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Test Series: April, 2018

MOCK TEST PAPER – 2
INTERMEDIATE (IPC) (OLD) COURSE: GROUP – II
PAPER – 5: ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
Wherever necessary suitable assumptions may be made and disclosed by way of a note.
Working Notes should form part of the answer.
Time Allowed: 3 Hours Maximum Marks: 100

1. (a) M/s. Zen Bridge Construction Limited obtained a loan of Rs. 64 crores to be utilized
as under:
Rs. in
Crores
(i) Construction of Hill link road in Kedarnath: (work was held up 50
totally for a month during the year due to heavy rain which
are common in the geographic region involved)
(ii) Purchase of Equipment and Machineries 6
(iii) Working Capital 4
(iv) Purchase of Vehicles 1
(v) Advances for tools/cranes etc. 1
(vi) Purchase of Technical Know how 2
(vii) Total Interest charged by the Bank for the year ending 1.6
31st March, 2016
You are required to show the treatment of Interest according to Accounting
Standard by M/s. Zen Bridge Construction Limited.
(b) A Ltd. has got the license to manufacture particular medicines for 10 years at a
license fee of Rs. 200 lakhs. Given below is the pattern of expected production and
expected operating cash inflow:
Year Production in bottles (in lakhs) Net operating cash flow (Rs. in lakhs)
1 300 900
2 600 1,800
3 650 2,300
4 800 3,200

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5 800 3,200
6 800 3,200
7 800 3,200
8 800 3,200
9 800 3,200
10 800 3,200
Net operating cash flow has increased for third year because of better inventory
management and handling method. Suggest the amortization method.
(c) Ram Ltd. purchased machinery for Rs. 80 lakhs. (useful life 4 years and residual
value Rs. 8 lakhs). Government grant received is Rs. 32 lakhs. Show the Journal
Entry to be passed at the time of refund of grant and the value of the fixed assets in
the third year and the amount of depreciation for remaining two years, if the grant is
credited to Fixed Assets A/c.
(d) ABC Ltd. took a machine on lease from XYZ Ltd., the fair value being
Rs. 10,00,000. The economic life of the machine as well as the lease term is 4
years. At the end of each year, ABC Ltd. pays Rs. 3,50,000. The lessee has
guaranteed a residual value of Rs. 50,000 on expiry of the lease to the lessor.
However, XYZ Ltd. estimates that the residential value of the machinery will be Rs.
35,000 only. The implicit rate of return is 16% and PV factors at 16% for year 1,
year 2, year 3 and year 4 are 0.8621, 0.7432, 0.6407 and 0.5523 respectively. You
are required to calculate the value of machinery to be considered by ABC Ltd. and
the finance charges for each year. (4 Parts x 5 Marks = 20 Marks)
2. X, Y and Z are in partnership sharing profits and losses in the ratio of 5:4:4. The Balance
Sheet of the firm as on 31 st March, 2016 is as below:
Liabilities Rs. Assets Rs.
X’s Capital 60,000 Factory Building 96,640
Y’s Capital 40,000 Plant and Machinery 65,100
Z’s Capital 50,000 Trade Receivable 21,600
Y’s Loan 18,000 Inventories 49,560
Trade Payable 66,000 Cash at Bank 1,100
2,34,000 2,34,000
On Balance Sheet date, all the three partners have decided to dissolve their partnership.
Since the realisation of assets was protracted, they decided to distribute amounts as and
when feasible and for this purpose they appoint Z who was to get as his remuneration
1% of the value of the assets realised other than cash at bank and 10% of the amount
distributed to the partners.

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Assets were realised piecemeal as under:
Rs.
First instalment 74,600
Second instalment 69,301
Third instalment 40,000
Last instalment 28,000
Dissolution expenses were provided for estimated amount of Rs. 12,000
The creditors were settled finally for Rs. 63,600
You are required to prepare a statement showing distribution of cash amongst the
partners by "Highest Relative Capital Method". (16 Marks)
3. (a) The following facts have been taken out from the records of City Bank Ltd. as on
31st March, 2017:
Rs. Rs.
Rebate on bill discounted (not due on March 31st, 2016) 66,400
Discount received 3,00,000
Bill discounted 24,50,000
An analysis of the bills discounted is as follows:
Amount Due date Rate of discount
Rs. 2017
(i) 7,50,000 April 8 12%
(ii) 3,00,000 May 5 14%
(iii) 4,40,000 June 12 14%
(iv) 9,60,000 July 15 15%
You are required to:-
(i) Calculate Rebate on Bill Discounted (not due) on 31st March, 2017.
(ii) The amount of discount to be credited to the profit and loss account.
(b) Modern Insurance Company’s Fire Insurance division provide the following
information, show the amount of claim as it would appear in the Revenue Account
for the year ended 31 st March, 2017.
Direct Business Re-insurance
Rs. Rs.
Claim paid during the year 7,06,000 1,64,000
Claim received 64,000

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Claim payable
1st April, 2016 1,64,600 11,600
31st March, 2017 1,75,000 17,400
Claim receivable:
1st April, 2016 - 17,000
31st March, 2017 - 28,400
Expenses of management 69,000
(Includes Rs. 7,600 Surveyor’s fee
and Rs. 8,400 Legal expenses for settlement of
claims)
(c) F Ltd. finalized their financial statements for the year ending 31 st March, 2017 and
got approved by their approving authority on 30 th June, 2017. A major fire broke out
in the night of 31 st May, 2017 destroying factory premises. Loss of property
estimated to be Rs. 25 lakhs. You are required to state how to deal with this
information in the annual accounts. (6 + 6 +4 = 16 Marks)
4. (a) On 31st December, 2016 the following balances appeared in the books of Kolkata
Branch of an English firm having its HO office in New York:
Amount in Rs. Amount in Rs.
Stock on Jan., 2016
1st 2,34,000
Purchases and Sales 15,62,500 23,43,750
Debtors and Creditors 7,65,000 5,10,000
Bills Receivable and Payable 2,04,000 1,78,500
Salaries and Wages 1,00,000 -
Rent, Rates and Taxes 1,06,250 -
Furniture 91,000 -
Bank A/c 5,68,650
New York Account - 5,99,150
36,31,400 36,31,400
Stock on 31st December, 2016 was Rs.6,37,500.
Branch account in New York books showed a debit balance of $ 13,400 on 31st
December, 2016 and Furniture appeared in the Head Office books at $ 1,750.
The rate of exchange on 31st December, 2015 was Rs. 52 and on 31st December,
2016 was Rs. 51. The average rate for the year was Rs. 50.

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Prepare in the Head Office books the Profit and Loss a/c and the Balance Sheet of
the Branch.
(b) Department A sells goods to Department B at a profit of 50% on cost and to
Department C at 20% on cost. Department B sells goods to A and C at a profit of
25% and 15% respectively on sales. Department C charges 30% and 40% profit on
cost to Department A and B respectively.
Stock lying at different departments at the end of the year are as under:
Department A Department B Department C
Rs. Rs. Rs.
Transfer from Department A - 45,000 42,000
Transfer from Department B 40,000 - 72,000
Transfer from Department C 39,000 42,000 -
Calculate the unrealized profit of each department and also total unrealized profit.
(10 + 6 = 16 Marks)
5. M/s Xylem Limited has decided to reconstruct the Balance Sheet since it has
accumulated huge losses. The following is the summarized Balance Sheet of the
company as on 31st March, 2017 before reconstruction:
Liabilities Amount (Rs.) Assets Amount (Rs.)
Share Capital Land & Building 42,70,000
50,000 shares of Rs. 50 Machinery 8,50,000
each fully paid up 25,00,000 Computers 5,20,000
1,00,000 shares of Rs. 50 Inventories 3,20,000
each Rs. 40 paid up 40,00,000 Trade receivables 10,90,000
Capital Reserve 5,00,000 Cash at Bank 2,68,000
8% Debentures of Rs. 100 each 4,00,000 Profit & Loss Account 29,82,000
12% Debentures of Rs. 100 each 6,00,000
Trade payables 12,40,000
Outstanding Expenses 10,60,000
1,03,00,000 1,03,00,000
Following is the interest of Mr. A and Mr. B in M/s Xylem Limited:
Mr. A Mr. B
8% Debentures 3,00,000 1,00,000
12% Debentures 4,00,000 2,00,000
Total 7,00,000 3,00,000

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The following scheme of internal reconstruction was framed and implemented, as
approved by the court and concerned parties:
(1) Uncalled capital is to be called up in full and then all the shares to be converted into
Equity Shares of Rs. 40 each.
(2) The existing shareholders agree to subscribe in cash, fully paid up equity shares of
40 each for Rs. 12,50,000.
(3) Trade payables are given option of either to accept fully paid equity shares of Rs.
40 each for the amount due to them or to accept 70% of the amount due to them in
cash in full settlement of their claim. Trade payables for Rs. 7,50,000 accept equity
shares and rest of them opted for cash towards full and final settlement of their
claim.
(4) Mr. A agrees to cancel debentures amounting to Rs. 2,00,000 out of total
debentures due to him and agree to accept 15% Debentures for the balance amount
due. He also agree to subscribe further 15% Debentures in cash amounting to
Rs. 1,00,000.
(5) Mr. B agrees to cancel debentures amounting to Rs. 50,000 out of total debentures
due to him and agree to accept 15% Debentures for the balance amount due.
(6) Land & Building to be revalued at Rs. 51,84,000, Machinery at Rs. 7,20,000,
Computers at Rs. 4,00,000, Inventories at Rs. 3,50,000 and Trade receivables at
10% less to as they are appearing in Balance Sheet as above.
(7) Outstanding Expenses are fully paid in cash.
(8) Profit & Loss A/c will be written off and balance, if any, of Capital Reduction A/c will
be adjusted against Capital Reserve.
You are required to pass necessary Journal Entries for all the above transactions and
draft the company's Balance Sheet immediately after the reconstruction. (16 Marks)
6. The following was the Balance Sheet of Omega Ltd. as on 31st March ,2016.
Equity & Liabilities Rs. Lakhs Assets Rs. Lakhs
Share Capital: Fixed Assets 14,000
Equity shares of Rs. 10 each Fully 8,000 Investments 3,000
Paid Up
10% Redeemable Pref. Shares of 2,500 Cash at Bank 1,650
Rs. 10 each Fully Paid Up
Reserves & Surplus Other Current Assets 8,250
Capital Redemption Reserve 1,000
Securities Premium 800
General Reserve 6,000
Profit & Loss Account 300

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Secured Loans:
9% Debentures 5,000
Current Liabilities:
Trade payables 2,300
Sundry Provisions 1,000
26,900 26,900
On 1st April, 2016 the Company redeemed all its Preference Shares at a Premium of 10%
and bought back 15% of its Equity Shares at Rs. 20 per Share. In order to make cash
available, the Company sold all the Investments for Rs. 3,150 lakhs and raised a Bank
Loan amounting to Rs. 400 lakh on the Security of the Company’s Plant.
You are required to
(i) pass journal entries for the above and
(ii) prepare the Company’s Balance sheet immediately thereafter. (16 Marks)
7. Answer any four of the following:
(a) Mohan Ltd. is in a dispute involving allegation of infringement of patents by a
competitor company who is seeking damages of a huge sum of Rs. 900 lakhs. The
directors are of the opinion that the claim can be successfully resisted by the
company.
How would you deal with the same in the annual accounts of the Mohan Ltd.?
(b) A liquidator is entitled to receive remuneration at 2% on the assets realized, 3% on
the amount distributed to Preferential Creditors and 3% on the payment made to
Unsecured Creditors. The assets were realized for Rs. 45,00,000 against which
payment was made as follows:
Liquidation expenses Rs. 50,000
Secured Creditors Rs. 15,00,000
Preferential Creditors Rs. 1,25,000
The amount due to Unsecured Creditors was Rs. 30,00,000. You are asked to
calculate the total remuneration payable to liquidator. Calculation shall be made to
the nearest multiple of a rupee.
(c) A Company has its share capital divided into shares of Rs. 10 each. On 1 st April,
20X1 it granted 10,000 employees’ stock options at Rs. 40, when the market price
was Rs. 130. The options were to be exercised between 15 th March, 20X2 and
31st March, 20X2. The employees exercised their options for 9,500 shares only; the
remaining options lapsed. The company closes its books on 31 st March every year.
Show Journal Entries.

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(d) Explain the concept of ‘weighted average number of equity shares outstanding
during the period’. State how would you compute, based on AS-20, the weighted
average number of equity shares in the following case:
No. of shares
1st April, 2016 Balance of equity shares 7,20,000
31st August, 2016 Equity shares issued for cash 2,40,000
1st February, 2017 Equity shares bought back 1,20,000
31st March, 2017 Balance of equity shares 8,40,000
(e) ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom -made
machine amounting to Rs. 4,00,000. As on 31 st March, 2016 before delivery of the
machine, ABC Ltd. had to change its method of production. The new method will not
require the machine ordered and so it shall be scrapped after delivery. The
expected scrap value is ‘NIL’.
Show the treatment of machine in the books of ABC Ltd.
(4 Parts x 4 Marks= 16 Marks)

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Test Series: April, 2018
MOCK TEST PAPER - 2
INTERMEDIATE (IPC): GROUP – II
PAPER – 5: ADVANCED ACCOUNTING
SUGGESTED ANSWERS/HINTS

1. (a) According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes substantial
period of time to get ready for its intended use. As per the standard, borrowing costs that are
directly attributable to the acquisition, construction or production of a qualifying asset should be
capitalized as part of the cost of that asset. Other borrowing costs should be recognized as an
expense in the period in which they are incurred. Capitalization of borrowing costs is also not
suspended when a temporary delay is a necessary part of the process of getting an asset ready
for its intended use or sale.
The treatment of interest by Zen Bridge Construction Ltd. can be shown as:
Qualifying Interest to be Interest to be
Asset capitalized charged to Profit
Rs. in crores & Loss A/c Rs.
in crores
Construction of hill road* Yes 1.25 1.6/64 x 50
Purchase of equipment
and machineries No 0.15 1.6/64 x 6
Working capital No 0.10 1.6/64 x 4
Purchase of vehicles No 0.025 1.6/64 x 1
Advance for tools, cranes
etc. No 0.025 1.6/64 x 1
Purchase of technical
know-how No 0.05 1.6/64 x 2
Total 1.25 0.35
*Note: It is assumed that construction of hill road will normally take more than a year (substantial
period of time), hence considered as qualifying asset.
(b) As per para 72 of AS 26 ‘Intangibles Assets’, the amortization method used should reflect the
pattern in which economic benefits are consumed by the enterprise. If pattern cannot be
determined reliably, then straight-line method should be used.
In the instant case, the pattern of economic benefit in the form of net operating cash flow vis -à-vis
production is determined reliably. A Ltd. should amortize the license fee of Rs. 200 lakhs as under:
Year Net operating Cash in Ratio Amortize amount (Rs. in lakhs)
flow (Rs.)
1 900 0.03 6
2 1,800 0.06 12
3 2,300 0.08 16
4 3,200 0.12 24

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5 3,200 0.12 24
6 3,200 0.12 24
7 3,200 0.12 24
8 3,200 0.12 24
9 3,200 0.12 24
10 3,200 0.11 (bal.) 22
27,400 1.00 200
(c) In the books of Ram Ltd.
(1) If the grant is credited to Fixed Assets Account:
1. Journal Entry (at the time of refund of grant)
In lakhs In lakhs
Rs. Rs.
I Fixed Assets Dr. 32
To Bank A/c 32
(Being grant refunded)
2. Value of Fixed Assets after two years but before refund of grant
Fixed assets initially recorded in the books = Rs. 80 lakhs – Rs. 32 lakhs
= Rs. 48 lakhs
Depreciation for each year = (Rs. 48 lakhs – Rs.8 lakhs)/4 years
= Rs. 10 lakhs per year for first two years.
Value of the assets before refund of grant =Rs. 48 lakhs - Rs. 20 lakhs
= Rs. 28 lakhs
3. Value of Fixed Assets after refund of grant
Value of Fixed Assets before refund of grant Rs. 28 lakhs
Add Refund of grant Rs. 32 lakhs
Rs. 60 lakhs
4. Amount of depreciation for remaining two years
Value of the fixed assets after refund of grant –residual value of the assets / No. of years
= Rs. 60 lakhs - Rs. 8 lakhs / 2
= Rs. 26 lakhs per annum will be charged for next two years.
(d) As per AS 19 “Leases”, the lessee should recognize the lease as an asset and a liability at the
inception of a finance lease. Such recognition should be at an amount equal to the fair value of the
leased asset at the inception of lease. However, if the fair value of the leased asset exceeds the
present value of minimum lease payment from the standpoint of the lessee, the amount recorded
as an asset and liability should be the present value of minimum lease payments from the
standpoint of the lessee.

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Value of machinery
In the given case, fair value of the machinery is Rs. 10, 00,000 and the net present value of
minimum lease payments is Rs. 10, 07,020 (Refer working Note). As the present value of the
machine is more than the fair value of the machine, the machine and the corresponding liability will
be recorded at value of Rs.10,00,000.
Calculation of finance charges for each year
Year Finance Payment Reduction in Outstanding
charge (Rs.) (Rs.) outstanding liability liability (Rs.)
(Rs.)
1st year beginning - - - 10,00,000
End of 1st year 1,60,000 3,50,000 1,90,000 8,10,000
End of 2nd year 1,29,600 3,50,000 2,20,400 5,89,600
End of 3rd year 94,336 3,50,000 2,55,664 3,33,936
End of 4th year 53,430 3,50,000 2,96,570 37,366
Working Note:
Present value of minimum lease payments
Annual lease rental x PV factor
Rs. 3,50,000 x (0.8621 + 0.7432 + 0.6407+ 0.5523) Rs. 9,79 ,405
Present value of guaranteed residual value
Rs. 50,000 x (0.5523) Rs. 27,615
Rs. 10,07,020
2. Statement showing distribution of cash amongst the partners
Trade Y’s Loan Capitals
Payable
X (Rs.) Y (Rs.) Z (Rs.)
Balance Due 66,000 18,000 60,000 40,000 50,000
Including 1st Instalment amount
with the firm 75,700
Rs. (1100 + 74,600)
Less: Dissolution expenses
provided for (12,000)
63,700
Less: Z’s remuneration of 1% on
assets realized (74,600 x 1%)
(746)
62,954
Less: Payment made to Trade
Payables (62,954) (62,954)
Balance due Nil 3046
2nd instalment realised 69,301


The difference between this figure and guaranteed residual value (Rs. 50,000) is due to rounding off.
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Less: Z’s remuneration of 1% on
assets realized (69,301 x 1%)
(693)
68,608
Less: Payment made to Trade
Payables (646) (646)
Transferred to P& L A/c 2,400
67,962
Less: Payment for Y’s loan A/c (18,000) (18,000)
Amount available for distribution
to partners 49,962 nil
Less: Z’s remuneration of 10% of
the amount distributed to (4,542)
partners (49,962 x 10/110)
Balance to be distributed to
partners on the basis of HRCM 45,420
Less: Paid to Z (W.N.) (2,000) (2,000)
43,420 48,000
Less: Paid to X and Z in 5:4 (18,000) (10,000) - (8,000)
(W.N.)
Balance due 25,420 50,000 40,000 40,000
Less: Paid to X, Y & Z in 5:4:4
25,420 (9,778) (7,821) (7,821)
Nil
Amount of 3rd instalment 40,000 40,222 32,179 32,179
Less: Z’s remuneration of 1% on
assets realized (40,000 x 1%)
(400)
39,600
Less: Z’s remuneration of 10% of
the amount distributed to
partners (39,600 x 10/110)
(3,600)
36,000
Less: Paid to X, Y, Z in 5:4:4 for
(W.N.) (36,000) (13,846) (11,077) (11,077)
Nil 26,376 21,102 21,102
Amount of 4th and last instalment 28,000
Less: Z’s remuneration of 1% on
assets realized (28,000 x 1%)
(280)
27,720
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Less: Z’s remuneration of 10% of
the amount distributed to
partners (27,720 x 10/110)
(2,520)
25,200
Less: Paid to X, Y and Z in 5:4:4
(25,200) (9,692) (7,754) (7,754)
Nil
Loss suffered by partners 16,684 13,348 13,348
Working Note:
(i) Rs. 1100 added to the first instalment received on sale of assets represents the Cash in Bank
(ii) The amount due to Creditors at the end of the utilization of First Instalment is Rs. 3046. However,
since the creditors were settled for Rs. 63,600 only the balance Rs.646 were paid and the balance
Rs. 2400 was transferred to the Profit & Loss Account.
(iii) Highest Relative Capital Basis
X Y Z
Rs. Rs. Rs.
Balance of Capital Accounts (A) 60,000 40,000 50,000
Profit sharing ratio 5 4 4
Capital Profit sharing ratio 12,000 10,000 12,500
Capital in profit sharing
ratio taking Y’s Capital as base (B) 50,000 40,000 40,000
Excess of X’s Capital and Z’s Capital (A-B) = (C) 10,000 nil 10,000
Again repeating the process
Profit sharing ratio 5 4
Capital Profit sharing ratio 2,000 2,500
Capital in profit sharing
ratio taking X’s Capital as base (D) 10,000 8,000
Excess of Z’s Capital (C-D)=(E) nil 2,000
Therefore, firstly Rs.2,000 is to be paid to Z, then X and Z to be paid in proportion of 5:4 upto
Rs. 18,000 to bring the capital of all partners X, Y and Z in proportion to their profit sharing ratio.
Thereafter, balance available will be paid in the profit sharing ratio 5:4:4 to all partners viz X, Y and
Z.
3. (a) (i) Calculation of Rebate on bills discounted (not due) on 31.3.2017
S. No. Amount Due date Unexpired Rate of Rebate on bill
(Rs.) 2017 portion discount discounted (Rs.)
(i) 7,50,000 April 8 8 days 12% 1,972
(ii) 3,00,000 May 5 35 days 14% 4,028
(iii) 4,40,000 June 12 73 days 14% 12,320
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(iv) 9,60,000 July 15 106 days 15% 4,1820
60,140

(ii) Amount of discount to be credited to the Profit and Loss Account
Rs.
Transfer from Rebate on bills discount as on 31st March, 2016 66,400
Add: Discount received during the year ended 31st March, 2017 3,00,000
3,66,400
Less: Rebate on bills discounted as on 31st March, 2017 60,140
Discount credited to the Profit and Loss Account 3,06,260

