What Should An Auditor See In Respect Of Dividends?

An auditor has many responsibilities towards the true and fair view of financial statements. With other responsibilities, the auditor will carry out an audit on company dividends matters. The auditor normally carries out the following procedures in respect of dividends.

1. Verify that the dividends paid by the company are within the overall limits prescribed by law. The factors taken into account in this regard-are the provisions of the Companies Act, 1956 (more particularly, section 205), relevant rules framed by the central government [viz., Companies (Transfer of Profits to Reserves) Rules, 1975, and Companies (Declaration of Dividend Out of Reserves) Rules, 1975], and the provisions of the articles of association of the company.

2. Verify that the dividends are in accordance with the provisions of any contracts entered into by the company which have a bearing upon the availability of profits for distribution as dividend. For example, while giving term loans, financial institutions often stipulate that dividends cannot exceed a certain rate unless the company satisfies the specified conditions.

3. Examine whether the procedural requirements relating to declaration of dividends have been complied with. The auditor examines the minutes of the board meeting at which the resolution recommending the declaration of dividends has been passed. He also examines the minutes of the general meeting at which the dividends have been declared.

4. Examine whether the dividends declared by the company have been paid within the prescribed time limit. For this purpose, the auditor examines the dividend registers showing the date(s) of dispatch of cheques or dividend warrants.

5. Examine a sample of entries in the dividend list with reference to the register of members.

6. Check the amount of gross dividends payable with reference to the paid-up share capital. Reconcile the net dividends payable with the gross dividends payable and the income-tax deducted at source. Check the gross and net dividends payable to individual members on a sampling basis.

7. Examine a sample of entries in the dividend list with reference to the bank statement.

8. Examine statement of unclaimed dividends with reference to the bank statement. Verify whether the company has complied with the requirements of the Act in this regard.

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