Duties of Auditor in verification of General Reserve & Special Reserve

What are General Reserves?

Retention of profit with no specific purpose may be utilized by the company for many purposes. The Board of Directors decides upon the percentage of profit to be appropriated to general reserve. The company law also requires a company to transfer a specific percentage of profit to be transferred to general reserve before declaring dividend. Articles of Association of a company may direct the company in this regard.

Purpose of General Reserves

The general reserve may act as a cushion (buffer) at the time of financial crisis, by providing funds for

  1. working capital.
  2. meeting long term liability
  3. expansion of business.
  4. acquiring capital assets.
  5. meeting unexpected liability.

General reserve can also be utilized for distribution as dividend, whenever the current profits are inadequate.

What are Special Reserves?

When the profit is appropriated and transferred to a reserve created for special purpose, it is called special reserve. Special reserve may be created in the following situations –

  1. As per the decisions made by the board of directors.
  2. As per the requirement of Articles of Association
  3. To comply with the requirements of Companies Act. (Example — Capital redemption reserve)

Some of the example of special reserves are:

  1. Dividend Equalization reserve
  2. Staff welfare reserve.
  3. Debenture redemption reserve, etc.

Of the various special reserves, only dividend equalization reserve can be utilized for payment of dividend. All the other reserves can be utilized only for the purpose for which they are created. If there is any surplus in such reserves, such excess amount can be utilized for payment of dividend.

Duties of an Auditor in verification of General and Special Reserves

1. The auditor has to verify the minutes of the board of directors and ensure that the profits are appropriated as per the decision taken by the directors.

2. The auditor should ensure that the requirements of Articles of Association regarding the appropriation of profit to general or special reserves are duly followed by the company.

3. The auditor should verify the accounts and ensure that the company has transferred the required amount to the general reserves and special reserves before declaring the dividend, as required by the company law.

4. If any part of the general reserve is utilized for payment of dividend, the auditor should ensure that the provisions of Companies Act are duly complied with.

5. The auditor should also ensure that the reserves are utilized only for the purpose for which they are created.

6. He should also ensure that the general reserves and special reserves are disclosed in the liabilities side of the balance sheet under appropriate heads.

Leave a Reply

Recent Posts

Related pages

direct material formulawhen did rbi establishedzero based budgeting definitionimportance of petty cash bookadvantages and disadvantages of record keepingdefinition of deficit financingpartnership to sole traderexport promotion schemesrole and function of wtomeaning of paybackbenefits of international retailinghow to calculate inventory turnover dayswhat is meant by privity of contractpayback definitionnegotiable instruments pptdishonor meaningnature of bills receivable accounthow to prepare a cash budgetmeaning of creditor in hindiproduction report managerial accountingmeaning of hire purchaseautomatic typewritercauses urbanisationeconomies of scale advantages and disadvantagesirredeemable debtnon probability sampling designshorizontal mergers examplesnon convertible debentures meaningbudgetary planning and control systemhow to calculate receivables turnover ratioadvantages of indirect marketingsporadic dumpingabsorption in cost accountingsocialization stagesbudgetary control techniquesamalgamated companies listadvantages of market segmentationdisadvantages of partnership firmaudit markingssole proprietorship economics definitionirredeemable debt definitionobjectives of gattmerits of centralisationmeaning of facility layoutintroduction of exim bankmodes of winding up a companywhat are consumable storeswho is a depository participantdisadvantage of cluster samplingsdr definitionmerit pay advantages and disadvantagesarr in accountingdemocratic style of management advantages and disadvantagesstructure of european unionadvantage of sole proprietorshipconsumable assetsstock turnover ratio analysis interpretationexamples of negotiable instrumentssecuritization debtadvantages of cartelssidbi wikisebi definitionretained profits definitiondisadvantages of sole proprietorship businesssebi guidelinewhat are social auditsdefinition decentralizationinventory turnover ratio definitionadvantages of a mixed economic systemmerits and demerits of television essaywhat is centralization and decentralization in managementobservational research advantages and disadvantagespartnership company advantages and disadvantagesdemotion definition