(b) Modern Insurance Company (Abstract showing the Amount of claims)
Net Claims incurred
Rs.
Claims paid on direct business (7,06,000 + 7,600 + 8,400) 7,22,000
Add: Re-insurance 1,64,000
Add: Outstanding as on 31.3.2017 17,400
Less: Outstanding as on 1.4.2016 (11,600) 1,69,800
8,91,800
Less: Claims received from re-insurance 64,000
Add: Outstanding as on 31.3.2017 28,400
Less: Outstanding as on 1.4.2016 (17,000) (75,400)
8,16,400
Add: Outstanding direct claims at the end of the year 1,75,000
9,91,400
Less: Outstanding claims at the beginning of the year (1,64,600)
Net claims incurred 8,26,800
(c) The event is a non-adjusting event with reference to the provisions of AS 4 “Contingencies and
Events Occurring After the Balance Sheet Date” since it occurred after the year-end and does not
relate to the conditions existing at the year-end. However, the event would appear to be of such
significance as to require a disclosure in the report of the approving authority to enable users of
the financial statements to make proper evaluation and decision, hence, such disclosure is
recommended.
4. (a) In the books of English Firm (Head Office in New York)
Kolkata Branch Profit and Loss Account
for the year ended 31st December, 2016
$ $
To Opening stock 4,500 By Sales 46,875
To Purchases 31,250 By Closing stock 12,500
To Gross profit c/d 23,625 (6,37,500 / 51)
59,375 59,375
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To Salaries 2,000 By Gross profit b/d 23,625
To Rent, rates and taxes 2,125
To Exchange translation loss 2,000
To Net Profit c/d 17,500
23,625 23,625
Balance Sheet of Kolkata Branch
as on 31st December, 2016
Liabilities $ $ Assets $
Head Office A/c 13,400 Furniture 1,750
Add : Net profit 17,500 30,900 Closing Stock 12,500
Trade creditors 10,000 Trade Debtors 15,000
Bills Payable 3,500 Bills Receivable 4,000
Cash at bank 11,150
44,400 44,400
Working Note:
Require for calculation of Exchange Translation Loss
Kolkata Branch Trial Balance (converted in $)
as on 31st December, 2016
Dr. Cr. Conversion Dr. Cr.
Rs. Rs. rate ($) ($)
Stock on 1st Jan., 2016 2,34,000 52 4,500
Purchases & Sales 15,62,500 23,43,750 50 31,250 46,875
Debtors & creditors 7,65,000 5,10,000 51 15,000 10,000
Bills Receivable and Bills Payable 2,04,000 1,78,500 51 4,000 3,500
Salaries and wages 1,00,000 50 2,000
Rent, Rates and Taxes 1,06,250 50 2,125
Furniture 91,000 1,750
Bank A/c 5,68,650 51 11,150
New York Account 5,99,150 13,400
Exchange translation loss (bal. fig.)
2,000
36,31,400 36,31,400 73,775 73,775
(b) Calculation of unrealized profit of each department and total unrealized profit
Dept. A Dept. B Dept. C Total
Rs. Rs. Rs. Rs.
Unrealized
Profit of:
Department A 45,000 x 50/150 = 15,000 42,000 x 20/120 = 7,000 22,000

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Department B 40,000 x .25 = 72,000 x .15= 10,800 20,800
10,000
Department C 39,000 x 30/130 42,000 x 40/140 = 12,000
= 9,000 21,000
63,800

Total unrealized profit is Rs. 63,800.
5. Journal Entries
Rs. Rs.
Bank A/c Dr. 10,00,000
To Equity share capital A/c 10,00,000
(Being money on final call received)
Equity share capital (Rs. 50) A/c Dr. 75,00,000
To Equity share capital (Rs. 40) A/c 60,00,000
To Capital Reduction A/c 15,00,000
(Being conversion of equity share capital of Rs. 50 each into
Rs. 40 each as per reconstruction scheme)
Bank A/c Dr. 12,50,000
To Equity Share Capital A/c 12,50,000
(Being new shares allotted at Rs. 40 each)
Trade payables A/c Dr. 12,40,000
To Equity share capital A/c 7,50,000
To Bank A/c (4,90,000 x 70%) 3,43,000
To Capital Reduction A/c 1,47,000
(Being payment made to trade payables in shares or cash to the
extent of 70% as per reconstruction scheme)
8% Debentures A/c Dr. 3,00,000
12% Debentures A/c Dr. 4,00,000
To A A/c 7,00,000
(Being cancellation of 8% and 12% debentures of A)
A A/c Dr. 8,00,000
To 15% Debentures A/c 6,00,000
To Capital Reduction A/c 2,00,000
(Being issuance of new 15% debentures and balance transferred to
capital reduction account as per reconstruction scheme)
Bank A/c Dr. 1,00,000
To A A/c 1,00,000
(Being new debentures subscribed by A)
8% Debentures A/c Dr. 1,00,000
12% Debentures A/c Dr. 2,00,000
To B A/c 3,00,000
(Being cancellation of 8% and 12% debentures of B)

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B A/c Dr. 3,00,000
To 15% Debentures A/c 2,50,000
To Capital Reduction A/c 50,000
(Being issuance of new 15% debentures and balance transferred to
capital reduction account as per reconstruction scheme)
Land and Building Dr.
(51,84,000 – 42,70,000) 9,14,000
Inventories Dr. 30,000
To Capital Reduction A/c 9,44,000
(Being value of assets appreciated)
Outstanding expenses A/c Dr. 10,60,000
To Bank A/c 10,60,000
(Being outstanding expenses paid in cash)
Capital Reduction A/c Dr. 33,41,000
To Machinery A/c 1,30,000
To Computers A/c 1,20,000
To Trade receivables A/c 1,09,000
To Profit and Loss A/c 29,82,000
(Being amount of Capital Reduction utilized in writing off P & L A/c (Dr.)
balance and downfall in value of other assets)
Capital Reserve A/c Dr. 5,00,000
To Capital Reduction A/c 5,00,000
(Being debit balance of capital reduction account adjusted against
capital reserve)
Balance Sheet of Xylem Ltd. (as reduced) as on 31.3.2017
Particulars Notes Rs.
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 80,00,000
2 Non-current liabilities
a Long-term borrowings 2 8,50,000
Total 88,50,000
Assets
1 Non-current assets
a Fixed assets
Tangible assets 3 63,04,000
2 Current assets
a Inventories 3,50,000
b Trade receivables 9,81,000
c Cash and cash equivalents 12,15,000
Total 88,50,000

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© The Institute of Chartered Accountants of India
Notes to accounts
Rs.
1. Share Capital
2,00,000 Equity shares of Rs. 40 80,00,000
2. Long-term borrowings
Secured
15% Debentures (assumed to be 8,50,000
secured)
3. Tangible assets
Land & Building 51,84,000
Machinery 7,20,000
Computers 4,00,000 63,04,000

Working Notes:
1. Cash at Bank Account
Particulars Rs. Particulars Rs.
To Balance b/d 2,68,000 By Trade payables A/c 3,43,000
To Equity Share capital A/c 10,00,000 By Outstanding expenses A/c 10,60,000
To Equity Share Capital A/c 12,50,000 By Balance c/d (bal. fig.) 12,15,000
To A A/c 1,00,000
26,18,000 26,18,000
2. Capital Reduction Account
Particulars Rs. Particulars Rs.
To Machinery A/c 1,30,000 By Equity Share Capital A/c 15,00,000
To Computers A/c 1,20,000 By Trade payables A/c 1,47,000
To Trade receivables A/c 1,09,000 By A A/c 2,00,000
To Profit and Loss A/c 29,82,000 By B A/c 50,000
By Land & Building 9,14,000
By Inventories 30,000
By Capital Reserve A/c 5,00,000
33,41,000 33,41,000
6. (i) Journal Entries in the books of Omega Ltd. (Rs. in lakhs)
Particulars
1 Bank A/c Dr. 3,150
To Investments A/c 3,000
To Profit and Loss A/c 150
(Being investment sold on profit for the purpose of buy-back)
2 10% Redeemable Preference Share Capital A/c Dr. 2,500
Premium on Redemption of Preference Shares A/c Dr. 250

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To Preference Shareholders A/c 2,750
(Being redemption of preference share capital at premium
of 10%)
3 Securities Premium A/c Dr 250
To Premium on Redemption of Preference Shares A/c 250
(Being premium on redemption of preference shares
adjusted through securities premium)
4 Equity Share Capital A/c Dr. 1,200
Premium on buyback Dr. 1,200
To Equity buy-back A/c 2,400
(Being Equity Share bought back, Share Capital cancelled,
and Premium on Buyback accounted for)
5 Securities Premium A/c (800-250) Dr. 550
General Reserve A/c 650
To Premium on Buyback A/c 1,200
(Being premium on buyback provided first out of securities
premium and the balance out of general reserves.)
6 Bank A/c 400
To Bank Loan A/c 400
(Being loan taken from bank to finance buyback and
redemption of shares)
7 Preference Shareholders A/c 2,750
Equity buy-back A/c 2,400
To Bank A/c 5,150
(Being payment made to preference shareholders and
equity shareholders)
8 General Reserve Account 3,700
To Capital Redemption Reserve Account 3,700
(Being amount transferred to capital redemption
reserve account towards face value of preference shares
redeemed and equity shares bought back)
(ii) Balance Sheet of Omega Ltd. (after Redemption and Buyback) (Rs. Lakhs)
Particulars Note No Amount
EQUITY AND LIABILITIES Rs.
(I) Shareholders’ Funds:
(a) Share Capital 1 6,800
(b) Reserves and Surplus 2 6,800
(2) Non-Current Liabilities:
(a) Long Term Borrowings 3 5,400
(3) Current Liabilities:
(a) Trade payables 2,300

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(b) Short Term Provisions 1,000
Total 22,300
(II) ASSETS
(1) Non-Current Assets
Fixed Assets 14,000
Current Assets:
(a) Cash and Cash equivalents (W N) 50
(b) Other Current Assets 8,250
22,300
Notes to Accounts
Rs. in Lakhs
1. Share Capital
680 lakh Equity Shares of Rs. 10 each Fully Paid
up (120 lakh Equity Shares bought back) 6,800
2. Reserves and Surplus
General Reserve 6,000
Less: Adjustment for premium paid on buy (650)
back
Less: Transfer to CRR (3,700) 1,650
Capital Redemption Reserve 1,000
Add: Transfer due to buy-back of shares from 3,700
Gen. res. 4,700
Securities premium 800
Less: Adjustment for premium paid on (250)
redemption of preference shares
Less: Adjustment for premium paid on buy (550)
back -
Profit & Loss A/c 300
Add: Profit on sale of investment 150 450 6,800
3. Long-term borrowings
Secured
9 % Debentures 5,000
Term Loans – From Banks 400 5,400
Working Note
Bank Account
Receipts Amount Payments Amount
(Rs. Lakhs) (Rs. Lakhs)
To balance b/d 1,650 By Preference 2,750
Sharesholders A/c
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To Investment A/c (sale 3,150 By Equity Shareholders 2,400
Proceeds) A/c
To Bank Loan A/c (Loan 400 By Balance c/d
received) (Balancing figure) 50
5,200 5,200
Income tax on the above will not be included in Revenue A/c of an insurance company .
7. (a) As per para 14 of AS 29 'Provisions, Contingent Liabilities and Contingent Assets', a provision
should be recognised when:
(i) An enterprise has a present obligation as a result of past event;
(ii) It is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; and
(iii) A reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognised.
A contingent liability is disclosed, unless the possibility of an outflow of resources embodying
economic benefits is remote. The possibility of an outflow of resources embodying economic
benefits seems to be remote in the given situation, since the directors of Mohan Ltd. are of the
opinion that the claim can be successfully resisted by the company. Therefore, the company shall
not disclose the same as contingent liability. However, following note in this regard may be given
in annual accounts of the company:
“Litigation is in process against the company relating to a dispute with a competitor who alleges
that the company has infringed patents and is seeking damages of Rs. 900 lakhs. However, the
directors are of the opinion that the claim can be successfully resisted by the company ”.
(b) Calculation of Total Remuneration payable to Liquidator
Amount in Rs.
2% on Assets realised (45,00,000 x 2%) 90,000
3% on payment made to Preferential creditors 1,25,000 x 3% 3,750
3% on payment made to Unsecured creditors
(Refer W.N) 79,551
Total Remuneration payable to Liquidator 1,73,301
Working Note:
Liquidator’s remuneration on payment to unsecured creditors =
Cash available for unsecured creditors after all payments including liquidation expenses, payment
to secured creditors, preferential creditors & liquidator’s remuneration
= Rs. 45,00,000 – Rs. 50,000 – Rs. 15,00,000 – Rs. 1,25,000 – Rs. 90,000 – Rs. 3,750
= Rs. 27,31,250
Liquidator’s remuneration on payment to unsecured creditors = 3/103 x Rs. 27,31,250 =
Rs. 79,551.

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(c) Journal Entries
Particulars Dr. Cr.
Rs. Rs.
15thMarch Bank A/c (9,500 x 40) Dr. 3,80,000
20X2 to Employee compensation expense A/c
[9,500 x (130-40) Dr. 8,55,000
31st March To Equity share capital A/c (9,500 x 10) 95,000
20X2 To Securities premium A/c [9,500 x (130-10)] 11,40,000
(Being allotment to employees of 9,500 equity shares of Rs. 10
each at a premium of Rs. 120 per share in exercise of stock
options by employees)
31st Profit and Loss A/c Dr. 8,55,000
March To Employee compensation expense A/c 8,55,000
20X2 (Being transfer of employee compensation expense to profit
and loss account)

(d) As per para 16 of AS 20, “Earnings Per Share”, the weighted average number of equity shares
outstanding during the period reflects the fact that the amount of shareholders’ capital may have
varied during the period as a result of a larger or less number of shares outstanding at any time.
For the purpose of calculating basic earnings per share, the number of equity shares should be the
weighted average number of equity shares outstanding during the period.
Weighted average number of equity shares
7,20,000 X 5/12 = 3,00,000 shares
9,60,000 X 5/12 = 4,00,000 shares
8,40,000 X 2/12 = 1,40,000 shares
= 8,40,000 shares
(e) A liability is recognized when outflow of economic resources in settlement of a present obligation
can be anticipated and the value of outflow can be reliably measured. In the given case, ABC Ltd.
should recognize a liability of Rs.4, 00,000 payable to XYZ Ltd.
When flow of economic benefit to the enterprise beyond the current accounting period is considered
improbable, the expenditure incurred is recognized as an expense rather than as an asset. In the
present case, flow of future economic benefit from the machine to the enterprise is improbable.
The entire amount of purchase price of the machine should be recognized as an expense.
Hence ABC Ltd. should charge the amount of Rs. 4,00,000 (being loss due to change in production
method) to Profit and loss statement and record the corresponding liability (amount payable to XYZ
Ltd.) for the same amount in the books for the year ended 31st March, 2016.

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Test Series: April, 2018
MOCK TEST PAPER – 2
INTERMEDIATE (IPC) GROUP – II
PAPER – 6: AUDITING AND ASSURANCE
Question No. 1 is compulsory.
Attempt any five questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100

1. Discuss the following:
(a) Discuss with reference to SA 510. “Initial Audit Engagement – Opening Balance”, the procedures
the auditor should undertake in respect of opening balances for a new audit engagement.
(5 Marks)
(b) Auditor’s job becomes simpler in CIS environment, where trial balance always tall ies. (5 Marks)
(c) What constitutes true and fair view is a matter of auditor’s judgement, but some specific points
must be seen by the auditor to ensure true and fair view. (5 Marks)
(d) “It is necessary that transactions of one period be separated from those in the ensuing period so
that the results of the working of each period can be correctly ascertained.” (5 Marks)
2. State with reason (in short) whether the following statements are correct or incorrect (Answer any eight):
(i) There is no need of written consent of the auditor for appointing him as an auditor in a company.
(ii) Letter of weakness is issued by the management.
(iii) The method which involves dividing the population into group of items is knows and block sampling.
(iv) It is necessary for the auditor to maintain professional skepticism throughout the audit.
(v) Central Government permission is required when auditors are to be removed before expiry of their
term, but not so when auditors are changed after expiry of their term.
(vi) Under the Companies Act, 2013, the financial statements of a company must be approved by two
directors out of which one shall be the managing director.
(vii) Check list is a complete and exhaustive description of the system as found in operation by the
auditor
(viii) As per SA 230 on “Audit Documentation”, the working papers are not the property of the auditor.
(ix) Control risk is the susceptibility of an account balance or class of transactions to misstatement that
could be material either individually or, when aggregated with misstatements in other balances or
classes, assuming that there were no related internal controls.
(x) NGOs registered under the Companies Act, 2013 can maintain their books on either accrual or
cash basis. (2 x 8 = 16 Marks)
3. How will you verify/vouch the following:
(a) Contingent Liabilities
(b) Goods sent on consignment
(c) Sales Commission Expenditure.

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(d) Endowment Policies. (4 x 4 = 16 Marks)
4. (a) “SA 320 “Materiality in Planning and Performing an Audit”, establishes standards on the concept
of materiality and the relationship with audit risk while conducting an audit. Hence, the auditor
requires more reliable evidence in support of material items”. Explain stating the factors to be
considered for determining materiality (6 Marks)
(b) What is the purpose of a Letter of Engagement? What are the important contents of a Letter of
Engagement? (6 Marks)
(c) Your firm of Chartered Accountants has been allotted Information Systems Audit of 4 branches of
SBI. How would you assess the reliability of internal control system in computerised information
system? (4 Marks)
5. (a) Mention special points to be examined by you in the audit of Income and Expenditure of a
Charitable Institution running a hospital. (8 Marks)
(b) A vacancy arose in the office of an auditor of XYZ Ltd due to death of the Auditor Mr Z and the
Managing Director of the company filled that vacancy. Comment citing the provisions of the
Companies Act, 2013. (4 Marks)
(c) “Provisions regarding rotation of auditors affect only specific class of companies”. Discuss.
(4 Marks)
6. (a) State the circumstances which could lead to any of the following in an Auditor’s Report:
(i) A modification of opinion
(ii) Disclaimer of opinion
(iii) Adverse opinion
(iv) Qualified opinion. (6 Marks)
(b) What audit points are to be borne in mind in case of issue of “Sweat Equity Shares” by a limited
company? (6 Marks)
(c) State the disclosure requirements in respect of Statement of profit and Loss as per Schedule III of
Companies Act, 2013, in case of Employee benefit expenses. (4 Marks)
7. Write short notes on any four of the following:
(a) Significant difficulties encountered during audit with reference to SA-260
(b) Conditions or events, which increase the risk of fraud or error leading to material misstatement in
Financial Statements.
(c) Scrutiny of General Ledger
(d) Emphasis of Matter paragraph, when it is used, and manner of its use in an audit report
(e) Analytical review procedures normally carried out in the audit of inventories. (4 x 4 = 16 Marks)

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© The Institute of Chartered Accountants of India
Test Series: April, 2018
MOCK TEST PAPER – 2
INTERMEDIATE (IPC) OLD COURSE: GROUP – II
PAPER – 6 : AUDITING AND ASSURANCE
INTERMEDIATE (IPC) EXAMINATION: MTP ANSWERS -APRIL,2018
1. (a) Audit Procedures in respect of Opening Balances for a New Audit Engagements: As per SA 510
“Initial Audit Engagements – Opening Balances”, the auditor should undertake the following
procedures in respect of opening balances in case of new audit engagement:
(i) The auditor shall read the most recent financial statements, if any, and the predecessor
auditor’s report thereon, if any, for information relevant to opening balances, including
disclosures.
(ii) The auditor shall obtain sufficient appropriate audit evidence about whether the opening
balances contain misstatements that materially affect the current period’s financial
statements by:
(a) Determining whether the prior period’s closing balances have been correctly brought
forward to the current period or, when appropriate, any adjustments have been
disclosed as prior period items in the current year’s Statement of Profit and Loss;
(b) Determining whether the opening balances reflect the application of appropriate
accounting policies; and
Performing one or more of the following:
(1) Where the prior year financial statements were audited, perusing the copies of the
audited financial statements including the other relevant documents relating to the
prior period financial statements;
(2) Evaluating whether audit procedures performed in the current period provide
evidence relevant to the opening balances; or
(3) Performing specific audit procedures to obtain evidence regarding the opening
balances.
If the auditor obtains audit evidence that the opening balances contain misstatements
that could materially affect the current period’s financial statements, the auditor shall
perform such additional audit procedures as are appropriate in the circumstances to
determine the effect on the current period’s financial statements. If the auditor
concludes that such misstatements exist in the current period’s financial statements,
the auditor shall communicate the misstatements with the appropriate level of
management and those charged with governance.
(b) Audit in a Computerized Information System (CIS) Environment: Though it is true that in CIS
environment the trial balance always tallies, the same cannot imply that the job of an auditor
becomes simpler. There can still be some accounting errors like omission of certain entries,
compensating errors; duplication of entries, errors of commission in the form of wrong account
head is posted. Possibility of “Window Dressing” and/or “Creation of Secret Reserves” where the
trial balance tallied. At present, due to complex business environment the importance of trial
balance cannot be judged only upto the arithmetical accuracy but the nature of transactions
recorded in the books and appear in the trial balance should be focused.

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The emergence of new forms of financial instruments like options and futures, derivatives, off
balance sheet financing etc. have given rise to further complexities in recording and disclosure of
transactions. In an audit, besides the tallying of a trial balance, there are also other issue like
estimation of provision for depreciation, valuation of inventories, obtaining audit evidence,
ensuring compliance procedure and carrying out substantive procedure, verification of assets &
liabilities their valuation etc. which still requires judgment to be exercised by the auditor.
Responsibility of expressing an audit opinion and objectives of an audit are not changed in the
audit in CIS environment. Therefore, it can be said that simply because of CIS environment and
the trial balance has tallied it does not mean that the audit would become simpler.
(c) True & Fair view: This is correct that what constitutes a ‘true and fair’ view is a matter of an
auditor’s judgment in the particular circumstances of a case. In more specific terms, to ensure
true and fair view, an auditor has to see:
(i) That the assets are neither undervalued nor overvalued, according to the applicable
accounting principles.
(ii) No material asset is omitted.
(iii) The charge, if any, on assets are disclosed.
(iv) Material liabilities should not be omitted.
(v) The profit and loss account discloses all the matters required to be disclosed by Part II of
Schedule III and the balance sheet has been prepared in accordance with Part I of Schedule
III.
(vi) Accounting policies have been followed consistently.
(vii) All unusual, exceptional or non-recurring items have been disclosed separately.
(d) Cut-off Arrangement: Accounting is a continuous process because the business never comes to
halt. It is, therefore, necessary that transactions of one period would be separated from those in
the ensuing period so that the results of the working of each period can be correctly ascertained.
The arrangement that is made for this purpose is technically known as “cut-off arrangement”. It
essentially forms part of the internal control system of the organisation. Accounts, other than
sales, purchase and inventory are not usually affected by the continuity of the business and
therefore, this arrangement is generally applied only to sales, purchase and inventory. The
auditor satisfies by examination and test-checks that the cut-off procedures are adequately
followed and ensure that:
(i) Goods purchased, property in which passed on to the client, have in fact been included in
the inventories and that the liability has been provided for in case credit purchase.
(ii) Goods sold have been excluded from the inventories and credit has been taken for the
sales. If the value of sales is to be received, the concerned party has been debited.
The auditor may examine a sample of documents, evidencing the movement of inventory into and
out of stores, including documents pertaining to period shortly before and after the cut -off date
and check whether inventories represented by those documents were included or excluded as
appropriate during inventory taking for perfect and correct presentation in the financial
statements.
2. (i) Incorrect: Before appointing an auditor, the written consent of the auditor to such appointment and a
certificate from him that appointment shall be in accordance with the conditions as may be prescribed
shall be obtained from the auditor.
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(ii) Incorrect: Letter of weakness is a report issued by the auditor stating the weakness in the
internal control mechanism. It also suggests measures by which the weakness in the system to
be corrected and the control system be made better protected.
(iii) Incorrect. The method which involves dividing the population into groups of items is known as
cluster sampling whereas block sampling involves the selection of a defined block of consecutive
items.
(iv) Correct. As per SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with Standards on Auditing”, professional skepticism is an attitude that
includes a questioning mind, being alert to conditions which may indicate possible misstatement
due to error or fraud, and a critical assessment of audit evidence. Thus, it is necessary for the
auditor to maintain professional skepticism throughout the audit.
(v) Correct. Removal of auditor before expiry of his term i.e. before he has submitted his report is a
serious matter and may adversely affect his independence. Hence, the permission of the Central
Government is required when auditors are removed before expiry of their term and the same is
not needed when they are not re-appointed after expiry of their term.
(vi) Incorrect: As per section 134 of the Companies Act, 2013, the financial statements shall be
approved by the board of directors before they are signed on behalf of the board at least by the
following-
(1) The chairperson of the company where he is authorised by the Board; or
(2) By two directors out of which one shall be managing director and
(3) The Chief Executive Officer, if he is a director in the company,
(4) The Chief Financial Officer, wherever he is appointed; and
(5) The company secretary of the company, wherever he is appointed.
(vii) Incorrect: Narrative Record is a complete and exhaustive description of the system as found in
operation by the auditor. On the other hand, a Check List is a series of instructions and/or
questions which a member of the auditing staff must follow and/or answer.
(viii) Incorrect: As per SA 230 on “Audit Documentations” the working papers are the property of the
auditor and the auditor has right to retain them. He may at his discretion can make available
working papers to his client. The auditor should retain them long enough to meet the needs of his
practice and legal or professional requirement.
(ix) Incorrect: Inherent risk is the susceptibility of an account balance or class of transactions to
misstatement that could be material either individually or, when aggregated with misstatements in
other balances or classes, assuming that there were no related internal controls.
(x) Incorrect: NGOs registered under the Companies Act, 2013 must maintain their books of
account under the accrual basis as required by the provisions of section 128 of the said Act. If
the accounts are not maintained on accrual basis, it would amount to non-compliance of the
provision of the Companies Act, 2013.

