ACCA Audit and Assurance (F8) Practice Exam

What must be confirmed to ensure compliance when auditing share capital?

1. The amount of cash book balance

2. The number of employees

3. Only distributable reserves have been paid out

4. The number of assets owned

The correct answer is: Only distributable reserves have been paid out

To ensure compliance when auditing share capital, it is essential to confirm that only distributable reserves have been paid out. This relates to the fundamental principle of protecting the interests of creditors and shareholders, as not all profits can be distributed. The Companies Act in various jurisdictions imposes restrictions on distributions to ensure that a company does not pay out money that should be retained to support its operations or to cover liabilities. Distributable reserves typically refer to profits available for distribution, which means that any dividends paid must come from these reserves. Auditors need to verify that dividends declared and paid do not exceed the available distributable reserves, as doing so could lead to legal and financial repercussions for the company and put its solvency at risk. Other options, such as the amount of cash book balance, the number of employees, and the number of assets owned, do not directly pertain to compliance with share capital regulations. While they may have relevance to the overall financial health of the company, they do not address the critical question of whether the company is distributing profits appropriately based on its financial standing and statutory requirements.