CHAPTER 25 – SHARE CAPITAL, RESERVES & DIRECTORS’
REMUNERATION
Director’s bonus [March/June 2019][June 2014]
The company’s board is comprised of seven directors. They are each entitled to a bonus based
on the draft year-end net assets, excluding intangible assets. Details of the bonus entitlement
are included in the directors’ service contracts. The bonus, which related to the 20X8 year end,
was paid to each director in February 20X8 and the costs were accrued and recognised within
wages and salaries for the year ended 31 January 20X8. Separate disclosure of the bonus, by
director, is required by local legislation.
Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to the directors’ bonuses. (5
marks)/(3 marks)
Perform subsequent events review by verifying cash payments made in February 20X8 to confirm
all bonus paid in February have actually been included in yearend current liability to confirm
completeness.
Recalculate the bonus payments and agree the criteria, including the exclusion of intangible
assets, to supporting documentation and the percentage rates to be paid to the directors’ service
contracts.
Agree individual bonus payment to payroll and accrual to confirm completeness and accuracy.
Agree the amounts paid per director to board minutes to ensure the sums included in the current
year financial statements are fully accrued and disclosed.
Review the board minutes to identify whether any additional payments relating to this year have
been agreed for any directors.
Obtain a written representation from management confirming the completeness of directors’
remuneration including the bonus.
Review the disclosures made regarding the bonus paid to directors and assess whether these
are in compliance with local legislation.
Director’s remuneration [March/June 2017]
Airsoft Co’s board is comprised of eight directors. Their overall remuneration consists of two
elements: an annual salary, paid monthly; and a significant annual discretionary bonus, which is
paid in a separate payment run on 20 December. All remuneration paid to directors is included
within wages and salaries. Local legislation requires disclosure of the overall total of directors’
remuneration broken down by element and by director.
Describe substantive procedures the auditor should perform to confirm the directors’
remuneration included in the financial statements at the year end.
(3 marks)
Obtain a schedule of the directors’ remuneration, split by salary and bonus paid in December
and cast the schedule to ensure accuracy.
Agree monthly salary payments and bonus payment in December to payroll and cash.
Review the board minutes to identify whether any additional payments relating to this year have
been agreed for any directors.
Obtain a written representation from management confirming the completeness of directors’
remuneration including the bonus.
Review the disclosures made regarding the directors’ remuneration and assess whether these
are in compliance with local legislation.
Tutor’s note
The last 3 points related to directors’ remuneration and bonus are same. Learn these points
thoroughly.
Audit procedures for ordinary shares
Review minutes of all board and committee meetings to identify any matters relating to share
capital and reserves (e.g. making a rights issue).
Discuss with management any changes to the capital structure (e.g. new share issues, share
buy-back) during the year.
Obtain a schedule of equity categories and movements from management.
i. Agree opening balances to prior-year closing balances.
ii. Agree closing balances to statutory records, accounting records, trial balance,
and financial statements including disclosures.
Review statutory records to identify changes made and obtain confirmation from the company
secretary.
For changes in statutory records, the auditor should agree that appropriate actions were taken,
for example:
Review board minutes to confirm share issue is authorised
Review memorandum of association to confirm authorised capital and share issue does not
exceed authorised capital.
Review register of members to confirm share issue is recorded in the register.
Recalculate share capital where new issues (including rights issues) have been made. If issued
at a premium, agree that the excess over the nominal value is credited to a share premium
reserve.
Agree proceeds of issues (other than bonus issues) to the bank ledger account and bank
statement.
Audit procedures for reserves
Agree that it is allowed under the entity's constitution, legal or GAAP requirements (e.g.
reserves for “repairs and maintenance” are not permitted under IFRS Standards).
Agree that it has been correctly used under the constitution, legal or GAAP requirements. For
example, a share premium account has limited uses, such as for the issue of bonus shares and
cannot be distributed as dividends.
Obtain, or prepare, a reconciliation of the movement agreeing:
i. opening balances to the prior-year closing balance;
ii. closing balance to the accounting records and financial statements;
iii. movement is suitably broken down into required components as required by
GAAP;
iv. required components supported by audited evidence.
Audit Procedures for reserves
Agree that dividends have been made from profits available for distribution as defined by
relevant company legislation and the entity's articles of association.
Confirm that only distributable reserves have been used for distributions.
Confirm that dividends declared or paid have been correctly authorised, documented and
accounted for. A dividend declared after year end is not a liability at the reporting date under
IFRS (IAS 10).
Recalculate dividends based on the declared rate and participating shares.
Agree a sample of dividends paid to the shareholders' register and the bank ledger account.
Recalculate the tax effects of distributions and confirm that tax liabilities were correctly
accounted for and subsequently paid (e.g. withholding taxation).
Agree that the provisions of any double taxation treaties for relevant countries have been met.