AUDIT OF DIVIDENDS

Verification of Dividends

In PE-II study material on Accounting, the various conditions subject to which profits are earned a company can be distributed as a dividend have been discussed. Therefore, only then procedure for the verification of payment of dividends is stated below :

1. Examine the company’s Memorandum and Articles of Association to ascertain the dividend rights of different classes of shares.
2. Confirm that the profits appropriated for payment of dividend are distributable having regard to the provisions contained in Section 205 and that the transfer to reserves is according to rules framed the Central Government in this respect [vide Section 205(2A)]. It may be noted that now there exists a requirement to transfer profits to reserves upon 10 per cent of the profits of that year. However, if the rate of dividend does not exceed 10 per cent no such transfer is necessary. If the company proposes to pay the dividend out of past profit in reserves, see that either this is in accordance with the rules framed the Central Government in this behalf or the consent of the Government has been obtained. [vide Section 205A(3)].
3. Inspect the shareholders’ Minute Book to verify the amount of dividend declared and confirm that the amount recommended the directors.
4. If a separate bank account was opened for payment of dividends, check the transfer of the total amount of dividends payable from the Dividends Accounts.
5. Check the particulars of members as are entered in the Dividend Register or Dividend List reference to the Register of Members, test check the calculation of the gross amount of dividend payable to each shareholder on the basis of the number of the shares held and the amount deductible for income-tax. Verify the casts and crosscast of the different columns.
6. Check the amount of dividend paid with the dividend warrants surrendered. Reconcile the amount of dividend warrants outstanding with the balance in the Dividend Bank Account.
7. Examine the dividend warrants in respect of previous years, presented during the year for payment and verify that their payment, any provision contained in the Articles in the matter of period of time during which amount of unclaimed dividend can be paid had not been contravened.
8. According to section 205A, as it is compulsory for a company to transfer the total amount of dividend which remains unpaid or unclaimed, within thirty days of the declaration of the dividend to a special bank account entitled “Unpaid Dividend Account of …. Company Limited/Company (Pvt.) Limited”. Such an account is to be opened only in a scheduled bank. The transfer must be made within 7 days from the date of expiry of thirty days. The expression “dividend which remains unpaid” means any dividend the warrant in respect thereof has not been encashed or which has otherwise not been paid or claimed.
9. In case any money transferred to the unpaid dividend amount of a company remain unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred to Investor Education and Protection Fund established under section 205C of the Act.

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