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3. (a) Contingent liabilities: Accounting Standard (AS) 29 on ‘Provisions, Contingent Liabilities and
Contingent Assets’, defines ‘Contingent Liability’ as a possible obligation that arises from past events
and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the enterprise; or as a present obligation that
arises from past events but is not recognised because it is not probable that an outflow of resources
embodying economic benefits will be required to settle the obligation, or a reliable estimate of the
amount of the obligation cannot be made.
The auditor may take following steps to vouch or verify the contingent liabilities:
(i) Inspect the minute books of the company to ascertain all contingent liabilities known to the
company.
(ii) Examine the contracts entered into by the company and the likelihood of contingent liabilities
emanating therefrom.
(iii) Scrutinise the lawyer’s bills to track unreported contingent liabilities.
(iv) Examine bank letters in respect of bills discounted and not matured.
(v) Examine bank letters to ascertain guarantees on behalf of other companies or individuals.
(vi) Discuss with various functional officers of the company about the possibility of contingent liability
existing in their respective field.
(vii) Obtain a certificate from the management that all known contingent liabilities have been included
in the accounts and they have been properly disclosed.
(viii) Ensure that proper disclosure has been made as per Schedule III to the Companies Act, 2013
and AS 29, “Provisions, Contingent Liabilities and Contingent Assets”.
(b) Goods Sent on Consignment:
(i) Verify the accounts sales submitted by the consignee showing goods sold and inventory of
goods in hand.
(ii) Reconcile the figure of the goods on hand, as given in the last accounts sales, with the
Performa invoices and accounts sales received during the year. If any consignment
inventory was in the hands of the consignee at the beginning of the year, the same should
be taken into account in the reconciliation.
(iii) Obtain confirmation from the consignee for the goods held on consignment on the balance
sheet date. Verify the terms of agreement between the consignor and the consignee to
check the commission and other expenses debited to the consignment account and credited
to the consignee’s account. The accounts sales also must be correspondingly checked.
(iv) Ensure that the quantity of goods in hand with the consignee has been valued at cost plus
proportionate non-recurring expenses, e.g., freight, dock dues, customs due, etc., unless
the value is lower. In case net realisable value is lower, the inventory in hand of the
consignee should be valued at net realisable value. Also see that the allowance has been
made for damaged and obsolete goods in making the valuation.
(v) See that goods in hand with the consignee have been shown distinctly under inventories.
(c) Sales Commission Expenditure:
(i) Ascertain agreement, if any, in respect of sales transaction actually occurred during the year
carried out by authorized parties on its behalf. If yes, the commission should be in
accordance with the terms and conditions as specified.
(ii) Check evidence of services rendered by the party to whom commission is paid with
reference to correspondence etc.
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(iii) Ensure that the sales in fact have taken place and the same has been charged to Statement
of Profit and Loss.
(iv) Compare the amount incurred in previous years with reference to total turnover.
(v) Check entries regarding TDS on commission at the time of credit to Payee’s Account, or
payment, whichever is earlier.
(vi) Ensure that the payment has been made through cheque only, if limit as stated in the clause
of tax audit is exceeded.
(d) Endowment Policies:
(i) Ascertain the specific purpose for which the endowment policy is taken, e.g., Sinking Fund
policies for redemption of debentures, redemption of leases or policies taken for other
similar purposes, etc.
(ii) Verify the terms and conditions of policies and ensure that all such conditions are in force
and being followed.
(iii) Check that premium has been deposited in time and the policy is in force.
(iv) Examine that proper disclosures have been made in the financial statements in respect of
items for which the policy has been taken
4. (a) Concept of Materiality: SA 320 “Materiality in Planning and Performing an Audit”, establishes
standards on the concept of materiality and the relationship with audit risk while conducting an
audit. Hence, the auditor requires more reliable evidence in support of material items. SA 320
defines material items as relatively important and relevant items, i.e., items the knowledge of
which would influence the decision of the user of financial statements. Financial statements
materially affect if such statement is erroneously stated or omitted to be stated there in and
economic decision of the users taken on the basis of such information is influenced by such
misstatements or omissions.
The auditor has to ensure that such items are properly and distinctly disclosed in the financial
statements.
The concept of materiality is fundamental to the process of accounting. It covers all the stages
from recording to classification and presentation. It is very important for the auditor who has
constantly to judge whether a particular item is material or not.
There is an inverse relationship between materiality and the degree of audit risk. The higher the
materiality level, the lower the audit risk and vice versa. For example, the risk that a particular
account balance or class of transactions could be misstated by an extremely large amount might
be very low but the risk that it could be misstated by an extremely small amount might be very
high.
Factors to be considered for determining materiality:
(i) Item of materiality may be determined individually or in aggregate.
(ii) The materiality depends on the regulatory or legal considerations.
(iii) Materiality is not often reckoned with respect to quantitative details above. It has qualitative
dimensions as well.

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(iv) Even insignificant items in terms of quality may be material in special cir cumstances.
(v) Sometimes the materiality of an item in terms of quantity is described in law itself. For
example, Schedule III requires disclosure of items of expenditures which are in excess of
one percent of the revenue from operations or ` 1,00,000, whichever is higher.
(vi) An item whose impact is insignificant at present, but in future it may be significant, may be
material item.
(b) Purpose of Letter of Engagement: The legal requirement to get the accounts audited so far
extends only to companies, co-operative societies, and registered societies. In these cases, the
respective law governs the appointment of auditors and their duties. In all other cases, it is a
matter of contract.
The client tells the auditor the nature of service he requires and the auditor, if he is agreeable to
undertake the assignment, specifies his terms. He must sign an agreement, if he accepts the
work in terms of the agreement subject to professional standards.
Clients who are not statutorily required to get their accounts audited may require preparation of
accounts for tax returns, checking of the sales tax -returns, etc. besides audit. In such cases,
there may be a misunderstanding about the exact scope of the work; the auditor may think that
he is merely required to prepare accounts while the client may think audit of accounts, is also
covered. It is, therefore, of the greatest importance, both for the accountant and client, that each
party should be clear about the nature of the engagement. It must be reduced in writin g and
should exactly specify the scope of the work.
The audit engagement letter is sent by the auditor to his client, which documents the objective
and scope of the audit, the extent of his responsibilities to the client and the form of report. The
ICAI has issued Standard on Auditing 210 “Agreeing the Terms of Audit Engagement” on the
subject. It is in the interest of both the auditor and the client to issue an engagement letter so that
the possibility of misunderstanding is reduced to a great extent.
Important Contents of Letter of Engagement: The agreed terms of the audit engagement shall
be recorded in an audit engagement letter or other suitable form of written agreement and shall
include:
(a) The objective and scope of the audit of the financial statements;
(b) The responsibilities of the auditor;
(c) The responsibilities of management;
(d) Identification of the applicable financial reporting framework for the preparation of the
financial statements; and
Reference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected form
and content.
(c) Reliability of Internal Control System in CIS: For evaluating the reliability of internal control
system in CIS, the auditor would consider the followings:-
(i) That authorised, correct and complete data is made available for processing.
(ii) That it provides for timely detection and corrections of errors.
(iii) That in case of interruption due to mechanical, power or processing failures, the system
restarts without distorting the completion of entries and records.

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(iv) That it ensures the accuracy and completeness of output.
(v) That it provides security to application softwares & data files against fraud etc.
(vi) That it prevents unauthorised amendments to programs.
5. (a) Audit of Hospital: While auditing the Income and Expenditure Account of a charitable institution
running a hospital, following special points may be examined:
(i) Verify the register of patients with duplicate copy of bills and patients admission record to
see that bills have been properly and correctly prepared for all the services, tests and
treatments.
(ii) Check cash collections from patients by tracing the receipt issued into cash book.
(iii) Check receipt of interest, rent, dividend etc., with receipt counterfoil into cash book and
bank book and ensure that all such income has been duly accounted for.
(iv) Check collection of subscription, donations from the receipt issued, correspondenc e etc.,
into cash book.
(v) Verify that all grants from government and other bodies have been duly accounted for and
have been applied in the manner as specified.
(vi) Verify all recurring nature of revenue expenditure, with necessary evidence like bill,
authority, period etc.
(vii) Examine the internal check as regards the receipt and issue of stores, medicines, linen etc.,
to ensure that these have been properly recorded and issued/consumed only on proper
authorisation.
(viii) See that depreciation has been written off in respect of all the assets at appropriate rate and
method as in the earlier year.
(ix) Verify the receipts from supply of food and canteen receipts and compare the same with
previous year as regards number of patients.
(x) Ensure that all outstanding liabilities have been adequately provided for and similarly all
accrued incomes and receipts have been duly accounted for.
(xi) Obtain inventory of stock and stores as at the end of the year and physically check a
percentage of items.
(b) Filling of Casual Vacancy: Section 139(8) of the Companies Act, 2013 states that any casual
vacancy in the office of an auditor shall in the case of a company other than a company whose
accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of
India, be filled by the Board of Directors within thirty days. But if such casual vacancy is as a
result of the resignation of an auditor, such appointment shall also be approved by the company
at a general meeting convened within three months of the recommendation of the Board and he
shall hold the office till the conclusion of the next annual general meeting.
In the given case, vacancy in the office of an auditor has arisen because of death and not due to
resignation, therefore applying the above provisions it would be filled by the Board of Directors
within thirty days. Appointment made by the Managing Director of the Company is not valid.
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(c) Applicability of provisions related to Rotation of Auditors: The provisions related to rotation
of auditor as provided under section 139(2) of the Companies Act, 2013 are applicable to all
listed companies and other class or classes of companies as prescribed under Companies (Audit
and Auditors) Rules, 2014.
As per rules prescribed in Companies (Audit and Auditors) Rules, 2014, for applicability of
section 139(2) the class of companies shall mean the following classes of companies excluding
one person companies and small companies:-
(I) all unlisted public companies having paid up share capital of rupees ten crore or more;
(II) all private limited companies having paid up share capital of rupees fifty crore or more;
(III) all companies having paid up share capital of below threshold limit mentioned in (I) and (II)
above, but having public borrowings from financial institutions, banks or public deposits of
rupees fifty crores or more.
6. (a) (i) Modification of Opinion: The auditor shall modify the opinion in the auditor’s report when-
(1) The auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or
(2) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that
the financial statements as a whole are free from material misstatement.
(ii) Disclaimer of Opinion: The auditor shall disclaim an opinion when the auditor is unable to
obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor
concludes that the possible effects on the financial statements of undetected misstatements,
if any, could be both material and pervasive.
The auditor shall disclaim an opinion when, in extremely rare circumstances involving
multiple uncertainties, the auditor concludes that, notwithstanding having obtai ned sufficient
appropriate audit evidence regarding each of the individual uncertainties, it is not possible to
form an opinion on the financial statements due to the potential interaction of the
uncertainties and their possible cumulative effect on the financial statements.
(iii) Adverse Opinion: The auditor shall express an adverse opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that misstatements, individually or
in the aggregate, are both material and pervasive to the financial statements.

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(iv) Qualified Opinion: The auditor shall express a qualified opinion when-
(i) The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the
financial statements; or
(ii) The auditor is unable to obtain sufficient appropriate audit evidence on which to base
the opinion, but the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be material but not pervasive.
(b) Issue of Sweat Equity Shares: As per section 54 of the Companies Act, 2013, the employees
may be compensated in the form of ‘Sweat Equity Shares”.
“Sweat Equity Shares” means equity shares issued by the company to employees or directors at
a discount or for consideration other than cash for providing know-how or making available right
in the nature of intellectual property rights or value additions, by whatever name called.
The auditor may see that the Sweat Equity Shares issued by the company are of a class of
shares already issued and following conditions are fulfilled-
(a) The issue is authorized by a special resolution passed by the company;
(b) The resolution specifies the number of shares, the current market price, consideration, if
any, and the class or classes of directors or employees to whom such equity shares are to
be issued;
(c) Not less than one year has, at the date of such issue, elapsed since the date on which the
company had commenced business; and
(d) Where the equity shares of the company are listed on a recognized stock exchange, the
sweat equity shares are issued in accordance with the regulations made by the Securities
and Exchange Board in this behalf and if they are not so listed, the sweat equity shares are
issued in accordance with such rules as may be prescribed.
The rights, limitations, restrictions and provisions as are for the time being applicable to
equity shares shall be applicable to the sweat equity shares issued under this sec tion and
the holders of such shares shall rank paripassu with other equity shareholders.
(c) Employee benefits expenses: The Company shall disclose by way of notes additional
information regarding aggregate expenditure on the Employee benefits expenses: -
(i) Salaries and wages.
(ii) Contribution to provident and other funds.
(iii) Expense on Employee Stock Option Scheme (ESOP) and Employee Stock Purchase Plan
(ESPP).
(iv) Staff welfare expenses
7. (a) Significant Difficulties Encountered During the Audit: As per SA 260 “Communication with
Those Charged with Governance”, significant difficulties encountered during the audit may
include such matters as:
 Significant delays in management providing required information.
 An unnecessarily brief time within which to complete the audit.
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 Extensive unexpected effort required to obtain sufficient appropriate audit evidence.
 The unavailability of expected information.
 Restrictions imposed on the auditor by management.
 Management’s unwillingness to make or extend its assessment of the entity’s ability to
continue as a going concern when requested.
(b) Conditions Which Increase the Risk of Fraud or Error: In planning and performing an
examination, the auditor should take into consideration the risk of material misstatements of the
financial information caused by fraud or error. Weaknesses in the design of the internal control
system and non-compliance with identified control procedures amongst other conditions or
events which increase the risk of fraud or error are-
(i) Weaknesses in the design of internal control system and non-compliance with the laid down
control procedures, e.g., a single person is responsible for the receipt of all dak and marking
it to the relevant sections or two persons are responsible for receipt of dak but the same is
not followed in actual practice, etc.
(ii) Doubts about the integrity or competence of the management, e.g., domination by one
person, high turnover rate of employees, frequent change of legal counsels or auditors,
significant and prolonged understaffing of the accounts department, etc.
(iii) Unusual pressures within the entity, for example, industry is doing well but the company is
not performing accordingly, heavy dependence on a single line of product, inadequate
working capital, entity needs raising share prices to support the market price in the wake of
public offer, etc.
(iv) Unusual transactions such as transactions with related parties, excessive payment for
certain services to lawyers, etc.
(v) Problems in obtaining sufficient and appropriate audit evidence, e.g., inadequate
documentation, significant differences between the figures as per the accounting records
and confirmation received from third parties, etc.
(c) Scrutiny of General Ledger:
(i) The General Ledger contains all the balances which are ultimately included in the Statement
of Profit and Loss and the Balance Sheet. Its examination therefore is undertaken last of all.
(ii) The scrutiny of General Ledger should be carried out with due care in as much as it is the
final review of balances which, on inclusion in Final Accounts, cumulatively reflect the
financial position of the concern.
(iii) Entries in the General Ledger usually are posted in a summary form from the books of
original entries such as Cash Book, Journal, Sales Book, Purchase Book and other
subsidiary books. Therefore, it should be confirmed that all the postings on various accounts
have been verified, totals, etc. checked.
(iv) It should also be ascertained that balances in all the income and expense accounts have
been adjusted: (a) according to standard accounting practices (i.e., all unpaid, prepaid
expenses have been adjusted and accrued Income and pre-recorded income is properly
adjusted); and (b) on a consideration of the legal provisions which are applicable to the
concern.
(v) The balances in the General Ledger should be traced to the trial balance and from the trial
balance to the final accounts.
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(d) Emphasis of Matter paragraph: Sometimes the auditor considers it necessary to draw users’
attention to a matter presented or disclosed in the financial statements that, in the auditor’s
judgment, is of such importance that it is fundamental to users’ understanding of the financial
statements, the auditor shall include an Emphasis of Matter paragraph in the auditor’s report
provided the auditor has obtained sufficient appropriate audit evidence that the matter is not
materially misstated in the financial statements.
Examples of when it is used:
 An uncertainty relating to the future outcome of an exceptional litigation or regulatory act ion.
 Early application (where permitted) of a new accounting standard that has a pervasive effect
on the financial statements in advance of its effective date.
 A major catastrophe that has had, or continues to have, a significant effect on the entity’s
financial position.
Manner of its use in Audit Report
As per SA 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor’s Report”, the inclusion of an Emphasis of Matter paragraph in the auditor’s report does
not affect the auditor’s opinion. When the auditor includes an Emphasis of Matter paragraph in
the auditor’s report, the auditor shall:
(i) Include it immediately after the Opinion paragraph in the auditor’s report;
(ii) Use the heading “Emphasis of Matter”, or other appropriate heading;
(iii) Include in the paragraph a clear reference to the matter being emphasised and to where
relevant disclosures that fully describe the matter can be found in the financial statements;
and
Indicate that the auditor’s opinion is not modified in respect of the matter emphasised
(e) Analytical Procedures for Verification of Inventories: The auditor can adopt the following
analytical procedures to verify the inventory of inventories-
(i) Quantitative reconciliation of opening inventories, purchases, product ion, sales and closing
inventories;
(ii) Comparison of closing inventory quantities and amounts with those of the previous year.
(iii) Comparison of the inventory turnover ratios for the current year with that of the previous
year and with industry standards if available.
(iv) Comparison of the closing inventory (Raw materials, closing work-in-progress and finished
goods are percentage of total inventories) with the corresponding figures of the previous
year.
(v) Comparison of current year gross profit ratio with that of the previous year.
(vi) Comparison of actual inventory, purchase and sales figures with the budgeted figures if
available.
(vii) Comparison of raw-material yield/wastage with previous year figures.

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Test Series: April, 2018
MOCK TEST PAPER – 2
INTERMEDIATE (IPC) OLD COURSE: GROUP – II
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – A: INFORMATION TECHNOLOGY
Question No. 1 is compulsory.
Attempt any five questions from the rest.
Time Allowed – 1½ Hours Maximum Marks – 50

1. Answer all the following questions in brief.
(i) What do you understand by the term “Accounting Information Systems”?
(ii) Define the term “Network Contention”.
(iii) Discuss Multiplexers in Telecommunication Networks.
(iv) Explain the term “Specialized Systems”.
(v) Define the term “Computerized Information Processing Cycle”. (2 x 5 = 10 Marks)
2. (a) Discuss some examples of Office Automation Applications. (4 Marks)
(b) Nowadays, the increased risks and changes in traditional control functions lead to a
shift in the auditor’s concern. List them. (4 Marks)
3. (a) Differentiate between Explicit Knowledge and Tacit Knowledge. (4 Marks)
(b) Discuss the advantages of Cloud Computing. (4 Marks)
4. (a) Discuss the facts that are responsible for the occurrence of vulnerabilities in the
software. (4 Marks)
(b) What role does the System Analyst play in “Phase 2: System Analysis” of System
Development Life Cycle (SDLC)? (4 Marks)
5. (a) Discuss in detail the term “Protocols”. (4 Marks)
(b) Differentiate between Hardware Virtualization and Network Virtualization .
(4 Marks)
6. An E-commerce site has the following cash back offers.
(i) If the purchase mode is via website, an initial discount of 10% is given on the bill
amount.
(ii) If the purchase mode is via phone app, an initial discount of 20% is given on the bill
amount.

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(iii) If done via any other purchase mode, the customer is not eligible for any discount.
Every purchase eligible to discount is given 10 reward points.
(i) If the reward points are between 100 and 200 points, the customer is eligible for a
further 30% discount on the bill amount after initial discount.
(ii) If the reward points exceed 200 points, the customer is eligible for a further 40%
discount on the bill amount after initial discount.
Taking purchase mode, bill amount and number of purchases as input; draw a flowchart to
calculate and display the total reward points and total bill amount payable by the customer after
all the discount calculation. (8 Marks)
7. Write short notes on any four of the following.
(a) Android
(b) PDCA Cycle
(c) Bus Network
(d) Dashboard
(e) Database Controls (4 × 2 = 8 Marks)

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Test Series: April, 2018
MOCK TEST PAPER - II
INTERMEDIATE (IPC): GROUP – II
PAPER –7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – B: STRATEGIC MANAGEMENT
Question No.1 is compulsory.
Attempt any five questions from the rest.
Time Allowed – 1½ Hours Maximum Marks – 50
1. (a) What are the Key Success Factors for operating in a competitive market place? (3 Marks)
(b) “A company should focus on external perspective to define its mission”. Support this statement
with reasons. (3 Marks)
(c) What does the concept of ‘question marks’ in the context of BCG Growth -share matrix signify?
What strategic options are open to a business firm which has some ‘question marks’ in the
portfolio of its businesses? (3 Marks)
(d) 'A network structure is suited to unstable environment.' Elaborate. (3 Marks)
(e) Being a strategic professional, analyze and redesign the work flows in the context of business
process reengineering. (3 Marks)
2. (a) State with reasons which of the following statements is correct/incorrect:
(i) Control systems run parallel with strategic levels.
(ii) SBU concepts facilitate multi-business operations. (2  2 = 4 Marks)
(b) Explain the meaning of the following concepts:
(i) Market Penetration
(ii) Cost Leadership Strategy
(iii) Production System (3  1 = 3 Marks)
3. Briefly explain the following:
(a) Strategic Decision Making (2 Marks)
(b) Implementation Control (2 Marks)
(c) SWOT Analysis (3 Marks)
4. The Management of a sick company manufacturing various electrical home appliances seeks your
advice for an appropriate retrenchment strategy. What will be your advice and why? (7 Marks)
5. What are the requirements for the successful implementation of supply chain management system?
Discuss. (7 Marks)
6. Explain briefly different strategic approaches for Globalisation by a company. (7 Marks)
7. Distinguish between DMAIC and DMADV Methodologies of Six Sigma. (7 Marks)

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© The Institute of Chartered Accountants of India
Test Series: April, 2018
MOCK TEST PAPER – 2
INTERMEDIATE (IPC) OLD COURSE: GROUP – II
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – A: INFORMATION TECHNOLOGY
SUGGESTED ANSWERS/HINTS
1. (i) Accounting Information System: An Accounting Information System (AIS) is
defined as a system of collection, storage and processing of financial and accounting
data that is used by decision makers. An Accounting Information System is generally
a computer-based method for tracking accounting activity in conjunction with
information technology resources. Collecting and storing the data, recording the
transaction, and safeguarding the organisational assets are the three basic functions
of AIS.
(ii) Network Contention: It refers to the situation that arises when there is a conflict for
some common resource in a network. For example, network contention could arise
when two or more computer systems try to communicate at the same time.
(iii) Multiplexers: Multiplexers are communications processor that allow a single
communications channel to carry simultaneous data transmissions from many
terminals. Typically, a multiplexer merges the transmissions of several terminals at
one end of a communications channel, while a similar unit separates the individual
transmissions at the receiving end.
(iv) Specialized Systems: Specialized Systems provide comprehensive end to end IT
solutions and services (including systems integration, implementation, engineering
services, software application customization and maintenance) to various
corporations of a world. Core Banking System (CBS), Enterprise Resource Planning
(ERP), Customer Relationship Management (CRM) etc. are some of the examples of
specialized systems.
(v) Computerized Information Processing Cycle: These are systems where
computers are used at every stage of transaction processing. The components of a
computerized information processing cycle include:
 Input: Entering data into the computer;
 Processing: Performing operations on the data;
 Storage: Saving data, programs, or output for future use; and
 Output: Presenting the results.

