Audit of share capital explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Equity and debt are the funding side of the balance sheet, and for most companies they are also where law and contract meet the accounts. The auditor tests not only the numbers but whether capital was raised and loans taken with proper authority, whether registers and filings are in order, and whether covenants have been kept. This article explains how, and what an accountant should have ready. Registers, resolutions and charge records are part of compliance documentation support.
This article is based on the Standards on Auditing issued by ICAI as in force on 4 October 2026; ICAI may revise standards, so check the current text on icai.org. The standards are explained in our linked posts; here they are applied to one group of balances.
For capital and borrowings the auditor ties each balance to authority (board and member approvals), records (registers, loan agreements, sanction letters), third-party evidence (lender and registrar confirmations under SA 505) and law (SA 250 asks for evidence on laws with a direct effect on the financial statements). Covenant breaches can change the classification of a loan and raise going concern questions. Companies Act provisions are referred to here by name only; each is explained in the linked section posts.
The standards that apply
SA 250, paragraph 12, asks the auditor to obtain a general understanding of the legal and regulatory framework applicable to the entity and how it complies. Paragraph 13 requires sufficient appropriate evidence of compliance with laws generally recognised as having a direct effect on the determination of material amounts and disclosures. For other laws the auditor inquires of management and inspects correspondence with regulators (paragraph 14), stays alert (paragraph 15) and asks for a written representation on known non-compliance (paragraph 16). Without identified or suspected non-compliance the auditor need do nothing more on other laws (paragraph 17). Share capital and borrowings are areas in which company law has a direct effect on the amounts and disclosures, so the auditor's tests include the legal steps. Our post on SA 250 covers the standard.
The evidence and assertions come from SA 500 and external confirmation from SA 505 (paragraph 7 on controlling requests; paragraphs 12 and 14 on non-replies and exceptions).
Share capital and reserves
| Assertion | What the auditor checks | Evidence |
|---|---|---|
| Rights and obligations | Capital was issued under proper authority; classes of shares and their rights agree to the constitutional documents | Memorandum and articles, board and general meeting resolutions, allotment records |
| Existence and completeness | Shares issued and money received agree to the register and the bank | Register of members, share certificates or demat records, bank statements |
| Valuation | Share premium, discount, buy-back and bonus issue are accounted for correctly | Resolutions, valuation reports where used, accounting entries |
| Presentation and disclosure | Authorised, issued, subscribed and paid-up capital, rights, reconciliation of shares and holders of significant interests are disclosed | Notes to the accounts, register of members |
For capital the auditor reads the minutes and resolutions authorising each change, and agrees the entries to the statutory registers. The structure of company law on classes of capital and alterations is covered in our posts on section 43 and section 61. Filing of alterations and increases is explained in our guide to increasing authorised share capital. The auditor checks that filings with the registrar were made for changes in the year and that the accounts reflect only what was authorised.
Reserves are tested by roll-forward: opening balance, profit for the year, transfers, dividends, bonus issue or capitalisation, and any adjustments. Each movement needs authority, and appropriations must agree to resolutions. Opening balances brought forward are tied to the prior year's audited statements. Revaluation reserves and similar items are tested against the underlying asset records.
Borrowings
Borrowings are tested for existence, completeness, classification, valuation and disclosure.
| Item | What the auditor checks | Evidence |
|---|---|---|
| Authority | Board approval for each loan, and any member approval or limits required | Resolutions and minutes; see our board resolution for taking a loan |
| Terms | Amount, rate, repayment, security, covenants | Sanction letters, loan agreements |
| Balance | Agrees to the lender's statement and confirmation | Lender confirmation, account statements |
| Charges | Security given is recorded and filed; satisfaction of old charges is filed | Charge documents, registrar records; see section 77 on registration of charges |
| Classification | Split between current and non-current, including repayments due within twelve months | Repayment schedule, covenant analysis |
| Interest and finance costs | Accrued correctly; capitalised where qualifying; classified properly | Interest recomputation, loan statements |
| Disclosure | Security, defaults, terms and utilisation as the framework requires | Notes to the accounts |
Lender confirmations are sent by the auditor and returned directly. Confirmations of term loans, cash credit, letters of credit, guarantees and other facilities should be requested, not only the balance on one account; the auditor investigates any difference between the lender's and the company's records (SA 505, paragraph 14). Where the lender does not reply, alternative procedures are performed (paragraph 12). See our post on SA 505.
