Question

Discuss the following two statements:

1- the corporate charter and the bylaws of a company are legal documents; therefore, they should not be examined by the auditors. If the auditor wants information about these documents, an attorney should be consulted.

2- the most important audit procedure to verify dividends for the year is a comparison of a random sample of cancelled dividends checks with a dividend list that has been prepared by management as of the dividend record date.

Answer 1

1) The corporate charter and bylaws of a company are legal documents and not public documents. But, they specify the purpose for which the company is formed, its objectives, the constitution and powers of the board of directors, details about share capital, powers and duties of key managerial person and so on. Hence, it is very essential that the Auditor is provided with a copy of the corporate charter and bylaws so that he is able to find out whether the transactions are properly authorized by the company's charter and bylaws. Only then the auditor can be satisfied with legality and propriety of the decisions taken.

2) To verify dividends the following procedure may be adopted:

*Check the board decision on declaration of dividends.

*Verify the list of shareholders as on the record date, randomly.

*Verify the share transfers made just before the record date.

*Verify the pending share transfers to see whether they ought to have been registered before the record date.

*Verify the cancelled checks returned with the bank statement.

*Verify the list of dividend checks not collected.

*Verify the dividends unpaid list.