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2. (a) Some examples of Office Automation Applications are as follows:
Application Description
Word Use of a computer to perform automatically many of the tasks
Processing necessary to prepare typed or printed documents.
Electronic mail Use of a computer network that allows users to send, store
and retrieve messages using terminals and storage devices.
Voice Mail Requires computers with an ability to store audio messages
digitally and convert them back upon retrieval.
Electronic Use of a networked computer to store and retrieve a
Calendaring manager’s appointment calendar. Allows other managers’
calendars to be accessed and facilitates scheduling.
Video Use of television equipment to link geographically dispersed
Conferencing conference participants.
Desktop Video Video and audio equipment are attached to each workstation
Conferencing in the network enabling the two-way communication of picture
and way communication of picture and sound.
FAX Uses special equipment that can read a document at one end
of a communication channel and make a copy at the other
end.
Imaging Uses Optical Character Recognition (OCR) to convert data on
paper to a digital format for storage in a secondary storage
device.
Desktop Uses a computer to prepare output that is very close in quality
Publishing to that produced by a typesetter.
(b) The increased risks and changes in traditional control functions lead to a shift in the
auditor’s concern. The key concerns of auditor are as follows:
 Develop and apply new criteria in evaluating control weaknesses in
Computerized Information Systems (CIS);
 Tailor testing techniques to the CIS under study; and
 Use computers to perform some portions of audit examination.
3. (a) Explicit Knowledge: Explicit Knowledge is that which can be formalized easily and
therefore is easily available across the organization. Explicit knowledge is articulated,
and represented as spoken words, written material and compiled data. This type of
knowledge is codified, easy to document, transfer and reproduce. For example –
Online tutorials, Policy and procedural manuals.

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Tacit knowledge: Tacit Knowledge resides in a few often-in just one person and
hasn’t been captured by the organization or made available to others. Tacit
knowledge is unarticulated and represented as intuition, perspective, beliefs, and
values that individuals form based on their experiences. It is personal, experimental
and context-specific. It is difficult to document and communicate the tacit knowledge.
For example – Hand-on skills, special know-how, employee experiences.
(b) Some advantages of Cloud Computing are as follows:
 Cost Efficient: Cloud computing is probably the most cost efficient method to
use, maintain and upgrade.
 Almost Unlimited Storage: Storing information in the cloud gives us almost
unlimited storage capacity.
 Backup and Recovery: Since all the data is stored in the cloud, backing it up
and restoring the same is relatively much easier than storing the same on a
physical device. Furthermore, most cloud service providers are usually
competent enough to handle recovery of information.
 Automatic Software Integration: In the cloud, software integration is usually
something that occurs automatically. Not only that, cloud computing allows us
to customize the options with great ease. Hence, we can handpick just those
services and software applications that we think will best suit the particular
enterprise.
 Easy Access to Information: Once we register ourselves in the cloud, we can
access the information from anywhere, where there is an Internet connection.
 Quick Deployment: Once we opt for this method of functioning, the entire
system can be fully functional in a matter of a few minutes. Of course, the
amount of time taken here will depend on the exact kind of technology that we
need for our business.
4. (a) The following facts are responsible for occurrence of vulnerabilities in the software:
 Software Bugs - Software bugs are so common that users have developed
techniques to work around the consequences, and bugs that make saving work
necessary every half an hour or crash the computer every so often are a normal
part of computing. For example - buffer overflow, failure to handle exceptional
conditions, access validation error, input validation errors are some of the
common software flaws.
 Timing Windows - This problem may occur when a temporary file is exploited
by an intruder to gain access to the file, overwrite important data, and use the
file as a gateway for advancing further into the system.

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 Insecure default configurations - Insecure default configurations occur when
vendors use known default passwords to make it as easy as possible for
consumers to set up new systems. Unfortunately, most intruders know these
passwords and can access systems effortlessly.
 Trusting Untrustworthy information - This is usually a problem that affects
routers, or those computers that connect one network to another. When routers
are not programmed to verify that they are receiving information from a unique
host, bogus routers can gain access to systems and do damage.
 End users - Generally, users of computer systems are not professionals and
are not always security conscious. For example, when the number of passwords
of a user increases, user may start writing them down, in the worst case to places
from where they are easy to find. In addition to this kind of negligence towards
security procedures users do human errors, for example save confidential files
to places where they are not properly protected.
(b) The “Phase 2: System Analysis of Systems Development Life Cycle (SDLC)”
examines that ‘What must the Information System do to solve the problem’? During
this phase, the Systems Analyst will:
 Examine data and information flows in the enterprise using data flow diagrams;
 Establish what the proposed system will actually do (not how it will do it);
 Analyze costs and benefits;
 Outline system implementation options. (e.g. in-house or using consultants);
 Consider possible hardware configurations; and
 Make recommendations.
5. (a) Protocols: Protocols are the software that performs a variety of actions necessary
for data transmission between computers. Stated more precisely, protocols are a set
of rules for inter-computer communication that have been agreed upon and
implemented by many vendors, users and standards bodies to ensure that the
information being exchanged between the two parties is received and interpreted
correctly. Ideally, a protocols standard allows heterogeneous computers to talk to
each other. Thus, Network protocols are essentially software that are sets of rules
for-
 Communicating timings, sequencing, formatting, and error checking for data
transmission.
 Providing standards for data communication.
A Protocol defines the following three aspects of digital communication.

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 Syntax: The format of data being exchanged, character set used, type of error
correction used, type of encoding scheme (e.g., signal levels) being used.
 Semantics: Type and order of messages used to ensure reliable and error free
information transfer.
 Timing: Defines data rate selection and correct timing for various events during
data transfer.
(b) Hardware Virtualization: Hardware Virtualization or Platform Virtualization refers to
the creation of a virtual machine that acts like a real computer with an operating
system. Software executed on these virtual machines is separated from the
underlying hardware resources. For example, a computer that is running Microsoft
Windows may host a virtual machine that looks like a computer with
the Linux operating system; based software that can be run on the virtual machine.
The basic idea of Hardware virtualization is to consolidate many small physical
servers into one large physical server so that the processor can be used more
effectively.
Network Virtualization: Network virtualization is a method of combining the available
resources in a network by splitting up the available bandwidth into channels, each of
which is independent from the others, and each of which can be assigned (or
reassigned) to a particular server or device in real time. This allows a large physical
network to be provisioned into multiple smaller logical networks and conversely allows
multiple physical LANs to be combined into a larger logical network. This behaviour
allows administrators to improve network traffic control, enterprise and security.
Network virtualization involves platform virtualization, often combined with resource
virtualization.
6. Let us define the variables first:
PM: Purchase Mode BA: Bill Amount
N: Counter (to track the number of purchases) TBA: Total Bill Amount
NOP: Number of Purchases TRP: Total Reward Point
IN_DISC: Initial Discount
ET_DISC: Extra Discount on purchases eligible to Initial Discount

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Start

TRP = 0, TBA = 0, BA = 0

Read PM, BA, NOP

Yes
If PM = Website? IN_DISC = 0.10

No

Yes
If PM = Phone App? IN_DISC = 0.20

No

IN_DISC = 0 TRP = NOP * 10

BA = BA – (BA*IN_DISC)

ET_DISC = 0.30 If 100 <= TRP <= 200?
Yes

No

ET_DISC = 0.40 If TRP > 200?
Yes
No
TBA = BA – (BA*ET_DISC)
TBA = BA

Print TRP, TBA
Stop

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7. (a) Android: Android is a Linux-based operating system designed primarily for touch
screen mobile devices such as smart phones and tablet computers. Android is an
open source and the permissive licensing allows the software to be freely modified
and distributed by device manufacturers, wireless carriers and enthusiast developers.
Android provides access to a wide range of useful libraries and tools that can be used
to build rich applications.
(b) PDCA Cycle: Total Quality Management (TQM) processes are divided into four
sequential categories: Plan, Do, Check, and Act (PDCA cycle) and are discussed
below:
 Plan: In the planning phase, people define the problem to be addressed, collect
relevant data, and ascertain the problem's root cause;
 Do: In the doing phase, people develop and implement a solution, and decide
upon a measurement to gauge its effectiveness;
 Check: In the checking phase, people confirm the results through before-and-
after data comparison;
 Act: In the acting phase, people document their results; inform others about
process changes, and make recommendations for the problem to be addressed
in the next PDCA cycle.
(c) Bus Network: In a Bus network; a single length of wire, cable, or optical fiber
connects several computers. The features of a bus network are as follows:
 All communications travel along this cable, which is called a bus.
 Bus networks have a decentralized approach.
Advantages of bus network include the following:
 There is no host computer or file server, which makes bus network reliable as
well as easy to use and understand.
 If one of the microcomputers fails, it will not affect the entire network.
 Requires the least amount of cable to connect the computers together and
therefore is less expensive than other cabling arrangements.
 Is easy to extend. Two cables can be easily joined with a connector, making a
longer cable for more computers to join the network.
 A repeater can also be used to extend a bus configuration.
Disadvantages of bus network include the following:
 Heavy network traffic can slow a bus considerably since any computer can
transmit at any time. But networks do not coordinate when information is sent.
Computers interrupting each other can use a lot of bandwidth.

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 Each connection between two cables weakens the electrical signal.
 The bus configuration can be difficult to troubleshoot. A cable break or
malfunctioning computer can be difficult to find and can cause the whole network
to stop functioning.
(d) Dashboards: This involves using the information gathered from the data warehouse
and making it available to users as snapshots of many different things with the
objective of getting response to the query: “Tell me a lot of things, but without too
much effort”. Dashboards are flexible tools that can be bent into as many different
shapes as per user requirements. It includes a collection of graphs, reports, and KPIs
that can help monitor such business activities as progress on a specific initiative.
(e) Database Controls: Database Controls protect the integrity of a database when
application software acts as an interface to interact between the user and the
database.
 Sequence Check Transaction and Master Files: Synchronization and the
correct sequence of processing between the master file and transaction file is
critical to maintain the integrity of updation, insertion or deletion of records in
the master file with respect to the transaction records. If errors in this stage a re
overlooked, it leads to corruption of the critical data.
 Ensure all records on files are processed: While processing the transaction
file records mapped to the respective master file the end-of-file of the transaction
file with respect to the end-of-file of the master file is to be ensured.
 Process multiple transactions for a single record in the correct order:
Multiple transactions can occur based on a single master record. For example,
dispatch of a product to different distribution centers. The order in which
transactions are processed against the product master record must be done
based on a sorted transaction codes.

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Test Series: April, 2018
MOCK TEST PAPER - II
INTERMEDIATE (IPC): GROUP – II
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – B: STRATEGIC MANAGEMENT
SUGGESTED ANSWERS/HINTS

1. (a) KSFs are the rules that shape whether a company will be financially and competitively successful.
Important key success factors for operating in competitive markets are:
 Cost structure of the market.
 The price sensitivity of the market.
 Technological structure of the market.
 The existing distribution system of the market.
 Is the market mature?
(b) A business organization is a part of overall structure of society and functions within wide external
environmental factors. It draws its resources from its external environment, processes them and
provides output in the form of goods and services. Therefore, it is correct to say that a business
enterprise should focus on external perspective to define its mission although enterprise’s internal
situation cannot be delinked while doing so. Bringing an external perspective justifies the very
existence of company. The mission statement is a message designed to be inclusive of the
expectations of all stakeholders for the performance of an enterprise / company over the long run.
Some of the questions addressed by mission statement are: Why is the firm in business? What are
the economic goals? What is the operating philosophy in terms of quality, firm’s image and self -
concept? What are the core competencies and competitive advantages? What customers do and
can a company serve? How does enterprise / company view its responsibilities to stockholders,
employees, communities, environment, social issues or competitors?
(c) The BCG growth-share matrix is the simplest way to portray a corporation’s portfolio of
investments. Using the matrix, organisations can identify four different types of products or
Strategic Business Units. Question Marks, sometimes called problem children or wildcats, are low
market share businesses in high-growth markets.
They require a lot of cash to hold their share. They need heavy investments with low potential to
generate cash. Question marks if left unattended are capable of becoming cash traps. Since growth
rate is high, increasing it should be relatively easier.
It is for business organisations to turn those businesses into stars and then to cash cows when the
growth rate reduces. Thus, the strategic option that they must strive to achieve is to build. Here the
objective is to increase market share, even by forgoing short-term earnings in favour of building a
strong future with large market share.
(d) Network structure is a newer and somewhat more radical organizational design. The network
structure could be termed a "non-structure" as it virtually eliminates in-house business functions
and outsource many of them. An organisation organized in this manner is often called a virtual
organization because it is composed of a series of project groups or collaborations linked by
constantly changing non-hierarchical, cobweb-like networks. The network structure becomes most
useful when the environment of a firm is unstable and is expected to remain so. Under such
conditions, there is usually a strong need for innovation and quick response. Instead of having
salaried employees, it may contract with people for a specific project or length of time. Long -term
contracts with suppliers and distributors replace services that the company could provide for itself.
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(e) Business Process Reengineering (BPR) refers to the analysis and redesign of workflows and
processes both within and between the organizations. The orientation of the redesign effort is
radical. It involves total deconstruction and rethinking of a business process in its entirety
The workflows are studied, appraised and improved in terms of time, cost, output, quality, and
responsiveness to customers. The redesign effort aims to simplify and streamline a process by
eliminating all extra avoidable steps, activities, and transactions. With the help of redesigning
workflows, organizations can drastically reduce the number of stages of work, and improve their
performance.
2. (a) (i) Correct: There are three strategic levels – corporate, business and functional. Control
systems are required at all the three levels. At the top level, strategic controls are built to
check whether the strategy is being implemented as planned and the results produ ced by the
strategy are those intended. Down the hierarchy management controls and operational
controls are built in the systems. Operational controls are required for day -to-day
management of business.
(ii) Correct: Organizing business along SBU lines and creating strategic business units has
become a common practice for multi-product/service and global organizations. It is a
convenient and intelligent grouping of activities along distinct businesses and has replaced
the conventional groupings. SBU facilitates strategic planning, gaining product-
related/market-related specialization, gaining cost-economies and more rational
organizational structure.
(b) (i) Market penetration is a growth strategy where the business focuses on selling existing
products into existing markets. It is achieved by making more sales to present customers
without changing products in any major way. Penetration might require greater spending on
advertising or personal selling.
(ii) A number of cost elements affect the relative attractiveness of generic strategies. A successful
cost leadership strategy usually permeates the entire firm, as evidenced by high efficiency,
low overhead cost, and waste reduction. The low cost leadership should be such that no
competitors are able to imitate so that it can result in sustainable competitive advantage to
the cost leader firm.
(iii) The production system is concerned with the activities directed towards creation of products
and services for customers. It covers factors such as capacity, location, layout, design, work
systems, automation, and so on.
3. (a) Decision making is a managerial process and function of choosing a particular course of action out
of several alternative courses for the purpose of accomplishment of the organizational g oals.
Decisions are routine, tactical or strategic in nature. Strategic decisions are different from other
decisions that are taken at various levels of the organization during day -to-day working of the
organizations. They have long term implications, steer organisation to its future path and have
organisation wide implications and so on. These decisions are taken considering different internal
and external factors. They are also taken with partial or no definite knowledge of different factors
affecting the decision situation.
(b) Implementation control: Managers implement strategy by converting major plans into concrete,
sequential actions that form incremental steps. Implementation control is directed towards
assessing the need for changes in the overall strategy in light of unfolding events and results
associated with incremental steps and actions.
Strategic implementation control is not a replacement to operational control. Strategic
implementation control, unlike operational controls continuously monitors the basic direction of the
strategy. The two basis forms of implementation control are:

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(i) Monitoring strategic thrusts: Monitoring strategic thrusts help managers to determine
whether the overall strategy is progressing as desired or whether there is need for
readjustments.
(ii) Milestone Reviews. All key activities necessary to implement strategy are segregated in
terms of time, events or major resource allocation. It normally involves a complete
reassessment of the strategy. It also assesses the need to continue or refocus the direction
of an organization.
(c) SWOT analysis is a tool used by organizations for evolving strategic options for the future. The
term SWOT refers to the analysis of strengths, weaknesses, opportunities and threats facing a
company. Strengths and weaknesses are identified in the internal environment, whereas
opportunities and threats are located in the external environment.
Strength: Strength is an inherent capability of the organization which it can use to gain strategic
advantage over its competitor.
Weakness: A weakness is an inherent limitation or constraint of the organisation which creates
strategic disadvantage to it.
Opportunity: An opportunity is a favourable condition in the external environment which enables
it to strengthen its position.
Threat: An unfavourable condition in the external environment which causes a risk for, or damage
to the organisation’s position.
4. A sick company has huge accumulated losses that have eroded its net worth. The electric home
appliance company may analyse its various products to take decisions on their individual viability.
Retrenchment becomes necessary for coping with hostile and adverse situations in the environment and
when any other strategy is likely to be suicidal. The nature, extent and timing of retrenchment are matters
to be carefully decided by management, depending upon each contingency.
Retrenchment strategy is adopted because:
 The management no longer wishes to remain in business either partly or wholly due to continuous
losses and unviability.
 The environment faced is threatening.
 Stability can be ensured by reallocation of resources from unprofitable to profitable businesses.
Retrenchment grand strategy is followed when an organization substantially reduces the scope of
its activity. This is done through an attempt to find out the problem areas and diagnose the causes
of the problems. Next, steps are taken to solve the problems. These steps result in different kinds
of retrenchment strategies.
Turnaround strategy: If the organization chooses to transform itself into a leaner structure and focuses
on ways and means to reverse the process of decline, it adopts a turnaround strategy. It may try to
reduce costs, eliminate unprofitable outputs, generate revenue, improve coordination, better control,
and so on. It may also involve changes in top management and reorienting leadership.
Divestment Strategy: Divestment strategy involves the sale or liquidation of a portion of business, or a
major division, profit centre or SBU. Divestment is usually a part of rehabilitation or restructuring plan
and is adopted when a turnaround has been attempted but has prov ed to be unsuccessful.
Liquidation Strategy: In the retrenchment strategy, the most extreme and unattractive is liquidation
strategy. It involves closing down a firm and selling its assets.
It is considered as the last resort because it leads to serious consequences such as loss of employment
for workers and other employees, termination of opportunities where a firm could pursue any future
activities, and the stigma of failure. Many small-scale units, proprietorship firms, and partnership
ventures liquidate frequently but medium-and large-sized companies rarely liquidate in India. The
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company management, government, banks and financial institutions, trade unions, suppliers and
creditors, and other agencies are extremely reluctant to take a decision, or ask, for liquidation.
Liquidation strategy may be unpleasant as a strategic alternative but when a "dead business is worth
more than alive", it is a good proposition.
The management of a Sick company manufacturing various electrical home appliances be explain ed
about the each of the above three options of retrenchment strategy with their pros and cons. But the
appropriate advice with respect to a particular option of retrenchment strategy will depend on the specific
circumstances of each electrical home appliances and management goals of the company.
5. Successful implementing supply management systems requires a change from managing individual
functions to integrating activities into key supply chain processes. It involves collaborative work between
buyers and suppliers, joint product development, common systems and shared information. A key
requirement for successfully implementing supply chain will be network of information sharing and
management. The partners need to link together to share information through electronic data
interchange and take decisions in timely manner.
Implementing and successfully running supply chain management system will involve:
1. Product development: Customers and suppliers must work together in the product development
process. Right from the start the partners will have knowledge of all. Involving all partners will help
in shortening the life cycles. Products are developed and launched in shorter time and help
organizations to remain competitive.
2. Procurement: Procurement requires careful resource planning, quality issues, identifying sources,
negotiation, order placement, inbound transportation and storage. Organizations have to
coordinate with suppliers in scheduling without interruptions. Suppliers are involved in planning the
manufacturing process.
3. Manufacturing: Flexible manufacturing processes must be in place to respond to market changes.
They should be adaptive to accommodate customization and changes in the taste and preferences.
Manufacturing should be done on the basis of just-in-time (JIT) and minimum lot sizes. Changes
in the manufacturing process be made to reduce manufacturing cycle.
4. Physical distribution: Delivery of final products to customers is the last position in a marketing
channel. Availability of the products at the right place at right time is important for each channel
participant. Through physical distribution processes serving the customer become an integral part
of marketing. Thus supply chain management links a marketing channel with customers.
5. Outsourcing: Outsourcing is not limited to the procurement of materials and components, but also
include outsourcing of services that traditionally have been provided within an organization. The
company will be able to focus on those activities where it has competency and everything else will
be outsourced.
6. Customer services: Organizations, through interfaces with the company's production and
distribution operations, develop customer relationships so as to satisfy them. They work with
customer to determine mutually satisfying goals, establish and maintain relationships. This in turn
help in producing positive feelings in the organization and the customers.
7. Performance measurement: There is a strong relationship between the supplier, customer and
organisation. Supplier capabilities and customer relationships can be correlated with a firm
performance. Performance is measured in different parameters such as costs, cust omer service,
productivity and quality.
6. Strategic approaches: International economic dynamics accompanied by geographical changes have
changed the paradigm of global business. A firm / company which wishes to go global will be guided by
the following four types of strategies:
(i) Multi-domestic strategy: A multi-domestic strategy focuses on competition within each country in
which the firm operates. This Strategy is adopted when a company tries to achieve a high level of
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local responsiveness by matching their products and services offerings to national conditions
prevailing in the countries they operate in. The organization attempts to extensively customize their
products and services according to the local conditions of different countries.
(ii) Global strategy: A global strategy assumes more standardization of products across country
boundaries. Under this strategy, the company tries to focus on a low cost structure by leveraging
their expertise in providing certain products and services and concentrating the production of these
standard products and services at a few favourable locations around the world. Competitive
strategy is centralized and controlled by the home office.
(iii) Transnational strategy: Many large multinational firms, particularly those with many diverse
products, may use a multi-domestic strategy with some product lines and a global strategy with
others. A transnational strategy seeks to combine aspects of both multi -domestic and global
strategies. Thus there is emphasizes on both local responsiveness and global integration and
coordination. Although the transnational strategy is difficult to implement, environmental trends are
causing multinational firms to consider the needs for both global efficiencies and local
responsiveness.
When a firm adopts one or more of the above strategies, the firm would have to take decisions on
the manner in which it would commence international operations. The decision as to how to enter
a foreign market can have a significant impact on the results. Expansion into foreign markets can
be achieved through following options:
 Exporting.
 Licensing/ Franchising.
 Joint Venture.
 Foreign Direct Investment.
7. For implementing six sigma, there are two separate key methodologies for existing and new processes.
They are known as DMAIC and DMADV.
DMAIC is an acronym for five different steps used in six sigma - Define, Measure, Analyze Improve, and
Control. DMAIC methodology is directed towards improvement of existing product, process or service.
 Define: To begin with six sigma experts define the process improvement goals that ar e consistent
with the strategy of the organization and customer demands. They discuss different issues with the
senior managers so as to define what needs to done.
 Measure: The existing processes are measured to facilitate future comparison. Six sigma expe rts
collect process data by mapping and measuring relevant processes.
 Analyze: Verify cause-and-effect relationship between the factors in the processes. Experts need
to identify the relationship between the factors. They have to make a comprehensive anal ysis to
identify hidden or not so obvious factor.
 Improve: On the basis of the analysis experts make a detailed plan to improve.
 Control: Initial trial or pilots are run to establish process capability and transition to production.
Afterwards continuously measure the process to ensure that variances are identified and corrected
before they result in defects.
DMADV is an acronym for Define, Measure, Analyze, Design, and Verify. DMADV is a strategy for
designing new products, processes and services.
 Define: As in case of DMAIC six sigma experts have to formally define goals of the design activity
that are consistent with strategy of the organization and the demands of the customer.
 Measure: Next identify the factors that are critical to quality (CTQs). Measure factors such as
product capabilities and production process capability. Also assess the risks involved.