Covenants and defaults
The auditor reads the loan agreements for financial covenants, such as ratios or restrictions on further borrowing and dividends, computes compliance at the balance sheet date and considers the effect of any breach. A breach may entitle the lender to demand repayment, which can affect the classification of the loan and, in serious cases, the assessment of going concern. This is an area where the auditor looks for correspondence with lenders (SA 250, paragraph 14). Reporting by companies on defaults and the use of funds is covered in our post on CARO 2020 clause 3(ix); this article does not repeat that wording.
Finance costs
Finance cost is tested by recomputing interest on major loans from the terms and balances, and checking for accrued interest at year end, processing fees and other charges, and the split between expense and borrowing cost capitalised under AS 16. A mismatch between interest recomputed and interest booked may point to unrecorded borrowings or wrongly capitalised cost.
Worked example (illustrative)
Rishi Components Pvt Ltd, an invented manufacturer, shows term loans of Rs 28 crore. The auditor requests confirmations from three banks and receives them. One bank's confirmation shows a working capital loan of Rs 4 crore that is not in the borrowing note: it was shown as trade payables because the bank had paid a supplier under a letter of credit. The auditor recomputes interest and finds booked interest lower by an illustrative Rs 33 lakh than the loans imply. The loan agreement requires a debt to equity ratio below a stated level; with the corrected figure the ratio is exceeded. The bank has not waived the breach in writing, so the auditor discusses reclassification of the loan as current, and the effect on going concern. Management obtains a waiver letter before the accounts are signed, and the disclosure is updated.
Documents to keep ready
- Constitutional documents, board and general meeting minutes and resolutions for capital changes and loans.
- Registers of members, allotments and share transfers; demat statements.
- Sanction letters, loan agreements, security documents and charge records.
- Lender statements, repayment schedules and covenant compliance workings.
- Interest computation and evidence of capitalisation.
- Correspondence with lenders on defaults, waivers or restructuring.
Common lapses
- Loans raised or security created without proper resolutions.
- Differences between registers, demat records and the accounts.
- Charges created but not recorded, or satisfied but not marked as satisfied.
- Covenants not computed, or waivers not in writing.
- Loans from the lender's other facilities left out of the borrowing note.
Need help documenting capital and borrowings?
Resolutions, registers, charge records and a covenant tracker are the documents the auditor asks for first, and they are most useful when kept up to date through the year. Our team can help you maintain them and prepare the supporting schedules; see our compliance documentation support.
Key takeaways
- The auditor tests capital and borrowings against authority, records, third-party evidence and law.
- SA 250 requires evidence of compliance with laws that directly affect the amounts and disclosures (paragraph 13).
- Lender confirmations should cover all facilities, and differences are investigated (SA 505, paragraph 14).
- Covenant breaches can change classification and raise going concern questions.
- Interest recomputation can reveal unrecorded borrowings.
Read next
- Audit of property, plant and equipment
- Audit of payables, provisions and bank balances
- SA 250, laws and regulations
- CARO 2020 clause 3(ix), loans and defaults
Disclaimer: Based on the Standards on Auditing, the review, assurance and related services standards, the Compendium of Standards on Internal Audit (as on 1 October 2022) and the Compendium of Forensic Accounting and Investigation Standards (as on September 2025) issued by the Institute of Chartered Accountants of India, in the versions named in the article, as consulted on 4 October 2026. ICAI revises standards from time to time; check the current text and effective dates on icai.org and the Companies Act provisions referred to. This article is general information, not legal advice; check the official text before acting.