Audit of Transfer of Shares | Role of Auditor

If a company commits any mistake in recording the share transfer, it may be faced with the liability of paying heavy damages to the affected shareholders. Therefore, it is the duty of the auditor to consider and check various aspects while auditing transfer of shares.

Auditing of Transfer of Shares

Image: Auditing of Transfer of Shares – Role of Auditor, Verification by Auditor

Auditing Transfer of Shares – Auditor’s Role and Verification

In Share transfer audit, the following has to be verified by auditors. He also plays an important role in verification of following components in auditing transfer of Shares.

  1. Examination of Transfer Forms,
  2. Share Transfer Journal,
  3. Directors’ Minutes Book,
  4. Register of Members,
  5. Counterfoils of Share Certificates.
  6. Transmission of Shares.

1. Examination of Transfer Forms

1. Application for transfer of shares should be made in a prescribed form, stamped by the prescribed authority with the date of its presentation.

2. The transfer form should be delivered to the company within 2 months from the date of presentation and if the shares are ‘Quoted’, the Transfer form should be delivered to the company before the closing of the Register of Members or within twelve months from the date of presentation of application to the prescribed authority, whichever is later.

3. The Transfer form should be duly executed and required stamp duty should have been paid.

4. The name of company should be correctly mentioned in the form.

5. It is the duty of the company to verify whether the consideration for the transfer is adequate.

6. If any alteration is made in the form, it should be initialed by the person making the alteration.

7. The name and the address of the transferee should be recorded in the transfer form completely.

The auditor should bear the above points in mind while examining the transfer form.

Verification by the Auditor

The auditor should

1. Cross verify the signature of the transferor in the transfer form with that of the original application.

2. Ensure that the transferee is not disqualified from holding the shares in the company.

3. He should distinctively mark the transfer forms checked, so that the same transfer form is not produced as evidence for supporting another share transfer.

2. Share Transfer Journal

The auditor should verify the name of the transferor, name and address of the transferee, the class and the distinctive numbers of the shares transferred that are recorded in the Share Transfer Journal.

He should also verify that the entries of the transfer journal are duly record in the Register of Members.

3. Directors’ Minutes Book

The Minutes book should be verified to ensure that all transfers recorded in the transfer journal are duly authorized. The auditor should also ensure that the share certificates, issued to the transferees are approved by the directors. This can be done by comparing the counterfoils of the share certificates with the directors’ Minutes book.

4. Register of Members

The auditor has to ensure that the name of the transferor, transferee and distinctive numbers of shares transferred are duly recorded in the Register of Members.

If a transfer is registered without a share certificate, the auditor should ensure that the company has obtained a letter of indemnity or any other similar document before registering such transfers.

5. Counterfoils of Share Certificates

If the company issues any share certificate to replace a share certificate that is destroyed or lost, the auditor should ensure that such issue has been authorized by the board and the company has obtained a bond of indemnity from the shareholders.

On the face of the duplicate share certificates, the word “Duplicate” should be punched or stamped in bold letters. Also, the fact that the duplicate share certificate has been issued to replace the lost / destroyed share certificate should be mentioned in the counterfoil mentioning the distinctive number of the lost shares.

If a shareholder transfers only a part of his holdings, the auditor should ensure that a fresh share certificate is issued to the transferor, stating the balance of shares held by him with the distinctive numbers of the shares held by him.

Role of an Auditor

The auditor should confirm that—

1. the staff members who are entrusted with the task relating to transfer of shares, have initialed at the documents handled by them.

2. the unused share certificates and the blocks used for printing the share certificates are safely kept and share certificates are printed only under the authority of the Board.

3. before registering the transfer the company obtains consent of each of the holders of the shares, if the shares are jointly held.

4. before registering the transfer, the company obtains a “no objection” from the transferee when the partly paid shares are transferred.

5. In the case of a private company, the transfer should be approved by the Board of Directors. The auditor should ensure the same.

However, the Companies (Amendment) Bill, 2003 requires approval by all the shareholders at its meeting for the transfer of shares.

6. Transmission of Shares

Shares are transmitted on death/insolvency of the shareholders. The Companies Act 1999, provides the shareholders, the facility of nomination. Therefore, after the death of the shareholder, his/her nominee will be registered as a shareholder. A nominee can be either be an individual or a company. Articles of Association of the company governs the transmission of shares.

Role of an Auditor

1. The auditor should ensure that the company has strictly followed procedures laid down by the Articles.

2. In case of transmission by death, the company should examine the grant of probate or succession certificate.

3. In case of transmission by insolvency, the company before registering the transmission should examine the order of the court.

4. The auditor should ensure that the company has adhered to all the procedures before recording the transmission.

In general, the auditor has to verify the following while auditing the share capital.

Verification by the auditor,

1. If the company has refused to register a transfer / transmission of shares, the auditor has to verify whether the company has sent notices to the transferee and transferor of its refusal to register such transfer / transmission, within a period of two months from the date on which the instrument of transfer/ transmission is presented to the company. The company should have stated the reasons for refusal of transfer.

2. He should also verify, whether the transfer fees collected and the total number of shares transferred during the period are reconciled and the transfer fees collected are duly accounted for.

3. Whether entries are made in the Register of Directors’ shareholding, on transfer of shares held by directors.

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