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 Analyze: Develop and design alternatives. Create high-level design and evaluate to select the best
design.
 Design: Develop details of design and optimise it. Verify designs may require using techniques
such as simulations.
 Verify: Verify designs through simulations or pilot runs. Verified and implemented processes are
handed over to the process owners.
However, in spite of different orientation in two methodologies, conceptually there is overlapping
between the DMAIC and DMADV as both are essentially having similar objectives.

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Test Series: March, 2018
MOCK TEST PAPER
INTERMEDIATE (IPC): GROUP – II
PAPER – 5 : ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
Wherever necessary suitable assumptions may be made and disclosed by way of a note.
Working Notes should form part of the answer.
(Time allowed: Three hours) (Maximum Marks: 100)
1. (a) From the following information, you are required to compute the basic and adjusted Earnings per
Share:
Net profit for 2015-16 11 lakh
Net profit for 2016-17 15 lakh
No. of shares issued before rights issue 5 lakhs
Right issue One for every 5 held
Right issue price 15 per share
Last date of exercising right option 1-06-2016
Fair value of shares before right issue 21 per share
(b) A Ltd. sold machinery having WDV of ` 40 lakhs to B Ltd. for ` 50 lakhs and the same machinery
was leased back by B Ltd. to A Ltd. The lease back is operating lease. You are required to
comment on the accounting treatment as per AS 19 in the following situations:
(i) Sale price of ` 50 lakhs is equal to fair value.
(ii) Fair value is ` 45 lakhs and sale price is ` 38 lakhs.
(iii) Fair value is ` 40 lakhs and sale price is ` 50 lakhs.
(iv) Fair value is ` 46 lakhs and sale price is ` 50 lakhs
(v) Fair value is ` 35 lakhs and sale price is ` 39 lakhs.
(c) Sun Ltd. has entered into a sale contract of ` 5 crores with X Ltd. during 2015-2016 financial
year. The profit on this transaction is ` 1 crore. The delivery of goods to take place during the
first month of 2016-2017 financial year. In case of failure of Sun Ltd. to deliver within the
schedule, a compensation of ` 1.5 crores is to be paid to X Ltd. Sun Ltd. planned to
manufacture the goods during the last month of 2015-2016 financial year. As on balance sheet
date (31.3.2016), the goods were not manufactured and it was unlikely that Sun Ltd. will be in a
position to meet the contractual obligation.
(i) Should Sun Ltd. provide for contingency as per AS 29?
(ii) Should provision be measured as the excess of compensation to be paid over the profit?
(d) Omega Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2016 -
17 for its residential project at 4 %. The interest is payable at the end of the Financial Year. At
the time of availment exchange rate was ` 56 per US $ and the rate as on 31st March, 2017 was
` 62 per US $. If Omega Limited borrowed the loan in India in Indian Rupee equivalent, the
pricing of loan would have been 10.50%.
You are required to compute Borrowing Cost and exchange difference for the year ending
31st March, 2017 as per applicable Accounting Standards. (4 x 4 = 16 marks)
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2. (a) From the following information as on 31 st March, 2016 of Xeta Insurance Co. Ltd. engaged in fire
insurance business, prepare the Revenue Account, reserving 50% of the net premiums for
unexpired risks and an additional reserve of ` 7,00,000:
Particulars Amount
`
Reserve for unexpired risk on 31st March, 2015 15,00,000
Additional reserve on 31st March, 2015 3,00,000
Claims paid 19,20,000
Estimated liability in respect of outstanding claims on 31st March, 2015 1,95,000
Estimated liability in respect of outstanding claims on 31st March, 2016 2,70,000
Expenses of management (including ` 90,000 incurred in connection with claims) 8,40,000
Re-insurance premium paid 2,25,000
Re-insurance recoveries 60,000
Premiums 33,60,000
Interest and dividend (gross before TDS) 1,50,000
Profit on sale of investments 30,000
Commission 50,000

(b) M/s P and Co., had four departments A, B, C and D. Each department being managed by
manager whose commission was 10% of the respective departmental profit, subject to a
minimum of ` 6,000 in each case. Inter-departmental transfers took place at a 'loaded' price as
follows:
From Department A to Department B 10% above cost
From Department A to Department D 20% above cost
From Department C to Department D 20% above cost
From Department C to Department B 20% above cost
For the year ending on 31 st March, 2016 the firm had already prepared and closed the
departmental Trading and Profit and Loss Account. Subsequently, it was discovered that the
closing stocks of departments had included interdepartmentally transferred goods at loaded price
instead of cost price. From the following information prepare a statement recomputing the
departmental profit or loss:
Dept. A Dept. B Dept. C Dept. D
` ` ` `
Final Profit (Loss) (38,000) 50,400 72,000 1,08,000
Inter departmental 70,000 - 4,800 (` 3,600 from
transfers included at (` 22,000 from Dept. A Dept. C and ` 1,200
loaded price in the and ` 48,000 from from Dept. A)
departmental stock Dept. C)
(10 + 6 =16 Marks)
3. (a) XYZ is having its Branch at Kolkata. Goods are invoiced to the branch at 20% profit on sale.
Branch has been instructed to send all cash daily to head office. All expenses are paid by head
office except petty expenses which are met by the Branch Manager.

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From the following particulars, you are required to prepare branch account in the books of Head
Office.
(`) (`)
Stock on 1st April 2017 30,000 Discount allowed to
(invoice price) debtors 160
Sundry Debtors on 1st April, 2017 18,000 Expenses paid by head office:
Cash in hand as on 1st April, 2017 800 Rent 1,800
Office furniture on 1st April, 2017 3,000 Salary 3,200
Goods invoiced from the head office Stationery & Printing 800
(invoice price) 1,60,000
Goods returned to Head Office 2,000 Petty expenses paid by the 600
branch
Goods returned by debtors 960 Depreciation to be provided on
Cash received from debtors 60,000 branch furniture at 10% p.a.
Cash Sales 1,00,000 Stock on 31st March, 2018
Credit sales 60,000 (at invoice price) 28,000
(b) Ganesh Ltd. has head office at Delhi (India) and branch at New York. New York branch is an integral
foreign operation of Ganesh Ltd. New York branch furnishes you with its trial balance as on
31st March, 2016 and the additional information given thereafter:
Dr. ($) Cr. ($)
Stock on 1st April, 2015 300 –
Purchases and sales 800 1,500
Sundry Debtors and creditors 400 300
Bills of exchange 120 240
Sundry expenses 1,080 –
Bank balance 420 –
Delhi office A/c – 1,080
3,120 3,120

The rates of exchange may be taken as follows:
 on 1.4.2015 @ ` 40 per US $
 on 31.3.2016 @ ` 42 per US $
 average exchange rate for the year @ ` 41 per US $.
New York branch account showed a debit balance of ` 44,380 on 31.3.2016 in Delhi books and
there were no items pending reconciliation.
You are asked to prepare trial balance of New York in ` in the books of Ganesh Ltd.
(c) A company has its share capital divided into shares of ` 10 each. On 1-1-20X1, it granted 5,000
employees stock options at ` 50, when the market price was ` 140. The options were to be
exercised between 1-3-20X2 to 31-03-20X2. The employees exercised their options for 4,800
shares only; remaining options lapsed.
You are required to pass the necessary journal entries for the year ended 31-3-20X2, with regard
to employees’ stock options. (8 + 4 + 4 = 16 Marks)

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4. L, M and N share profits and losses in the ratio of 5:3:2. Their firm was dissolved due to misconduct of
M and their balance sheet on that date was as under:
Balance Sheet as at 31-3-2016
Liabilities ` Assets `
Capital Accounts : Land and Building 2,00,000
L 3,00,000 Plants 2,00,000
M 2,00,000 Trade receivables 1,00,000
N 1,00,000 6,00,000 Inventories 1,50,000
Current Accounts: Cash 1,00,000
L 50,000 Current Account:
M 30,000 80,000 N 50,000
Trade payables 1,20,000
8,00,000 8,00,000
The whole business of the firm was sold to Preet Limited, on that day on the following terms:
(i) Preet Limited will issue the following securities in consideration for transfer of business:
10,000 equity shares @ ` 15 each, 15,000 preference shares @ ` 15 each; and 20,000
debentures @ ` 14.725.
(ii) The agreed value of assets and liabilities of partnership firm are as follows:
Land & Building – ` 3,00,000, Plants – ` 1,50,000, Inventory – ` 1,40,000, Trade Receivables –
` 97,500, and Trade Payables – ` 1,18,000.
It was mutually decided that preference shares and debentures will be distributed in profit sharing ratio
and cash brought in by the partner (if any) will be shared equally by the remaining partners before
distribution of equity shares. Equity shares are distributed on residual basis at the end.
You are required to prepare Realization Account, Cash Account, Partners’ Current and Capital
Accounts at the time of closing the books of the firm. (16 Marks)
5. The Balance Sheet of Lion Limited as on 31-03-2016 is given below:
Particulars Note No. Amount
(` in lakh)
Equity & Liabilities
Shareholders' Funds
Shares’ Capital 1 1,400
Reserves & Surplus 2 (522)
Non-Current Liabilities
Long term Borrowings 3 700
Current Liabilities
Trade Payables 4 102
Other Liabilities 5 24
Total 1704
Assets
Non-Current Assets
Fixed Assets
Tangible Assets 6 750
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© The Institute of Chartered Accountants of India
Current Assets
Current Investments 7 200
Inventories 8 300
Trade Receivables 9 450
Cash & Cash Equivalents 10 4
Total 1704
Notes to Accounts:
` in Lakhs
(1) Share Capital
Authorised :
200 lakh shares of ` 10 each 2,000
8 lakh, 8% Preference Shares of ` 100 each 800
2,800
Issued, Subscribed and paid up:
100 lakh Equity Shares of ` 10 each, full paid up 1,000
4 lakh 8% Preference Shares of ` 100 each, fully paid up 400
Total 1400
(2) Reserves and Surplus
Debit balance of Profit & Loss A/c (522)
(3) Long Term Borrowings
6% Debentures (Secured by Freehold Property) 400
Directors’ Loan 300
700
(4) Trade Payables
Trade payables for Goods 102
(5) Other Current Liabilities
Interest Accrued and Due on 6% Debentures 24
(6) Tangible Assets
Freehold Property 550
Plant & Machinery 200
750
(7) Current Investment
Investment in Equity Instruments 200
(8) Inventories
Finished Goods 300
(9) Trade Receivables
Trade receivables for Goods 450
(10) Cash and Cash Equivalents
Balance with Bank 4

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The Board of Directors of the company decided upon the following scheme of reconstruction with the
consent of respective shareholders:
(1) Preference Shares are to be written down to ` 80 each and Equity Shares to ` 2 each.
(2) Preference Shares Dividend in arrears for 3 years to be waived by 2/3 rd and for balance 1/3rd,
Equity Shares of ` 2 each to be allotted.
(3) Debenture holders agreed to take one Freehold Property at its book value of ` 300 lakh in part
payment of their holding. Balance Debentures to remain as liability of the company.
(4) Interest accrued and due on Debentures to be paid in cash.
(5) Remaining Freehold Property to be valued at ` 400 lakh.
(6) All investments sold out for ` 250 lakh.
(7) 70% of Directors' loan to be waived and for the balance, Equity Shares of ` 2 each to be allowed.
(8) 40% of Trade receivables and 80% of Inventories to be written off.
(9) Company's contractual commitments amounting to ` 600 lakh have been settled by paying 5%
penalty of contract value.
You are required to:
(a) Pass Journal Entries for all the transactions related to internal reconstruction;
(b) Prepare Capital Reduction Account; and
(c) Prepare notes on Share Capital and Tangible Assets to Balance Sheet, immediately after the
implementation of scheme of internal reconstruction. (16 Marks)
6. (a) Paper Limited comes out with a public issue of share capital on 01 -01-2016 of 30,00,000 equity
shares of ` 10 each at a premium of 5%. ` 2.50 is payable on application (on or before
31-01-2016) and ` 3 on allotment (31-3-2016) including premium.
This issue was underwritten by two underwriters namely White and Black, equally, the
commission being 4% of the issue price. Each of the underwriters underwrites 60,000 shares
firm. Subscriptions including firm underwriting came for 28,80,000 shares, the distribution of
forms being White: 15,60,000; Black; 10,80,000 and Unmarked 2,40,000.
One of the allottees (using forms marked with name of White) for 6,000 shares fails to pay the
amount due to allotment, all the other money due being received in full including any due from
the shares devolving upon the underwriters. The commission due was paid separately.
6,000 shares of one allottee who failed to pay the allotment money were finally forfeited by
30-06-2016 and were re-allotted for payment in cash of ` 4 per share.
You are required to prepare each underwriter’s liability (in shares) in statement form assuming
that the benefit of firm underwriting is given to individual underwriter.
(b) SMM Ltd. has the following capital structure as on 31 st March, 2017: ` in crore
Particulars
(i) Equity share capital (shares of ` 10 each) 1,200
(ii) Reserves:
General Reserves 1,080
Securities Premium 400
Profit & Loss 200
Infrastructure Development Reserve (Statutory Reserve) 320
(iii) Loan Funds 3,200

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© The Institute of Chartered Accountants of India
The company has offered buy back price of ` 30 per equity share. You are required to calculate
maximum permissible number of equity shares that can be bought back in the above situation
and also required to pass necessary Journal Entries. (4 +12 = 16 Marks)
7. Answer any four of the following:
(a) Explain the nature of Limited Liability Partnership. Who can be a designated partner in a Limited
Liability Partnership?
(b) A company had issued 30,000, 14% convertible debentures of ` 100 each on 1st April, 2014. The
debentures are due for redemption on 1 st July, 2016. The terms of issue of debentures provided
that they were redeemable at a premium of 5% and also conferred option to the debenture
holders to convert 20% of their holding into equity shares (Nominal value ` 10) at a price of ` 15
per share. Debenture holders holding 2,500 debentures did not exercise the option. Calculate the
number of equity shares to be allotted to the debenture holders exercising the option to the
maximum.
(c) ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom -made machine
amounting to ` 4,00,000. As on 31 st March, 2016 before delivery of the machine, ABC Ltd. had to
change its method of production. The new method will not require the machine ordered and so it
shall be scrapped after delivery. The expected scrap value is ‘NIL’.
Show the treatment of machine in the books of ABC Ltd.
(d) A fixed asset is purchased for ` 20 lakhs. Government grant received towards it is ` 8 lakhs.
Residual Value is ` 4 lakhs and useful life is 4 years. Assume depreciation on the basis of
Straight Line method. Asset is shown in the balance sheet net of grant. After 1 year, grant
becomes refundable to the extent of ` 5 lakhs due to non compliance with certain conditions.
Pass journal entries for second year.
(e) The Board of Directors of New Graphics Ltd. in its Board Meeting held on 18 th April, 2017,
considered and approved the Audited Financial results along with Auditors Report for the
Financial Year ended 31 st March, 2017 and recommended a dividend of ` 2 per equity share (on
2 crore fully paid up equity shares of ` 10 each) for the year ended 31 st March, 2017 and if
approved by the members at the forthcoming Annual General Meeting of the company on 18 th
June, 2017, the same will be paid to all the eligible shareholders.
Discuss on the accounting treatment and presentation of the said proposed dividend in the
annual accounts of the company for the year ended 31 st March, 2017 as per the applicable
Accounting Standard and other Statutory Requirements. (4 x 4 = 16 Marks)

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© The Institute of Chartered Accountants of India
Test Series: March, 2018
MOCK TEST PAPER
INTERMEDIATE (IPC) : GROUP – II
PAPER – 5 : ADVANCED ACCOUNTING
ANSWERS
1. (a) Computation of theoretical ex-rights fair value per share
Fair value of all outstanding shares immediately prior to exercise of rights + Total amount received from exercise of rights

Number of shares outstanding prior to exercise + number of shares issued in the exercise
(` 21.00 x 5,00,000 shares) + (` 15.00 x 1,00,000 shares)
5,00,000 shares + 1,00,000 shares
Theoretical ex-rights fair value per share = ` 20.00
(a) Computation of adjustment factor
Fair value per share prior to exercise of rights ` (21.00)
(b) = = 1.05
Theoretica l ex - rights value per share ` (20.00)

Computation of earnings per share
Year 2015-16 Year 2016-17
EPS for the year 2015-16 as originally reported: ` 2.20
(` 11,00,000/5,00,000 shares)
EPS for the year 2015-16 restated for rights issue: ` 2.10
[` 11,00,000/ (5,00,000 shares x 1.05)]
EPS for the year 2016-17 including effects of rights issue
` 15,00,000
` 2.55
(5,00,000 x 1.05 x 2 / 12) + (6,00,000 x 10 / 12)

(b) Following will be the treatment in the given cases:
(i) When sales price of ` 50 lakhs is equal to fair value, A Ltd. should immediately recognise
the profit of ` 10 lakhs (i.e. 50 – 40) in its books.
(ii) When fair value of leased machinery is ` 45 lakhs & sales price is ` 38 lakhs, then loss of
` 2 lakhs (40 – 38) to be immediately recognised by A Ltd. in its books provided loss is not
compensated by future lease payment.
(iii) When fair value is ` 40 lakhs & sales price is ` 50 lakhs then, profit of ` 10 lakhs is to be
deferred and amortised over the lease period.
(iv) When fair value is ` 46 lakhs & sales price is ` 50 lakhs, profit of ` 6 lakhs (46-40) to be
immediately recognised in its books and balance profit of ` 4 lakhs (50-46) is to be
amortised/deferred over lease period.
(v) When fair value is ` 35 lakhs & sales price is ` 39 lakhs, then the loss of ` 5 lakhs (40-35)
to be immediately recognised by A Ltd. in its books and profit of ` 4 lakhs (39-35) should be
amortised/deferred over lease period.
(c) (i) AS 29 “Provisions, Contingent Liabilities and Contingent Assets” provides that when an
enterprise has a present obligation, as a result of past events, that probably requires an
outflow of resources and a reliable estimate can be made of the amount of obligation, a
provision should be recognised. Sun Ltd. has the obligation to deliver the goods within the
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© The Institute of Chartered Accountants of India
scheduled time as per the contract. It is probable that Sun Ltd. will fail to deliver the goods
within the schedule and it is also possible to estimate the amount of compensati on.
Therefore, Sun Ltd. should provide for the contingency amounting ` 1.5 crores as per
AS 29.
(ii) Provision should not be measured as the excess of compensation to be paid over the profit.
The goods were not manufactured before 31st March, 2016 and no profit had accrued for
the financial year 2015-2016. Therefore, provision should be made for the full amount of
compensation amounting ` 1.50 crores.
(d) (i) Interest for the period 2016-17
= US $ 10 lakhs x 4% × ` 62 per US$ = ` 24.80 lakhs
(ii) Increase in the liability towards the principal amount
= US $ 10 lakhs × ` (62 - 56) = ` 60 lakhs
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs × ` 56 x 10.5% = ` 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency
borrowing = ` 58.80 lakhs - ` 24.80 lakhs = ` 34 lakhs.
Therefore, out of ` 60 lakhs increase in the liability towards principal amount, only ` 34 lakhs will
be considered as the borrowing cost. Thus, total borrowing cost would be ` 58.80 lakhs being the
aggregate of interest of ` 24.80 lakhs on foreign currency borrowings plus the exchange
difference to the extent of difference between interest on local currency borrowing and interest on
foreign currency borrowing of ` 34 lakhs.
Hence, ` 58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS
16 and the remaining ` 26 lakhs (60 - 34) would be considered as the exchange difference to be
accounted for as per AS 11.
2. (a) Name of the Insurer: Xeta Insurance Company Limited
Registration No. and Date of registration with IRDA: ……………………..
Revenue Account for the year ended 31 st March, 2016
Particulars Schedule Amount (`)
Premium earned (net) 1 26,67,500
Profit on sale of investment 30,000
Others –
Interest and dividend (gross) 1,50,000
Total (A) 28,47,500
Claims incurred (Net) 2 20,25,000
Commission 3 50,000
Operating expenses related to insurance 4 7,50,000
Total (B) 28,25,000
Operating profit from insurance business (A) – (B) 22,500
Schedule –1 Premium earned (net)
`
Premium received 33,60,000

