calculated the performance of the company about the second half of the year accurately.

Hence, if the company had a sufficient balance in the P & L Account as at the beginning of the year, the interim dividend paid may be adjusted against the same. In this situation, auditor need not report anything.

However, if balance in P & L A/c was not available, the dividend may also be paid out of reserves, subject to compliance of conditions as prescribed in Companies (Declaration and Payment of Dividend) Rules, 2014. If, however, there is no balance in the profit and loss account nor any reserves were available, the dividend would be clearly paid out of capital.

Conclusion: Assuming that there is no balance in the profit & loss account nor any reserves were available. Auditor need to qualify his report mentioning the fact that the dividend having been paid out of capital.

Audit of Dividend – CA Final Audit Question Bank

Question 4.
For the year ended on 31st March, 2021, P Ltd. proposed to pay a dividend of 25% on its equity shares and it further proposed to transfer 20% of Net profit for that year after tax to its reserves. Its auditor objected to the same stating that 10% is the maximum permissible limit to transfer to reserves. [May 14 (4 Mark)]
Answer:
Transfer to Reserve:
Section 123(1) of the Companies Act, 2013 provides that dividend cannot be declared or paid by a company for any financial year except out of profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of Section 123(2), or out of the profits or the company for any previous financial year or years arrived at after providing for depreciation in the manner aforementioned and remaining undistributed, or out of both.

First proviso to Section 123(1) provides that a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profit for that financial year as it may consider appropriate to the reserves of the company. Therefore, company is not mandatorily required to transfer the profit to the reserves, it is an option available to the company to transfer a percentage of profit to reserves.

In the present case, P Ltd. has proposed to pay a dividend of 25% on its equity shares and a transfer of 20% of Net profit to its reserves.

Conclusion: Assuming that the company has complied with the depreciation requirement, the dividend can be declared by transferring any amount of profits to reserves.

Audit of Dividend – CA Final Audit Question Bank

Question 5.
As a statutory auditor, how would you deal with the following: ABC Ltd. having a paid-up capital of ₹ 1 crore earned as total net profit of ₹ 1 crore for the years 2017-18 to 2019-20. The Company did not declare any dividend nor transferred any amount to Reserves for these years. The entire profit was retained in the Profit & Loss Account.

In 2020-21, the company made a profit of ₹ 20 lacs. The company also proposed in 2020-21 to declare dividend @25% of capital out of accumulated profits.
Answer:
Declaration of Dividends:
Section 123(1) of the Companies Act, 2013 provides that dividend cannot be declared or paid by a company for any financial year except out of profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of Section 123(2), or out of the profits or the company for any previous financial year or years arrived at after providing for depreciation in the manner aforementioned and remaining undistributed, or out of both.

First proviso to Sectionl23(1) provides that a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profit for that financial year as it may consider appropriate to the reserves of the company. Therefore, company is not mandate rily required to transfer the profit to the reserves, it is an option available to the company to transfer a percentage of profit to reserves.

In the present case company earns a profit of ₹ 20 Lacs, but wants to declare dividend @ 25%, of capital that amounts to ₹ 25 Lacs. The deficiency of ₹ 5 Lacs may be paid out of accumulated profits.

Conclusion: The company is well within its power and right to declare the dividend of ₹ 25 lacs for the year 2020-21.

Audit of Dividend – CA Final Audit Question Bank

Question 6.
As Auditor of Act Fast Ltd. what steps will you take to ensure that the dividend has been paid only out of profit? ‘ [Nov. 08 (8 Marks)]
Or
AARK Ltd is a large-sized listed company having annual turnover of INR 4000 crores. The company also has a plan to get listed on New York Stock Exchange next year. The company has paid good amount of dividend during the year to its shareholders which is significantly higher as compared to earlier years. The statutory auditors would like to focus on this aspect at the time of their statutory audit.
Please advise the relevant procedures that the statutory auditors should perform in respect of this area. [RTP-May 19]
Answer:
Steps for verification of dividend:
To ensure that dividend is paid out of profits, auditor should take the following steps:
(i) Ensure that all the rules and regulations concerning the declaration or payment of dividends have been complied with.

(ii) Ensure that the dividends have been declared or paid only out of distributable profit z.e. profits for the current year for which dividend is declared, or accumulated profits of the previous years, or money provided by the Central or State Government as per Sec. 123(1) of the Companies Act, 2013.

(iii) In case of inadequacy or absence of profits in any financial years, if dividend has been paid out of accumulated profits, earned by it in previous years and transferred to the reserves, verify that the rules related to such distribution has been complied.

(iv) Verify that the dividend recommended by the Board has been approved by the members at the AGM.

Audit of Dividend – CA Final Audit Question Bank

(v) Verify that the dividend has been transferred to the separate scheduled bank account within 5 days from the declaration of such dividend as required by Sec. 123(4) of the Companies Act, 2013.

(vi) Verily that the dividend has been paid within 3 0 days from the declaration. If in case the dividend has not been claimed or paid within 30 days from the declaration, verify that the unpaid or unclaimed dividend amount has been transferred to a special account called unpaid dividend account as per Sec. 124(1) of the Companies Act, 2013.

(vii) Verify that the company has prepared a statement within a period of 90 days of making any transfer of an amount to the Unpaid Dividend Account containing the specified particulars, and have placed it on the website of the company, if any, and also on any other website approved by the C.G. for this purpose as required under Sec. 124(2) of the Companies Act, 2013.