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Less: Premium on reinsurance ceded (2,25,000)
Net Premium 31,35,000
Less: Adjustment for change in Reserve for Unexpired risk (as per W.N.) (4,67,500)
Total premium earned 26,67,500
Schedule -2 Claims incurred (net)
`
Claims paid 19,20,000
Add: Expenses regarding claims 90,000
20,10,000
Less: Re-insurance recoveries (60,000)
19,50,000
Add: Claims outstanding as on 31st March, 2016 2,70,000
22,20,000
Less: Claims outstanding as on 31st March, 2015 (1,95,000)
20,25,000
Schedule -3 Commission
`
Commission paid 50,000
Schedule-4 Operating expenses related to Insurance Business
`
Expenses of management (` 8,40,000 – ` 90,000) 7,50,000
Working Note:
Calculation for change in Reserve for Unexpired risk:
`
Reserve for Unexpired Risk as on 31st March, 2016 15,67,500
Additional Reserve as on 31st March, 2016 7,00,000 22,67,500
Less: Reserve for Unexpired Risk as on 31st
March, 2015 15,00,000
Additional Reserve as on 31st March, 2015 3,00,000 (18,00,000)
4,67,500
(b) Statement showing the re-computation of Departmental Profit or Loss
Particulars Dept. A Dept. B Dept. C Dept. D
` ` ` `
A Final Profit/(Loss) (Computed earlier) (38,000) 50,400 72,000 1,08,000
B Add: Departmental Manager’s Commission @ 6,000 6,000 8,000 12,000
10% of Deptt. Profit subject to a minimum of
` 6,000 [Working Note (i)]
C Profit before Deptt. Manager’s commission (32,000) 56,400 80,000 1,20,000
(A+B)

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© The Institute of Chartered Accountants of India
D Less: Profit earned through transfer of goods at
loaded price remaining in stock at transfer
department (W.N. 2) (2,200) - (8,600) -
E Correct Departmental Profit (before manager’s (34,200) 56,400 71,400 1,20,000
commission) (C-D)
F Less: Manager’s commission @ 10% of profit
subject to a minimum of ` 6,000 (6,000) (6,000) (7,140) (12,000)
G Departmental Profit after Manager’s (40,200) 50,400 64,260 1,08,000
commission (E-F)
Working Note:
1. Manager’s Commission:
Deptt. Profit/Loss Commission
A (-) 38,000 6,000
B 50,400 6,000 i.e. (50,400 x 1/9 = ` 5,600 less than `
6,000
C 72,000 8,000 i.e. (72,000 x 1/9 = ` 8,000)
D 1,08,000 12,000 i.e. (1,08,000 x 1/9 = ` 12,000)
2. Unrealised Profit on stock transfer:
`
Dept. A ` 22,000 to Deptt. B @ 110%, Profit thereon 22,000 x 10/110 2,000
` 1,200 to Deptt. D @ 120% Profit thereon 1,200 x 20/120 200
2,200
Dept. C ` 48,000 to Deptt. B 120% Profit thereon 48,000 x 20/120 8,000
` 3,600 to Deptt. D @ 120 % Profit thereon 3,600 x 20/120 600
8,600
3. (a) In the books of Head Office – XYZ
Kolkata Branch Account (at invoice)
` `
To Balance b/d By Stock reserve (opening) 6,000
Stock 30,000 By Remittances:
Debtors 18,000 Cash Sales 1,00,000
Cash in hand 800 Cash from Debtors 60,000 1,60,000
Furniture 3,000 By Goods sent to branch (loading) 32,000
To Goods sent to By Goods returned by
branch 1,60,000 branch (Return to H.O.) 2,000
To Goods returned by 400 By Balance c/d
branch (loading) Stock 28,000
To Bank (expenses Debtors 16,880
paid by H.O.) Cash (800-600) 200
Rent 1,800 Furniture (3,000-300) 2,700
Salary 3,200

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© The Institute of Chartered Accountants of India
Stationary &
printing 800 5,800
To Stock reserve (closing) 5,600
To Profit transferred to
General Profit & Loss A/c 24,180
2,47,780 2,47,780
Working Note:
Debtors Account
` `
To Balance b/d 18,000 By Cash account 60,000
To Sales account (credit) 60,000 By Sales return account 960
By Discount allowed account 160
By Balance c/d 16,880
78,000 78,000
Note: It is assumed that goods returned by branch are at invoice price.
(b) In the books of Ganesh Ltd.
New York Branch Trial Balance in (`)
as on 31st March, 2016
Conversion rate per US $ Dr. Cr.
(` ) ` `
Stock on 1.4.15 40 12,000
Purchases and sales 41 32,800 61,500
Sundry debtors and creditors 42 16,800 12,600
Bills of exchange 42 5,040 10,080
Sundry expenses 41 44,280
Bank balance 42 17,640
Delhi office A/c – 44,380
1,28,560 1,28,560

(c) Journal Entries in the books of company
Date Particulars Dr. ` Cr. `
1-3-X2 to Bank A/c Dr. 2,40,000
31-3-X2 Employees compensation expenses A/c Dr. 4,32,000
To Equity Share Capital A/c 48,000
To Securities Premium A/c 6,24,000
(Being allotment to employees 4,800 shares of
` 10 each at a premium of ` 130 at an exercise price of ` 50
each)
31-3-X2 Profit and Loss account Dr. 4,32,000
To Employees compensation expenses A/c 4,32,000
(Being transfer of employees compensation expenses)

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© The Institute of Chartered Accountants of India
Working Note:
1. Employee Compensation Expenses = Discount between Market Price and option price
= ` 140 – ` 50 = ` 90 per share = ` 90 x 4,800 = ` 4,32,000/- in total.
2. The Employees Compensation Expense is transferred to Securities Premium Account.
3. Securities Premium Account = ` 50 – ` 10 = ` 40 per share + ` 90 per share on account of
discount of option price over market price = ` 130 per share = ` 130 x 4,800 = ` 6,24,000/-
in total.
4. Realization Account
` ` `
To Land & Building 2,00,000 By Trade Payables 1,20,000
To Plant 2,00,000 By Preet Limited (W.N.1) 6,69,500
To Inventories 1,50,000
To Trade Receivable 1,00,000
To Cash 1,00,000
To Profit transferred to Capital A/c:
L 19,750
M 11,850
N 7,900 39,500
7,89,500 7,89,500
Cash Account
` `
To N’s Capital A/c 46,000 By L’s Capital A/c 23,000
By M’s Capital A/c 23,000
46,000 46,000

Partners’ Current Accounts
L M N L M N
` ` ` ` ` `
To Balance b/d - 50,000 By Balance b/d 50,000 30,000 -
To L’s Capital A/c 69,750 By Realisation A/c 19,750 11,850 7,900
To M’s Capital A/c 41,850 By N’s Capital A/c 42,100
69,750 41,850 50,000 69,750 41,850 50,000

Partners’ Capital Accounts
L M N L M N
` ` ` ` ` `
To N’s Current A/c - - 42,100 By Balance b/d 3,00,000 2,00,000 1,00,000
To Preference 1,12,500 67,500 45,000 By L’s Current A/c 69,750
Shares in Preet Ltd.
A/c
To Debentures A/c 1,47,250 88,350 58,900 By M’s Current A/c 41,850
6

© The Institute of Chartered Accountants of India
To Cash A/c 23,000 23,000 - By Cash A/c (bal. fig.) 46,000
To Equity Shares A/c
87,000 63,000 -
3,69,750 2,41,850 1,46,000 3,69,750 2,41,850 1,46,000
Working Notes:
1. Calculation of Purchase consideration
Net Payment Method
`
Equity Shares = 10,000 @ ` 15 1,50,000
Preference Shares = 15,000 @ ` 15 2,25,000
Debentures = 20,000 @ ` 14.725 2,94,500
6,69,500
2. As whole business of the firm was sold to Preet Limited, cash balance of the firm ` 1,00,000 is
also transferred to realization account. Cash brought in by N equal to Dr. balance appearing in
his account, after distribution of preference shares and debentures in profit sharing ratio would be
shared by L and M equally. The balance amount payable to L and M would be settled by transfer
of equity shares in Preet Company.
5. Journal Entries in the books of Lion Ltd.
Particulars Debit Credit
(` in lakhs) (` in lakhs)
(i) 8% Preference share capital A/c (` 100 each) Dr. 400
To 8% Preference share capital A/c (` 80 each) 320
To Capital Reduction A/c 80
(Being the preference shares of ` 100 each reduced to
` 80 each as per the approved scheme)
(ii) Equity share capital A/c (` 10 each) Dr. 1,000
To Equity share capital A/c (` 2 each) 200
To Capital Reduction A/c 800
(Being the equity shares of ` 10 each reduced to ` 2
each)
(iii) Capital Reduction A/c Dr. 32
To Equity share capital A/c (` 2 each) 32
(Being 1/3rd arrears of preference share dividend of 3 years
to be satisfied by issue of 8 lakhs equity shares of ` 2 each)
(iv) 6% Debentures A/c Dr. 300
To Freehold property A/c 300
(Being claim of Debenture holders settled in part by
transfer of freehold property)
(v) Accrued debenture interest A/c Dr. 24
To Bank A/c 24
(Being accrued debenture interest paid)
(vi) Freehold property A/c Dr. 150
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© The Institute of Chartered Accountants of India
To Capital Reduction A/c 150
(Being appreciation in the value of freehold property)
(vii) Bank A/c Dr. 250
To Investments A/c 200
To Capital Reduction A/c 50
(Being investment sold at profit)
(viii) Director’s loan A/c Dr. 300
To Equity share capital A/c (` 2 each) 90
To Capital Reduction A/c 210
(Being director’s loan waived by 70% and balance being
discharged by issue of 45 lakhs equity shares of ` 2
each)
(ix) Capital Reduction A/c Dr. 972
To Profit and loss A/c 522
To Trade receivables A/c (450x 40%) 180
To Inventories-in-trade A/c (300x 80%) 240
To Bank A/c (600 x 5%) 30
(Being certain value of various assets, penalty on
cancellation of contract, profit and loss account debit
balance written off through Capital Reduction Account)
(x) Capital Reduction A/c 286
To Capital reserve A/c 286
(Being balance transferred to capital reserve account as
per the scheme)
Capital Reduction Account
(` in lakhs) (` in lakhs)
To Equity Share Capital 32 By Preference Share Capital 80
To Trade receivables 180 By Equity Share Capital 800
To Finished Goods 240 By Freehold Property 150
To Profit & Loss A/c 522 By Bank 50
To Bank A/c 30 By Director’s Loan 210
To Capital Reserve 286
1,290 1,290
Notes to Balance Sheet
(` in lakhs) (` in lakhs)
1. Share Capital
Authorized:
200 lakhs Equity shares of ` 2 each 400
8 lakhs 8% Preference shares of ` 80 each 640
1,040
Issued:
161 lakhs equity shares of ` 2 each 322
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© The Institute of Chartered Accountants of India
4 lakhs Preference Shares of ` 80 each 320
642
2. Tangible Assets
Freehold Property 550
Less: Utilized to pay Debenture holders (300)
250
Add: Appreciation 150 400
Plant and Machinery 200
600
6. (a) Statement showing liability of underwriters
Particulars Basis White Black
A Gross Liability [No. of Shares) 1:1 15,00,000 15,00,000
B Less: Marked Applications {Net of (15,00,000) (10,20,000)
firm underwriting}
C Balance [A-B] - 4,80,000
D Less: Unmarked Applications 1:1 (1,20,000) (1,20,000)
E Balance [C-D] (1,20,000) 3,60,000
F Less: Firm Underwriting (60,000) (60,000)
G Balance (1,80,000) 3,00,000
H Credit for White ’s Oversubscription 1,80,000 (1,80,000)
I Net Liability - 1,20,000
J Add: Firm Underwriting 60,000 60,000
K Total Liability [No. Shares] 60,000 1,80,000
(b) Statement determining the maximum number of shares to be bought back
Number of shares (in crore)
Particulars When loan fund is ` 3,200 crore
Shares Outstanding Test (W.N.1) 30
Resources Test (W.N.2) 24
Debt Equity Ratio Test (W.N.3) 32
Maximum number of shares that can be bought 24
back [least of the above]
Journal Entries for the Buy Back
` in crore
Debit Credit
(a) Equity share buyback account Dr. 720
To Bank account 720
(Being payment for buy back of 24 crores equity
shares of ` 10 each @ ` 30 per share)
(b) Equity share capital account Dr. 240
Premium Payable on buyback account Dr. 480
To Equity share buyback account 720
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© The Institute of Chartered Accountants of India
(Being cancellation of shares bought back)
Securities Premium account Dr. 400
General Reserve / Profit & Loss A/c Dr. 80
To Premium Payable on buyback account 480
(Being Premium Payable on buyback account
charged to securities premium and general
reserve/Profit & Loss A/c)
(c) General Reserve / Profit & Loss A/c Dr. 240
To Capital redemption reserve account 240
(Being transfer of free reserves to capital
redemption reserve to the extent of nominal value
of share capital bought back out of redeemed
through free reserves)
Working Notes:
1. Shares Outstanding Test
Particulars (Shares in crores)
Number of shares outstanding 120
25% of the shares outstanding 30
2. Resources Test
Particulars
Paid up capital (` in crores) 1,200
Free reserves (` in crores) (1,080 + 400 +200) 1,680
Shareholders’ funds (` in crores) 2,880
25% of Shareholders fund (` in crores) ` 720 crores
Buy back price per share ` 30
Number of shares that can be bought back 24 crores
shares
3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy
Back
Particulars
(a) Loan funds (`) 3,200
(b) Minimum equity to be maintained after buy back in the 1,600
ratio of 2:1 (`) (a/2)
(c) Present equity shareholders fund (`) 2,880
(d) Future equity shareholders fund (`) (see W.N.4) 2,560 (2,880-320)
(e) Maximum permitted buy back of Equity (`) [(d) – (b)] 960
(f) Maximum number of shares that can be bought back @ 32 crore shares
` 30 per share
As per the provisions of the Companies Act, 2013,
company Qualifies

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© The Institute of Chartered Accountants of India
4 Amount transferred to CRR and maximum equity to be bought back will be calculated
by simultaneous equation method
Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy -back of
equity is ‘y’ Then
Equation 1: (Present Equity- Transfer to CRR)- Minimum Equity to be maintained
= Maximum Permitted Buy Back
= (2,880 – x) – 1,600 = y
= 1280 – x =y (1)
Equation 2: Maximum Permitted Buy Back X Nominal Value Per Share/Offer Price Per
Share

=  10  = x Or
y
3x = y (2)
 30 
by solving the above two equations we get
x= ` 320
y = ` 960
7. (a) Nature of Limited Liability Partnership: A limited liability partnership is a body corporate
formed and incorporated under the LLP Act, 2008 and is a legal entity separate from that of its
partners. A limited liability partnership shall have perpetual succession and any change in the
partners of a limited liability partnership shall not affect the existence, rights or liabilities of the
limited liability partnership.
Designated partners: Every limited liability partnership shall have at least two designated
partners who are individuals and at least one of them shall be a resident in India.
In case of a limited liability partnership in which all the partners are bodies corporate or in which
one or more partners are individuals and bodies corporate, at least two individuals who are
partners of such limited liability partnership or nominees of such bodies corporate shall act as
designated partners
(b) Calculation of number of equity shares to be allotted
Number of debentures
Total number of debentures 30,000
Less: Debenture holders who have not opted for conversion (2,500)
Debenture holders who opted for conversion 27,500
Option for conversion 20%
Number of debentures to be converted (20% of 27,500) 5,500
Redemption value of 5,500 debentures at a premium of 5% [5,500 x (100+5)] ` 5,77,500
Equity shares of ` 10 each issued on conversion
[` 5,77,500/ ` 15] 38,500 shares
(c) A liability is recognized when outflow of economic resources in settlementof a present obligation
can be anticipated and the value of outflow can be reliably measured. In the given case, ABC Ltd.
should recognize a liability of ` 4,00,000 payable to XYZ Ltd.
When flow of economic benefit to the enterprise beyond the current accounting peri od is
considered improbable, the expenditure incurred is recognized as an expense rather than as an
asset. In the present case, flow of future economic benefit from the machine to the enterprise is
improbable. The entire amount of purchase price of the machine should be recognized as an
expense.

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Hence ABC Ltd. should charge the amount of ` 4,00,000 (being loss due to change in production
method) to Profit and loss statement and record the corresponding liability (amount payable to
XYZ Ltd.) for the same amount in the books for the year ended 31st March, 2016.
(d) Journal Entries
Year Particulars ` in lakhs ` in lakhs
(Dr.) (Cr.)
2nd Fixed Asset Account Dr. 5
To Bank Account 5
(Being government grant on asset partly refunded
which increased the cost of fixed asset)
Depreciation Account (W.N.) Dr. 3.67
To Fixed Asset Account 3.67
(Being depreciation charged on SLM on revised
value of fixed asset prospectively)
Profit & Loss Account Dr. 3.67
To Depreciation Account 3.67
(Being depreciation transferred to Profit and Loss
Account at the end of year 2)
Working Note:
Depreciation for Year 2
` in lakhs
Cost of the Asset 20
Less: Government grant received (8)
12
 12  4 
Less: Depreciation for the first year   2
 4 
10
Add: Government grant refundable 5
15
 15  4 
Depreciation for the second year   3.67
 3 
(e) As per the amendment in AS 4 “Contingencies and Events Occurring After the Balance Sheet
Date” vide Companies (Accounting Standards) Amendments Rules, 2016 dated 30 th March, 2016,
the events which take place after the balance sheet date, are sometimes reflected in the financial
statements because of statutory requirements or because of their special n ature. However,
dividends declared after the balance sheet date but before approval of financial statements are
not recognized as a liability at the balance sheet date because no statutory obligation exists at
that time. Hence such dividends are disclosed in the notes to financial statements.
Provision for proposed dividends is not required to be made as per the amendment in AS 4. Such
proposed dividends are to be disclosed in the notes to financial statements. Accordingly, the
dividend of ` 4 crores recommended by New Graphics Ltd. in its Board meeting on 18 th April,
2017 shall not be accounted for in the books for the year 2016-17 irrespective of the fact that it
pertains to the year 2016-17 and will be paid after approval in the Annual General Meeting of the
members/shareholders.

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Test Series: March, 2018
MOCK TEST PAPER
INTERMEDIATE (IPC) GROUP – II
PAPER – 6: AUDITING AND ASSURANCE
Question No. 1 is compulsory.
Attempt any five questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100

1. Discuss the following:
(a) Matters indicating auditor about non-compliance of laws & regulations by management. (5 Marks)
(b) “Disclosure of significant accounting policies followed is necessary if the view presented is to be
properly appreciated.” (5 Marks)
(c) Guidance Notes issued by the ICAI are mandatory in nature. (5 Marks)
(d) “Inquiry is one of the audit procedures to obtain audit evidence.” (5 Marks)
2. State with reason (in short) whether the following statements are correct or incorrect (Answer any eight):
(i) Director's relative can act as an auditor of the company.
(ii) A company shall disclose by way of notes additional information regarding aggregate expenditure
and income for an item which exceeds ` 1,00,000.
(iii) Where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue to
be the auditor of the company.
(iv) The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not
detecting one resulting from error.
(v) As per SA 570, the objective of the Auditor is to obtain sufficient appropriate audit evidence about
the appropriateness of management’s use of consistency assumption in the preparation and
presentation of the financial statements.
(vi) A company can issue its sweat equity shares at discounted price.
(vii) Internal control can provide absolute assurance.
(viii) Manner of rotation of auditor will not be applicable to company A, which is having paid up share
capital of ` 45 crores and having public borrowing from nationalized bank of ` 40 crore because it
is a Private Limited Company.
(ix) The overall objective of audit does not change in Computer Information System (CIS) environment.
(x) Substantive procedure may be defined as an audit procedure designed to evaluate the operating
effectiveness of controls in preventing, or detecting and correcting, material misstatements at the
assertion level. (2 x 8 = 16 Marks)
3. How will you vouch/verify the following:
(a) Sale of Scrap
(b) Advertisement Expenses
(c) Assets acquired on Lease
(d) Investment in Shares and Debentures of Subsidiary. (4 x 4 = 16 Marks)

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4. Discuss with reference to SAs:
(a) What auditor shall do after the identification of significant related party transactions outside the
entity’s normal course of business? (4 Marks)
(b) What are the factors that may influence the degree of estimation uncertainty associated with an
accounting estimate? (6 Marks)
(c) What are the factors that may influence the auditor’s decision on whether to use an auditor’s expert,
when management has used a management’s expert in preparing the financial statements?
(6 Marks)
5. (a) Internal Control System can provide only reasonable but not absolute assurance that its objective
relating to prevention and detection of errors/frauds, safeguarding of assets etc., are achieved.
Briefly explain the inherent limitations that the system suffers. (6 Marks)
(b) The auditor of X Ltd. did not report on the matters specified under sub-section (1) of section 143
of the Companies Act, 2013, as he was satisfied that no comment is required. However, the
management of the company wanted the auditor to disclose the findings of enquiry thinking that it
would provide a good impression on the stakeholders. Now, agreeing with the thought of the
management, the auditor is thinking to disclose his findings of enquiry. Comment. (4 Marks)
(c) Mention any eight special steps involved in conducting the audit of an Educational Institution?
(6 Marks)
6. (a) As an auditor what are the essential points to be borne in mind while examining a voucher?
(4 Marks)
(b) “Y Ltd. utilised its securities premium to declare 45% dividend.” State the provisions related to
application of securities premium account and comment on the statement given. (6 Marks)
(c) “Audit of the accounts of stores and inventories has been developed as a part of expenditure audit
with reference to the duties and responsibilities entrusted to C&AG.” Discuss. (6 Marks)
7. Write short notes on any four of the following:
(a) Audit Note Book.
(b) Examination in Depth.
(c) Companies exempted from reporting under Companies (Auditor’s Report) Order, 2016.
(d) Verification procedure for Splitting of one share of the face value of ` 10 into 10 shares of ` 1
each.
(e) Assertions used by auditor to consider potential misstatements about presentation and disclosure
at the period end. (4 x 4 = 16 Marks)

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© The Institute of Chartered Accountants of India
Test Series: March, 2018
MOCK TEST PAPER
INTERMEDIATE (IPC): GROUP – II
PAPER – 6: AUDITING AND ASSURANCE
SUGGESTED ANSWERS / HINTS
1. (a) Matters indicating Auditor about Non-Compliance with Laws and Regulations by
Management: As per SA 250 on “Consideration of Laws and Regulation in an Audit of Financial
Statements”, the following are examples or matters indicating to the auditor about non -compliance
with laws and regulations by management-
(i) Investigations by regulatory organisations and government departments or payment of fines
or penalties.
(ii) Payments for unspecified services or loans to consultants, related parties, employees or
government employees.
(iii) Sales commissions or agent’s fees that appear excessive in relation to those ordinarily paid
by the entity or in its industry or to the services actually received.
(iv) Purchasing at prices significantly above or below market price.
(v) Unusual payments in cash, purchases in the form of cashiers’ cheques payable to b earer or
transfers to numbered bank accounts.
(vi) Unusual payments towards legal and retainership fees.
(vii) Unusual transactions with companies registered in tax havens.
(viii) Payments for goods or services made other than to the country from which the goods or
services originated.
(ix) Payments without proper exchange control documentation.
(x) Existence of an information system which fails, whether by design or by accident, to provide
an adequate audit trail or sufficient evidence.
(xi) Unauthorised transactions or improperly recorded transactions.
(xii) Adverse media comment.
(b) Disclosure of Accounting Policies: The view presented in the financial statements of an
enterprise of its state of affairs and of the profit or loss can be significantly affe cted by the
accounting policies followed in the preparation and presentation of the financial statements.
The accounting policies followed vary from enterprise to enterprise. Disclosure of significant
accounting policies followed is necessary if the view presented is to be properly appreciated. The
disclosure of some of the accounting policies followed in the preparation and presentation of the
financial statements is required by some cases.
The purpose of AS 1 is to promote better understanding of financial statements by establishing
through an accounting standard and the disclosure of significant accounting policies and the
manner in which such accounting policies are disclosed in the financial statements.
Such disclosure would also facilitate a more meaningful comparison between financial statements
of different enterprises.
To ensure proper understanding of financial statements, it is necessary that all significant
accounting policies adopted in the preparation and presentation of financial statemen ts should be
disclosed. Such disclosure should form part of the financial statements.
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It would be helpful to the reader of financial statements if they are all disclosed at one place instead
of being scattered over several statements, schedules and notes which form part of financial
statements.
Any change in accounting policy, which has a material effect, should be disclosed. The amount by
which any item is in the financial statement is affected by such change should also be disclosed to
the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should
be indicated. If a change is made in the accounting policies, which has not material effect on the
financial statements for the current period, which is reasonably expected to have material effect in
latter periods, the fact of such change should be appropriately disclosed in the period in which the
change is adopted.
(c) Guidance Notes: ‘Guidance Notes’ are primarily designed to provide guidance to members on
matters which may arise in the course of their professional work and on which they may desire
assistance in resolving issues which may pose difficulty. Guidance Notes are recommendatory in
nature. A member should ordinarily follow recommendations in a guidance not e relating to an
auditing matter except where he is satisfied that in the circumstances of the case, it may not be
necessary to do so.
Similarly, while discharging his attest function, a member should examine whether the
recommendations in a guidance note relating to an accounting matter have been followed or not.
If the same have not been followed, the member should consider whether keeping in view the
circumstances of the case, a disclosure in his report is necessary.
There are, however a few guidance notes in case of which the Council has specifically stated that
they should be considered as mandatory on members while discharging their attest function.
(d) Inquiry – Audit Procedure to Obtain Audit Evidence: Inquiry consists of seeking information of
knowledgeable persons, both financial and non- financial, within the entity or outside the entity.
Inquiry is used extensively throughout the audit in addition to other audit procedures. Inquiries may
range from formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is
an integral part of the inquiry process.
Responses to inquiries may provide the auditor with information not previously possessed or with
corroborative audit evidence. Alternatively, responses might provide information that differs
significantly from other information that the auditor has obtained, for example, information
regarding the possibility of management override of controls. In some cases, responses to inquiries
provide a basis for the auditor to modify or perform additional audit procedures.
Although corroboration of evidence obtained through inquiry is often of particular importance, in
the case of inquiries about management intent, the information available to support management’s
intent may be limited. In these cases, understanding management’s past history of carrying out its
stated intentions, management’s stated reasons for choosing a particular course of action, and
management’s ability to pursue a specific course of action may provide relevant in formation to
corroborate the evidence obtained through inquiry. In respect of some matters, the auditor may
consider it necessary to obtain written representations from management and, where appropriate,
those charged with governance to confirm responses to oral inquiries.
2. (i) Incorrect: As per section 141(3) of the Companies Act, 2013, a person shall not be eligible for
appointment as an auditor of a company whose relative is a Director or is in the employment of the
Company as a director or key Managerial Personnel.
(ii) Incorrect: As per Schedule III to the Companies Act, 2013, a company shall disclose by way of
notes additional information regarding aggregate expenditure and income for an item which
exceeds 1% of the revenue from the operation or ` 1,00,000 whichever is higher.

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(iii) Correct: As per section 139(10) of the Companies Act, 2013, where at any AGM, no auditor is
appointed or re-appointed, the existing auditor shall continue to be the auditor of the company.
(iv) Correct: The risk of not detecting a material misstatement resulting from fraud is higher than the
risk of not detecting one resulting from error. This is because fraud may involve sophisticated and
carefully organized schemes designed to conceal it.
(v) Incorrect: As per the objectives given in SA 570 “Going Concern”, the auditor is required to obtain
sufficient appropriate audit evidence about the appropriateness of management’s use of going
concern assumption in the preparation and presentation of the financial statements .
(vi) Correct: According to section 53 of the Companies Act, 2013, a company shall not issue shares
at a discount. However, exception has been given in the case of an issue of swe at equity shares.
(vii) Inorrect: Internal control can provide only reasonable but not absolute assurance that its objective
relating to prevention and detection of errors/frauds, safeguarding of assets etc., are achieved.
This is because it suffers from some inherent limitations.
(viii) Correct: According to section 139 of the Companies Act, 2013, the provisions related to rotation
of auditor are applicable to all private limited companies having paid up share capital of ` 50 crore
or more; and all companies having paid up share capital of below threshold limit mentioned above,
but having public borrowings from financial institutions, banks or public deposits of ` 50 crore or
more.
Applying the above to the given problem, it would not be governed by provi sions of rotation of
auditor.
(ix) Correct: Overall objective of audit does not change in Computer Information System (CIS)
environment. But the use of computer changes the processing and storage, retrieval and
communication of financial information.
(x) Inorrect: Test of controls may be defined as an audit procedure designed to evaluate the operating
effectiveness of controls in preventing, or detecting and correcting, material misstatements at the
assertion level.
Whereas substantive procedure may be defined as an audit procedure designed to detect material
misstatements at the assertion level.
3. (a) Sale of Scrap:
(i) Review the internal control as regards generation, storage and disposal of scrap.
(ii) Check whether the organization is maintaining reasonable record for generation of Scrap.
(iii) Analyze the raw material used, production and generation pattern of scrap and compare the
same with figures of earlier year.
(iv) Check the rates at which scrap has been sold and compare the rate with previous year.
(v) Vouch sales, with invoices raised, advertisement for tender, rate contract with scrap dealers.
(vi) Ensure that there exists a proper control procedure to identify scrap and good units and they
are not mixed up and sold as scrap.
(vii) Make an overall assessment of the value of realization from scrap as to its reasonableness.
(b) Advertisement Expenses:
(i) Verify the bill/invoice from advertising agency to ensure that rates charged for different types
of advertisement are as per contract.
(ii) See that advertisement relates to client’s business.
(iii) Inspect the receipt issued by the agency.
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(iv) Ascertain the nature of expenditure – revenue deferred and see that it has been recorded
properly.
(v) Ascertain the period for which payment is made and see that pre-paid is carried forward to
balance sheet.
(vi) Compare the statement of account with the ledger account.
(vii) See that all outstanding advertisement bills have been provided for.
(c) Assets Acquired on Lease:
(i) Examine the terms and conditions of the lease deed.
(ii) If a part of the leasehold property has been sublet, examine the tenant’s agreement.
(iii) Verify relevant document to check the cost of property.
(1) In case of acquisition of an asset is on operating lease, lease payment should be
recognized as an expense in the Statement of Profit and Loss on a straight line basis
over the lease term;
(2) In case of acquisition of an asset is on finance lease, ensure all the substantial risks and
rewards to ownership are transferred, considering the indication as prescribed in AS-19,
the lessee should recognize the lease as an asset and as a liability. Such recognition
should be at an amount equal to the fair value of the leased assets at the inception of
the lease. Ensure contingent rents are recognized as expense in the statement of profit
& loss for the period in case of Finance lease.
(iv) Ensure assets acquired under finance lease are segregated from the assets owned.
(v) Ensure that the assets under lease have been properly disclosed as per requirement of
Schedule III to the Companies Act, 2013.
(d) Investment in Shares and Debentures of Subsidiary:
(i) The auditor should obtain a complete schedule of all such investments held, showing
particulars as regards the name of the subsidiary company, class of shares or debenture,
date of purchase, number of units and denoting numbers, book value, dividend re ceived etc.
(ii) All the particulars entered in the schedule should be verified with the relevant account in the
General Ledger.
(iii) The auditor should, at the same time, examine all the investments by inspection of the
securities, share scrips or certificates, debenture bonds, etc. If any of the securities are held
by bankers, he should verify them with their certificate which should disclose the charge, if
they are subject to any such charge.
(iv) The provisions contained in Part I of Schedule III to the Companies Act, 2013 requires that
the shares held in a subsidiary should be shown separately.
(v) The shares or debentures of a subsidiary are valued at cost.
(vi) If the subsidiary has suffered a loss, then a provision for the proportionate part of the loss
should be made in the accounts of the holding company.
4. (a) Identification of Significant Related Party Transaction Outside Business: As per SA 550 on
“Related Parties”, for identified significant related party transactions outside the entity’s normal
course of business, the auditor shall-
(i) Inspect the underlying contracts or agreements, if any, and evaluate whether:

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(1) The business rationale (or lack thereof) of the transactions suggests that they may have
been entered into to engage in fraudulent financial reporting or to conceal
misappropriation of assets;
(2) The terms of the transactions are consistent with management’s explanations; and
(3) The transactions have been appropriately accounted for and disclosed in accordance
with the applicable financial reporting framework; and
(ii) Obtain audit evidence that the transactions have been appropriately authorized and approved.
(b) Factors Influencing Degree of Estimation Uncertainty: According to SA 540 “Auditing
Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures”, t he
degree of estimation uncertainty associated with an accounting estimate may be influenced by
factors such as-
(i) The extent to which the accounting estimate depends on judgment.
(ii) The sensitivity of the accounting estimate to changes in assumptions.
(iii) The existence of recognised measurement techniques that may mitigate the estimation
uncertainty (though the subjectivity of the assumptions used as inputs may nevertheless give
rise to estimation uncertainty).
(iv) The length of the forecast period, and the relevance of data drawn from past events to forecast
future events.
(v) The availability of reliable data from external sources.
(vi) The extent to which the accounting estimate is based on observable or unobservable inputs.
(c) Factors Influencing Auditor’s Decision on Whether to Use an Auditor’s Expert when
Management has used a Management’s Expert: SA 620 “Using the Work of an Auditor’s Expert”
states that when management has used a management’s expert in preparing the financial
statements, the auditor’s decision on whether to use an auditor’s expert may be influenced by such
factors as-
(i) The nature, scope and objectives of the management’s expert’s work.
(ii) Whether the management’s expert is employed by the entity, or is a party engaged by it to
provide relevant services.
(iii) The extent to which management can exercise control or influence over the work of the
management’s expert.
(iv) The management’s expert’s competence and capabilities.
(v) Whether the management’s expert is subject to technical performance standards or other
professional or industry requirements.
(vi) Any controls within the entity over the management’s expert’s work.
5. (a) Limitations of Internal Control system: Internal control system can provide only reasonable but
not absolute assurance that its objective relating to prevention and detection of errors/frauds,
safeguarding of assets etc., are achieved. This is because it suffers from some inherent limitations,
such as:-
(i) Management’s consideration that cost of an internal control does not exceeds the expected
benefits.
(ii) Most controls do not tend to be directed at unusual transactions.
(iii) The potential of human error due to carelessness, misjudgment and misunderstanding of
instructions.

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(iv) The possibility that control may be circumvented through collusion with employees or
outsiders.
(v) The possibility that a person responsible for exercising control may abuse that authority.
(vi) Compliance with procedures may deteriorate because the procedures becoming inadequate
due to change in condition.
(vii) Manipulation by management with respect to transactions or estimates and judgements
required in the preparation of financial statements.
(viii) Inherent limitations of Audit.
(b) Comment on Matters Contained under Section 143(1) of the Companies Act, 2013: Section
143(1) of the Companies Act, 2013 deals with duties of an auditor requiring him to make an enquiry
in respect of specified matters. The matters in respect of which the enquiry has to be made by the
auditor are relating to loans and advances, transactions represented merely by book entries,
investments sold at less than cost price, loans and advances shown as deposits, etc. Since the
law requires the auditor to make an enquiry, the Institute opined that the auditor is not required to
report on the matters specified in sub-section (1) unless he has any special comments to make on
any of the items referred to therein. If the auditor is satisfied as a result of the enquirie s, he has no
further duty to report that he is so satisfied. Therefore, the auditor of X Ltd. is correct in non -
reporting on the matters specified in section 143(1) of the Companies Act, 2013.
(c) Audit of an Educational Institution: The special steps involved in the audit of an educational
institution are the following-
(i) Examine the Trust Deed, or Regulations in the case of school or college and note all the
provisions affecting accounts. In the case of a university, refer to the Act of Legislature and
the Regulations framed thereunder.
(ii) Read through the minutes of the meetings of the Managing Committee or Governing Body,
noting resolutions affecting accounts to see that these have been duly complied with, specially
the decisions as regards the operation of bank accounts and sanctioning of expenditure.
(iii) Check names entered in the Students’ Fee Register for each month or term, with the
respective class registers, showing names of students on rolls and test amount of fees
charged; and verify that there operates a system of internal check which ensures that
demands against the students are properly raised.
(iv) Check fees received by comparing counterfoils of receipts granted with entries in the cash
book and tracing the collections in the Fee Register to confirm that the revenue from this
source has been duly accounted for.
(v) Total up the various columns of the Fees Register for each month or term to ascertain that
fees paid in advance have been carried forward and the arrears that are irrecoverabl e have
been written off under the sanction of an appropriate authority.
(vi) Check admission fees with admission slips signed by the head of the institution and confirm
that the amount had been credited to a Capital Fund, unless the Managing Committee has
taken a decision to the contrary.
(vii) See that free studentship and concessions have been granted by a person authorised to do
so, having regard to the prescribed Rules.
(viii) Confirm that fines for late payment or absence, etc., have either been collec ted or remitted
under proper authority.
(ix) Confirm that hostel dues were recovered before students’ accounts were closed and their
deposits of caution money refunded.

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(x) Verify rental income from landed property with the rent rolls, etc.
(xi) Vouch income from endowments and legacies, as well as interest and dividends from
investment; also inspect the securities in respect of investments held.
(xii) Verify any Government or local authority grant with the relevant papers of grant. If any
expense has been disallowed for purposes of grant, ascertain the reasons and compliance
thereof.
(xiii) Report any old heavy arrears on account of fees, dormitory rents, etc, to the Managing
Committee.
(xiv) Confirm that caution money and other deposits paid by students on admission have been
shown as liability in the balance sheet and not transferred to revenue.
(xv) See that the investments representing endowment funds for prizes are kept separate and any
income in excess of the prizes has been accumulated and invested along with the corpus.
(xvi) Verify that the Provident Fund money of the staff has been invested in appropriate securities.
(xvii) Vouch donations, if any, with the list published with the annual report. If some donations were
meant for any specific purpose, see that the money was utilised for the purpose.
(xviii)Vouch all capital expenditure in the usual way and verify the same with the sanction for the
Committee as contained in the minute book.
(xix) Vouch in the usual manner all establishment expenses and enquire into any unduly heavy
expenditure under any head.
(xx) See that increase in the salaries of the staff have been sanctioned and minuted by the
Committee.
(xxi) Ascertain that the system ordering inspection on receipt and issue of provisions, foodstuffs,
clothing and other equipment is efficient and all bills are duly authorised and passed before
payment.
(xxii) Verify the inventories of furniture, stationery, clothing, provision and all equipment, etc. These
should be checked by reference to Inventory Register and values applied to various items
should be test checked.
(xxiii)Confirm that the refund of taxes deducted from the income from investment (interest on
securities, etc.) has been claimed and recovered since the institutions are generally exempted
from the payment of income-tax.
(xxiv)Verify the annual statements of accounts and while doing so see that separate statements of
account have been prepared as regards Poor Boys Fund, Games Fund, Hostel and Provident
Fund of Staff, etc.
6. (a) Examining a Voucher: The essential points to be borne in mind while examining a voucher are-
(i) that the date of the voucher falls within the accounting period;
(ii) that the voucher is made out in the client’s name;
(iii) that the voucher is duly authorised;
(iv) that the voucher comprised all the relevant documents which could be expected to have been
received or brought into existence on the transactions having been entered into, i.e., the
voucher is complete in all respects; and
(v) that the account in which the amount of the voucher is adjusted is the one that would clearly
disclose the character of the receipts or payments posted thereto on its inclusion in the final
accounts.

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After the examination is over, each voucher should be either impressed with a rubber stamp or
initialed so that it may not be presented again in support of another entry .
(b) Utilisation of Securities Premium: Section 52 of the Companies Act, 2013 deals with creation of
Securities Premium Account for premium received on issues of shares and its application thereon.
Section 52(2) lays down that the securities premium account may be applied by the company -
(i) in paying up unissued shares of the company to be issued to members of the company as
fully paid bonus shares;
(ii) in writing off the preliminary expenses of the company;
(iii) in writing off the expenses of, or the commission paid or discount allowed on, any issue of
shares or debentures of the company;
(iv) in providing for the premium payable on the redemption of any redeemable preference shares
or of any debentures of the company; or
(v) for the purchase of its own shares or other securities under section 68.
Thus, it is clear from the above that securities premium can be utilised only for specific purposes.
Further, section 123 of the Companies Act, 2013 also specifies the sources from which dividends
can be paid and requires the same to be only paid out of current/past profits or any other free
reserve.
Hence, declaration of dividends out of securities premium is not proper and, consequently, the
auditor shall have to qualify the audit report.
(c) Audit of Stores and Inventories: Audit of the accounts of stores and inventories has been
developed as a part of expenditure audit with reference to the duties and responsibilities entrusted
to C&AG. Audit is conducted to ascertain whether the Regulations governing purchase, receipt and
issue, custody, sale and inventory taking of stores are well devised and properly carried out. The
aim is also to bring to the notice of the government any deficiencies in quantities of stores held or
any defects in the system of control.
The audit of purchase of stores is conducted in the same manner as audit of expenditure, namely,
that these are properly sanctioned, made economical and in accordance with the Rules for
purchase laid down by the competent authority. The auditor has to ensure that the prices paid are
reasonable and are in agreement with those shown in the contract for the supply of stores, and
that the certificates of quality and quantity are furnished by the inspecting and receiving units.
Cases of uneconomical purchase of stores and losses attributable to defective or inferior quality of
stores are specifically brought by the audit.
Accounts of receipts, issues and balances are checked regarding accuracy, correctness and
reasonableness of balances in inventories with particular reference to the specified norms for level
of consumption of inventory holding. Any excess or idle inventory is specifically mentioned in the
report and periodical verification of inventory is also conducted to ensure their existence. When
priced accounts are maintained, the auditor should see that the prices charged are reasonable and
have been reviewed from time to time. The valuation of the inventories is seen carefully so that the
value accounts tally with the physical accounts and that adjustment of profits or losses due to
revaluation, inventory taking or other causes is carried out.
7. (a) Audit Note Book: An audit note book is usually a bound book in which a large variety of matters
observed during the course of audit are recorded. Audit note books form part of audit working
papers and for each year a fresh audit note book is maintained. In case an auditor classifies his
working paper into permanent and current, then audit note book shall form part of the current file.
It is in any case a part of the permanent record of the auditor available for reference later on, if
required.

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The audit note book also provides a valuable help to the auditor in picking up the links of work
when the concerned assistant is away or the work is stopped temporarily. It is also used for
recording the various queries raised in the course of the work and their state of disposal. In respect
of disposed queries, explanation obtained and evidence seen would be recorded in the said book,
while queries remaining undisposed off would be noted for follow up.
(b) Examination in Depth: It implies examination of a few selected transactions from the beginning
to the end through the entire flow of the transaction, i.e., from initiation to the completion of the
transaction by receipt or payment of cash and delivery or receipt of the goods. This examination
consists of studying the recording of transactions at the various stages through which they have
passed. At each stage, relevant records and authorities are examined; it is also judged whether
the person who has exercised the authority in relation to the transactions is fit to do so in terms of
the prescribed procedure. For example, a purchase of goods may commence when a
predetermined re-order level has been reached. The ensuing stages may be summarised thus:
(i) Requisitions are pre-printed, pre-numbered and authorised;
(ii) official company order, also sequentially pre-numbered, authorised and placed with approved
suppliers only;
(iii) receipt of supplier’s invoice;
(iv) receipt of supplier’s statement;
(v) entries in purchases day book;
(vi) postings to purchase ledger and purchase ledger control account;
(vii) cheque in settlement;
(viii) entry on bank statement and returned “paid” cheque (if requested);
(ix) cash book entry;
(x) posting from cash book to ledger and control account, taking into account any discounts.
(xi) receipt of goods, together with delivery/advice note;
xii) admission of goods to stores;
(xiii) indication, by initials or rubber stamp on internal goods inwards note, of compliance with order
regarding specification, quantity and quality;
(xiv) entries in stores records.
It should be noted that the above list is not necessarily comprehensive, nor does its constituent
stages inevitably take place in the sequence suggested. The important point to note is that from
the moment it was realised that once a re-order level had reached, a chain of events was put in
motion, together leaving what may be termed as “audit trail”. Each item selected for testing must
be traced meticulously, and although sample sizes need not be large, they must, of course, be
representative.
It is an acceptable practice to check a slightly smaller number of transactions at each successive
stage within a depth test, on the statistical grounds (based on probability theory) that the optimum
sample size decreases as the auditor’s “level of confidence” concerning the functioning of the
system increases. Examination in depth has been found indispensable in modern auditing practice
and, if intelligently conducted, its reconstruction of the audit trail reveals more about the functioning
(or malfunctioning) of the client’s system in practice than the haphazard and mechanical approach
to testing.

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(c) Companies Exempted from Reporting under CARO, 2016
The CARO, 2016 is an additional reporting requirement Order. The order applies to every company
including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013.
However, the Order specifically exempts the following class of companies-
(i) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949;
(ii) an insurance company as defined under the Insurance Act,1938;
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined under clause (62) of section 2 of the Companies Act;
(v) a small company as defined under clause (85) of section 2 of the Companies Act; and
(vi) a private limited company, not being a subsidiary or holding company of a public company,
having a paid up capital and reserves and surplus not more than
` 1 crore as on the balance sheet date and which does not have total borrowings exceeding
` 1 crore from any bank or financial institution at any point of time during the financial year
and which does not have a total revenue as disclosed in Scheduled III to the Companies Act,
2013 (including revenue from discontinuing operations) exceeding ` 10 crore during the
financial year as per the financial statements.
It may be noted that the Order shall not be applicable to the auditor’s report on consolidated
financial statements.
(d) Verification procedure for Splitting of one share of the face value of ` 10 into 10 shares of
Re. 1 each:
(i) Confirm that alteration was authorised by articles.
(ii) Verify the minutes of the Board meeting and ordinary resolution passed in the general meeting
in which the approval of members is obtained.
(iii) Verify also with reference to requisite Form required to be filed with the ROC.
(iv) Verify that alteration had been effected in copies of Memorandum Articles, etc.
(v) Verify that proper accounting entries have been passed. Register of members may also be
checked to see that the necessary alteration have been effected therein.
(e) Assertions used by Auditor to Consider Potential Misstatements about Presentation and
Disclosure at the Period End: According to SA 315 “Identifying and Assessing the Risk of Material
Misstatement through understanding the Entity and its Environment”, the assertions used by the
auditor to consider the different types of potential misstatements that may occur about presentation
and disclosure at the period end are-
(i) Occurrence and rights and obligations — disclosed events, transactions, and other matters
have occurred and pertain to the entity.
(ii) Completeness — all disclosures that should have been included in the financial statements
have been included.
(iii) Classification and understandability — financial information is appropriately presented and
described, and disclosures are clearly expressed.
(iv) Accuracy and valuation — financial and other information are disclosed fairly and at
appropriate amounts.