(viii) Verify that, if any money transferred to Unpaid Dividend Account has remained unpaid or unclaimed for a period of 7 years from the date of such transfer then, whether it has been transferred by the company along with interest accrued, if any, thereon to the Investor Education and Protection Fund established u/s 125(1) of the Companies Act, 2013 and a statement regarding such transfer has also been sent to the authority which administers such fund.

(ix) In case the company has outsourced the activity to the Service Organisation, check that all the compliances with laws, regulations, accounting and disclosure related to the dividends have been made appropriately.

Audit of Dividend – CA Final Audit Question Bank

Question 7.
The management of limited company states that proposed dividend does not represent a liability and hence no provision need to be made. Comment.
Or
As a statutory auditor of the company, comment on the following: For the year ended 31st March 2021, the financial statements of A (Pvt) Ltd. were adopted on 30th April, 2021. At this meeting, the directors proposed a dividend for the year 2020-21 of 25% on the equity share capital amounting to ₹ 10 Lacs. No entry was passed for the proposed dividend in the books of the company, since in the view of the directors the same was not required as per Schedule 111. [Nov. 12 (5 Marks)]
Answer:
Non-Provisions for proposed dividends;
Schedule III requires disclosure of the amount of dividend proposed to be distributed to equity and preference shareholders for the period and the related amount per share to be disclosed separately. It also requires separate disclosure of the arrears of fixed cumulative dividends on preference shares.

As per AS-4, “Contingencies and Events Occurring after the Balance Sheet Date” there are events which, although they take place after the balance sheet date, are sometimes reflected in the financial statements because of statutory requirements or because of their special nature. For example, if dividends are declared after the balance sheet date but before the financial statements are approved for issue, the dividends are not recognised as a liability at the balance sheet date because no obligation exists at that time unless a statute requires otherwise. Such dividends are disclosed in the notes.

In the present case, no entry was passed for proposed dividend.

Conclusion; Contention of the management not to provide dividend is correct.

Audit of Dividend – CA Final Audit Question Bank

Question 8.
The Board of Directors of ACP Ltd. has recommended the dividend of 15% on paid up share capital of ₹ 450 crores for the year ended 31st March, 2020, at their meeting held on 1st of May, 2020 when the accounts for the financial year 2019-20 were approved. The Board of Directors when they met on 7th July, 2020 for the review of first Quarter accounts, the Board has decided to rescind their decision to recommend dividend.
The notice for AGM to be held on 14.08.2020 was sent on 15th July, 2020 without any recommendation of dividend.
At the AGM the members asked the management how they can rescind the declaration of dividend once recommended. Comment. [May 16 (4 Marks), MTP-Aug. 18]
Answer:
Revocation of recommended Dividend:
As per Regulation 80 of Table F of schedule I of the Companies Act, 2013, the company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the Board.

Section 123 of the Companies Act, 2013, provides that the dividend shall be declared or paid by a company for any financial year out of the profits of the company for that year arrived at after providing for depreciation in prescribed manner.

As per Sec. 127 of Companies Act, 2013, dividend after declaration has to be paid or warrant in respect thereof has to be posted within 30 days from the date of declaration.

Dividend once declared, becomes a debt against the company and cannot be revoked except in certain situations.

In the present case, the decision for revocation of dividend arrived before its declaration in General meeting.

Conclusion: Board of directors are well within their powers to rescind the dividend which is recommended earlier, but not yet declared in the

“ICAI Examiner Comments”
Most of the candidates failed to explain the valid reason for rescinding the dividend.

Audit of Dividend – CA Final Audit Question Bank

Question 9.
ABC Limited is in the practice of maintaining consistent dividend payment over a minimum of 14%. The Financial year 2020-21 was so very bad for the company that it was not possible for the 1 company to maintain the payment of consistent dividend as above. The Management, being hopeful of recovery of its performance in next year, felt that the depreciation of the year to the extent of 75% alone be charged to the statement of profit and loss and the remaining 25% be kept in a ‘ separate account code in the balance sheet – ‘Debit Balances Adjustable against Revenue Account’, The Management was of the view that it would be in fair practice of accounting if the depreciation for asset is charged before the expiry of the lifes of assets and the amount parked in asset code as above would unfailingly be adjusted to Revenue before the close of next financial year anyway.

Analyse the issues involved and state how the Auditor should decide on this matter. [Nov. 18-New Syllabus (5 Marks), MTP-Oct 20]
Answer:
Declaration of Dividend without providing the depreciation:
Sec. 123(1) of Companies Act, 2013 provides that, no dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that financial year arrived at after providing for depreciation in accordance with the provisions of Sec. 123(2).

Sec. 123(2) provides that depreciation shall be provided to in accordance with the provisions of Schedule II.

As per Schedule II to the Companies Act, 2013 deprecation is to be charged over useful lives of the assets. Useful life of an asset is the period over which an asset is expected to be available for use by an entity or the number of production or similar units expected to be obtained from the asset by the entity. The useful life of an asset shall not be longer that the useful life specified in the Part C of Schedule II. If, however where a company uses a different useful life justification for the difference shall be disclosed in the financial statement with justification supported by technical device.

Audit of Dividend – CA Final Audit Question Bank

In the present case, company in order to maintain consistency in payment of dividend is willing to charge 75% of the depreciation to the statement of profit and loss and the remaining 25% be kept in a separate account code in the balance sheet – ‘Debit Balances Adjustable against Revenue Account’.

Conclusion: Management view is not correct as depreciation can be paid only out of profits that is arrived at after providing the depreciation.

Auditor should ensure the compliance of provisions of section 123 and Schedule II. In case the management does not comply with the provisions and does not charge the 100% depreciation the auditor shall suggest the management for the same and if management refuses, the auditor should qualify his report accordingly. ‘

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