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© The Institute of Chartered Accountants of India
Test Series: March, 2018
MOCK TEST PAPER
INTERMEDIATE (IPC): GROUP – II
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – A: INFORMATION TECHNOLOGY
Question No. 1 is compulsory.
Attempt any five questions from the rest.
Time Allowed – 1½ Hours Maximum Marks – 50
1. Answer all the following questions in brief.
(i) What do you understand by the term “Organizational Business Processes”?
(ii) Define the term “Application Software”.
(iii) Explain the term “Public Data Network”.
(iv) What do you understand by the term “Information System”?
(v) Which are the majorly used channels for delivery of information? (2 x 5 = 10 Marks)
2. (a) Explain the concept of “Mobile Computing” and prepare a list of its business applications.
(4 Marks)
(b) Discuss key modules of Human Resource Management Systems (HRMS). (4 Marks)
3. (a) Explain the role of “Internetwork Processors” in Telecommunication Networks. (4 Marks)
(b) Discuss the benefits of pursuing Business Process Automation. (4 Marks)
4. (a) “Information Systems can support the four levels of decisions which revolves around Strategy,
Management, Knowledge and Operations”. Justify the statement. (4 Marks)
(b) Differentiate between Thick Client and Thin Client in Telecommunication Networks. (4 Marks)
5. (a) How does the details about the current system is gathered in the “Systems Analysis” phase under
System Development Life Cycle (SDLC)? Also, list the activities performed by System Analyst in
processing that information. (4 Marks)
(b) State the characteristics of Cloud Computing. (4 Marks)
6. Auditor Forum Limited XYZ has two types of employees viz. Permanent and Contractual and intends to
develop a computer program for calculating annual performance bonus for its employees. There are
three categories - A in which managerial staff is placed; and B and C into which all the non-managerial
staff are placed. Employees in category A, contractual employees and employees whose service period
is less than nine months are not eligible for the award of bonus. On a scaled score of 1 to 100, the
amount of bonus for the eligible employees is determined as follows:

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SCALED SCORE NO. OF BASIC SALARIES
80 and above 2.0
65 – 79 1.5
50 – 64 1
Less than 50 0.0

Prepare a program flowchart showing the process of calculation of bonus. (8 Marks)
7. Write short notes on any four of the following.
(a) Business Process Management (BPM)
(b) Bluetooth
(c) Extranets
(d) Scorecards
(e) TALLY (4 × 2 = 8 Marks)

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Test Series: March, 2018
MOCK TEST PAPER
INTERMEDIATE (IPC): GROUP – II
PAPER –7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – B: STRATEGIC MANAGEMENT
Question No.1 is compulsory.
Attempt any five questions from the rest.
Time Allowed – 1½ Hours Maximum Marks – 50
1. (a) Briefly describe the impact of corporate culture on an organization. (3 Marks)
(b) Briefly outline some of the major reasons due to which all types of firms should engage in
‘Strategic Management’. (3 Marks)
(c) “Six sigma is not merely a quality initiative, it is a business initiative.” Elucidate. (3 Marks)
(d) Elaborate the interrelationship between strategy formulation and implementation. (3 Marks)
(e) “A Manager working on a strategic decision has to balance socio-cultural opportunities,
influences and constraints”. Discuss. (3 Marks)
2. (a) State with reasons which of the following statements is correct/incorrect:
(i) Major task of strategic management is developing annual objectives & compatible short-
term strategies.
(ii) An industry can have more than one strategic group. (2  2 = 4 Marks)
(b) Explain the meaning of the following concepts:
(i) Logistics Strategy.
(ii) Demarketing.
(iii) Service Marketing. (3  1 = 3 Marks)
3. Write short notes on the following:
(a) Product life cycle as a S shaped curve. (2 Marks)
(b) Functional Structure. (2 Marks)
(c) Strategic Decision Making. (3 Marks)
4. Explain GE model. How is it useful in making strategic choices? (7 Marks)
5. What do you understand by the term business? Are business done for profit alone. Explain various
objectives of business. (7 Marks)
6. What is the rationale behind Business Process Reengineering (BPR)? What steps would you
recommend to implement BPR in an organization? (7 Marks)
7. Discuss how mergers and acquisitions are used for business growth. What are the various types of
mergers? (7 Marks)

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© The Institute of Chartered Accountants of India
Test Series: March, 2018
MOCK TEST PAPER
INTERMEDIATE (IPC): GROUP – II
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – A: INFORMATION TECHNOLOGY
SUGGESTED ANSWERS/HINTS
1. (i) Organizational Business Processes: Organizational business processes are high-level
processes that are typically specified in textual form by their inputs, their outputs, their expected
results and their dependencies on other organizational business processes. These business
processes act as supplier or consumer processes. To manage incoming raw materials provided by
a set of suppliers is an example of an organizational business process. While organizational
business processes characterize coarse-grained business functionality, there are multiple
operational business processes that contribute to one organizational business process.
(ii) Application Software: Application Software includes all that computer software that cause a
computer to perform useful tasks beyond the running of the computer itself. It is a collection of
programs which address a real-life problem of its end users which may be business or scientific or
any other problem. The different types of application software are Application Suite, Enterprise
Software, Enterprise Infrastructure Software, Information Worker Software, Content Access
Software, Educational Software and Media Development Software.
(iii) Public Data Network: A Public Data Network is defined as a network shared and accessed by
users not belonging to a single organization. It is a network established and operated by a
telecommunications administration, or a recognized private operating agency, for the specific
purpose of providing data transmission services for the public. The Internet is an example of a
Public Data Network.
(iv) Information System: Information System (IS) is a combination of people, hardware, software,
communication devices, network and data resources that processes (can be storing, retrieving,
transforming information) data and information for a specific purpose. The system needs inputs
from user (key in instructions and commands, typing, scanning) which will then be processed
(calculating, reporting) using technology devices such as computers, and produce output (printing
reports, displaying results) that will be sent to another user or other system via a network and a
feedback method that controls the operation.
(v) Delivery channels for information include Intranet; E-mail; Internal newsletters and magazines;
Staff briefings, meetings and other face-to-face communications methods; Notice boards in
communal areas; Manuals, guides and other printed resources; Hand-held devices (PDAs, etc.);
and Social networking sites, like Facebook, WhatsApp, etc.
2. (a) Mobile Computing: Mobile Computing, is the use of portable computing devices (such as laptop
and handheld computers) in conjunction with mobile communications technologies to enable users
to access the Internet and data on their home or work computers from anywhere in the world. It is
a human–computer interaction by which a computer is expected to be transported during normal
usage. Mobile computing involves Mobile Communication, Mobile Hardware and Mobile Software.
Some examples of business applications are as follows:
 There is increase in workforce productivity as mobile device enables employees to work from
anywhere, anytime by accessing and updating information as required. For example:
employees can read/respond to emails using laptops, PDAs or smart phones from office,
residence and even when on the move.

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 Customer service can be improved by responding to customer queries on site or off site. For
example: customer complaints can be accessed and responded by accessing past/latest
information of client as required.
 Incident management can be improved by resolving problems faster without limitation of time
as the concerned employees can attend to these regardless of their location. Further,
escalations can be updated in real time which ensures timely resolution of problems. For
example: Computer breakdowns can be serviced by service engineers from their
desks/outside by logging into the specific computer, identify problem and resolve it online.
 Business processes can be transformed by using mobile devices. Enterprises can reengineer
core business processes. The new and reengineered processes can focus on utilizing the key
features of location and time independence. Enterprises can focus on providing customers
and employees with access to information in different ways and provide the latest information.
This enables employees, customers, and businesses to be available to one another as per
their choice. For example: billing can be done by employees using hand held devices at
customer site and the information updated online and deliveries to customers can be fastened.
 Enterprises can dynamically modify and update their offerings and offer new products and
services altogether. For example: enterprises can implement telecommuting with flexible
working hours and locations allowing for cost savings and better efficiency.
 Mobile computing gives users the freedom to roam, with access to data and services at any
time and in any place. Most of the high-end ERP and business software applications for SMEs
have in-built capabilities of mobile computing enabling users to access data. Used with proper
security, enterprises can harness the power of this technology to create innovative
opportunities for improving the quality and efficiency of business processes and services.
Mobile devices are increasingly acquiring the must-have status for enterprises on account of
the increasing acceptance as business tools.
(b) Key Modules of Human Resource Management Systems (HRMS) are as follows:
 Workforce Management: Integrated across the strategic Human Capital Management (HCM)
solution, Workforce Management provides powerful tools to effectively manage labor rules,
ensure compliance, and control labor costs and expenses.
 Time and Attendance Management: The time and attendance module gathers standardized
time and work related efforts. The most advanced modules provide broad flexibility in data
collection methods, labor distribution capabilities and data analysis features. Cost analysis
and efficiency metrics are the primary functions.
 Payroll Management: This module of the system is designed to automate manual Payroll
functions and facilitate salary, deductions etc. calculations, eliminates errors and free up HR
staff for more productive tasks. Data is generally fed from the human resources and time
keeping modules to calculate automatic deposit and manual cheque writing capabilities. This
module can encompass all employee-related transactions as well as integrate with existing
financial management systems.
 Training Management: Training programs can be entered with future dates which allow
managers to track progress of employees through these programs, examine the results of
courses taken and reschedule specific courses when needed. The module tracks the trainer
or training organization, costs associated with training schedules. The module also tracks
training locations, required supplies and equipment and registered attendees. All employees
are linked to a skills profile. The skill profile lists the skills brought with them and acquired
through training after they were hired. The skills profile is updated automatically through the
training module.

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 Compensation Management: Compensation Management is more than just the means to
attract and retain talented employees. In today’s competitive labor market, organizations need
to fully leverage their human capital to sustain a competitive position. This requires integrating
employee processes, information and programs with organizational processes and strategies
to achieve optimal organizational results.
 Recruitment Management: This module helps in hiring the right people with the right target
skills. This module includes processes for managing open positions/requisitions, applicant
screening, assessments, selection and hiring, correspondence, reporting and cost analysis.
 Personnel Management: The personnel management comprises of HR master-data,
personnel administration, recruitment and salary administration.
 Organizational Management: Organizational management includes organizational
structure, staffing schedules & job description.
 Employee Self Service (ESS): The employee self-service module allows employees to query
HR related data and perform some HR transactions over the system. Employees may query
their attendance record from the system without asking the information from HR personnel.
The module also lets supervisors approve OverTime (O.T) requests from their subordinates
through the system without overloading the task on HR department.
 Analytics: The Analytics module enables organizations to extend the value of an HRMS
implementation by extracting HR related data for use with other business intelligence
platforms. For example, organizations combine HR metrics with other business data to identify
trends and anomalies in headcount to better predict the impact of employee turnover on future
output.
3. (a) Internetwork Processors: Telecommunications networks are interconnected by special purpose
communications processors called Internetwork Processors. Examples include switches, routers,
hubs, bridges, repeaters and gateways.
 Switch - Switch is a communications processor that makes connections between
telecommunications circuits in a network so that a telecommunications message can reach
its intended destination.
 Router – Router is a communications processor that interconnects networks based on
different rules or protocols, so that a telecommunications message can be routed to its
destination.
 Hub – Hub is a port-switching communications processor. This allows for the sharing of the
network resources such as servers, LAN workstations, printers, etc.
 Bridge – Bridge is a communications processor that connects numerous Local Area Networks
(LANs). It magnifies the data transmission signal while passing data from one LAN to another.
 Repeater – Repeater is a communications processor that boosts or amplifies the signal before
passing it to the next section of cable in a network.
 Gateway – Gateway is a communications processor that connects networks that use different
communication architectures.
(b) Business Process Automation (BPA) is the basic component of an enterprise-wide automation and
management scheme for both business and IT workflow. Some benefits of pursuing BPA include
the following:
 Reducing the Impact of Human Error: BPA removes human participation in the process,
which is the source of many errors.
 Transforming Data into Information: BPA can, apart from collecting and storing data also
analyze data and make it available in a form that is useful for decision -making.
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 Improving performance and process effectiveness: In many cases, tasks that must be
done manually are the bottleneck in the process. Automating those manual tasks speeds up
the effective throughput of the application.
 Making users more efficient and effective: People can focus their energies on the tasks
they do best, allowing the computers to handle those that machines are best suited for.
 Making the business more responsive: Enterprises can easily automate new applications
and processes as they are introduced that provide greater control over business and IT
processes.
 Improving Collaboration and Information Sharing: Business processes designed through
a collaborative interface mean IT can integrate its processes with the business side logic that
drives day-to-day operations.
 Cost Saving: Automation leads to saving in time and labor costs through higher efficiency
and better management of the people involved;
 To remain competitive: To provide the level of products and services as offered by
competition.
 Fast service to customers: Automation shortens cycle times in the execution of processes
through improved and refined business workflows and help enterprises to serve their
customers faster and better.
4. (a) The following classification of Information Systems at four different levels support the four level of
decisions - Strategy, Management, Knowledge and Operations.
 Strategic-Level Systems: These are totally focused on Strategic and planning issues. These
systems are for strategic managers to track and deal with strategic issues and assisting in
long-range planning. A principle area is tracking changes in the external conditions (market
sector, employment levels, share prices, etc.) and matching these with the internal conditions
of the organization.
 Management-Level Systems: These systems are used for the monitoring, controlling,
decision-making, and administrative activities of middles management. Some of these
systems deal with predictions or “what if…” type questions. e.g. “What would happen to our
profits if the completion of the new production plant was delayed by 6 months?” Tracking
current progress in accord with plans is another major function of systems at this level.
 Knowledge-Level Systems: These systems support discovery, processing and storage of
knowledge and data workers. These further control the flow of paper work and enable group
working.
 Operational-Level Systems: These systems support operational managers tracking
elementary activities. These can include tracking customer orders, invoice tracking, etc.
Operational level systems ensure that business procedures are followed.
(b) Thick Client: A Thick Client (Fat Client) is a client that performs the bulk of any data processing
operations itself, and does not necessarily rely on the server. Unlike thin clients, thick clients do
not rely on a central processing server because the processing is done locally on the user system,
and the server is accessed primarily for storage purposes. For that reason, thick clients often are
not well-suited for public environments. To maintain a thick client, IT needs to maintain all systems
for software deployment and upgrades, rather than just maintaining the applications on the server.
For example – Personal Computer.
Thin Client: Thin client uses the resources of the host computer. A thin client generally only
presents processed data provided by an application server, which performs the bulk of any required
data processing. A thin client machine is going to communicate with a central processing server,
meaning there is little hardware and software installed on the user's machine. Unlike thick clients,
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© The Institute of Chartered Accountants of India
thin clients rely on a central processing server for the processing to be done. A device using web
application (such as Office Web Apps) is a thin client.
5. (a) System Analysis: This is the second phase in SDLC (Systems Development Life Cycle) that
examines ‘What must the Information System do to solve the problem’? System analyst would be
gathering details about the current system and will involve:
 Interviewing staff: at different levels from end-users to senior management;
 Examine current business: systems documents and output including current order
documents, computer system procedures and reports used by operations and senior
management;
 Sending out questionnaires: that have to be carefully constructed to elicit unambiguous
answers; and
 Observation of current procedures: by spending time in various departments. A time and
motion study can show where procedures could be more efficient or to detect bottlenecks.
The Systems Analyst will:
 Examine data and information flows in the enterprise using data flow diagrams;
 Establish what the proposed system will actually do (not how it will do it);
 Analyze costs and benefits;
 Outline system implementation options. (e.g. in-house or using consultants);
 Consider possible hardware configurations; and
 Make recommendations.
(b) Characteristics of Cloud Computing are as follows:
 Elasticity and Scalability: Cloud computing gives us the ability to expand and reduce
resources per the specific service requirement. For example, we may need many server
resources for the duration of a specific task. We can then release these server resources after
we complete our task.
 Pay-per-Use: We pay for cloud services only when we use them, either for the short term (for
example, for CPU time) or for a longer duration (for example, for cloud-based storage or vault
services).
 On-demand: Because we invoke cloud services only when we need them, they are not
permanent parts of the IT infrastructure. This is a significant advantage for cloud use as
opposed to internal IT services. With cloud services, there is no need to have dedicated
resources waiting to be used, as is the case with internal services.
 Resiliency: The resiliency of a cloud service offering can completely isolate the failure of
server and storage resources from cloud users. Work is migrated to a different physical
resource in the cloud with or without user awareness and intervention.
 Multi Tenancy: Public cloud service providers often can host the cloud services for multiple
users within the same infrastructure. Server and storage isolation may be physical or virtual
depending upon the specific user requirements.
 Workload Movement: This characteristic is related to resiliency and cost considerations.
Here, cloud-computing providers can migrate workloads across servers both inside the data
center and across data centers. This migration might be necessitated by cost, efficiency
considerations, or regulatory considerations for certain types of workloads.

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6. Let us define the variables first:
Emp_Ctgy: Employee Category Emp_Type: Employee Type
Srv_Period: Service Period SS: Scaled Service
BS: Basic Salary B: Bonus

Start

Read Emp_Ctgy, Emp_Type, Srv_Period, SS

If Emp_Ctgy = “A”?
Yes

No

Yes
If Emp_Type = Contractual?
“A”?
No

Yes
If Srv_Period < 9?

No
B=0
Yes
If SS ≥ 80? B = 2 * BS

No

Yes
If 65 ≤ SS ≤ 79? B = 1.5 * BS

No
Yes
If 50 ≤ SS ≤ 64? B = 1 * BS

No
Print B Stop
B=0

7. (a) Business Process Management (BPM): This refers to the closed loop, iterative management of
business processes over their complete lifecycle. In simple terms, BPM is about the management
of business processes with the organization being the primary focus. It is the methodology used
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© The Institute of Chartered Accountants of India
by enterprises to improve end-to-end business processes in various stages and aim to grow
revenues quickly while controlling resource costs. BPM evaluates the efficacy and usefulness of
business processes for reducing costs and ensure value creation. It includes concepts, methods,
and techniques to support the design, administration, configuration, enactment, and analysis of
business processes. The basis of BPM is the explicit representation of business processes with
their activities and the execution constraints between them. Once business processes are defined,
they can be subject to analysis, improvement, and enactment.
(b) Bluetooth: Bluetooth is a wireless technology standard for exchanging data over short distances
up to 50 meters (164 feet) from fixed and mobile devices, creating Personal Area Networks (PANs)
with high levels of security. It is a feature which is used every day thro ugh several compatible
devices. Bluetooth is really like a very low-power, short-range radio signal through which both data
and voice transmissions can be sent. Bluetooth signals are secure from the moment they're sent,
so unlike any other wireless network we don't have to worry about turning on security. Few devices
that utilize Bluetooth technology are Keyboards and mice, Printers, Cell phones and headsets,
PDAs (Personal Digital Assistants), Desktop and laptop computers, Digital cameras, and Remotes:
replacing IR (infrared).
(c) Extranets: Extranets are network links that use Internet technologies to interconnect the Intranet
of a business with the Intranets of its customers, suppliers, or other business partners. Companies
can use Extranets establish direct private network links between themselves, or create private
secure Internet links between them called virtual private networks. They use the unsecured Internet
as the extranet link between its intranet and consumers and others, but rely on encryption of
sensitive data and its own firewall systems to provide adequate security.
(d) Scorecards: This involves providing a visual representation of the enterprise strategy by taking
critical metrics and mapping them to strategic goals throughout the enterp rise. Scorecards offer a
rich, visual gauge to display the performance of specific initiatives, business units, or the enterprise
and the individual goals in the context of larger enterprise strategy. Scorecards distil information
into a small number of metrics and targets and provide users with an at‐a‐glance perspective of
information. A scorecard has a graphical list of specific, attainable strategic milestones, combined
with metrics that serve as benchmarks. Specific measures on how well the company has actually
performed specified activities are linked in the scorecard with graphical display highlighting the
status of each goal.
(e) TALLY: It is an accounting application that helps entity to automate processes relating to
accounting of transactions. It also helps to achieve automation of few processes in inventory
management. The latest version has been upgraded to help user achieve TAX compliances also.
It has features such as Remote Access Capabilities, Tax Audit and Statutory Compliance, Payroll,
Excise for Manufacturers, Multilingual Support, VAT Composition Returns, TDS, VAT (Value Added
Tax), Rapid Implementation, Real Time Processing, Dynamic Interactive Reports and Unique Drill-
Down Facility, Unlimited Companies and Periods of Accounting.

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© The Institute of Chartered Accountants of India
Test Series: March, 2018
MOCK TEST PAPER
INTERMEDIATE (IPC): GROUP – II
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – B: STRATEGIC MANAGEMENT
SUGGESTED ANSWERS/HINTS

1. (a) Corporate culture refers to values, beliefs, business principles, traditions, ways of operating, and
internal work environment. An organization’s culture is either an important contributor or an
obstacle to successful strategy execution. The beliefs, vision, objectives, business approaches and
practices underpinning a company's strategy may be compatible with its culture or not. When they
are, the culture becomes a valuable ally in strategy implementation and execution. When the
culture is in conflict with some aspect of the company's direction, performance ta rgets or strategy,
the culture becomes a stumbling block that impedes successful strategy implementation and
execution.
A culture grounded in values, practices, and behavioural norms that match what is needed for good
strategy execution helps energize people throughout the company to do their jobs in a strategy-
supportive manner, adding significantly to the power and effectiveness of strategy execution.
(b) Strategic management is essential for the survival and growth of all types of firms. The following
are the major reasons due to which firms should engage in strategic management:
 Strategic management helps organisations to be more proactive instead of reactive in shaping
its future.
 Strategic management provides framework for all the major business decisions of an
enterprise.
 Strategic management is concerned with ensuring a good future for the firm.
 Strategic management serves as a corporate defence mechanism against mistakes and
pitfalls.
(c) Six Sigma is a total management commitment and philosophy of excellence, customer focus,
process improvement. Six Sigma is about making every area of the organization better able to
meet the changing needs of customers, markets, and technologies - with benefits for employees,
customers, and shareholders. So the six sigma is not merely a quality initiative, it is a business
initiative.
(d) While strategy formulation is a process of finalizing strategy, strategy implementation is the
managerial exercise of putting a chosen strategy into place. Strategy formulation involves choice
between various alternatives. Strategy execution deals with supervising the ongoing pursuit of
strategy, making it work, improving the competence with which it is executed and showing
measurable progress in achieving the targeted results. Strategic implementation is concerned with
translating a decision into action.
It involves allocation of resources to new courses of action that need to be undertaken. There may
be a need for adapting the organization’s structure to handle new activities as well as training
personnel and devising appropriate system.
It is crucial to realize the difference between the formulation and implementation because both
require very different skills. A business organization will be successful only when the strategy
formulation is sound and implementation is excellent.

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(e) A manager working on a strategic decision has to balance opportunities, influences and constraints.
These opportunities emanate from various sources including the socio -cultural elements of
environment. Socio-cultural factors consist of factors such as traditions, values and beliefs, literacy
and education, the ethical standards, stratification, conflict, cohesiveness and so forth. These
factors are also evolving in the sense that there are changes in the preferences, value systems,
education level and so on. Managers must segregate the factors that have a bearing on the
organisation and consider them while taking strategic decisions. Some of these factors can be
managed to an extent, however, there will be several others that are beyond the control of a
manager.
2. (a) (i) Correct: A strategic manager has to set the long term objectives, future oriented plans by
appreciating the competitive environment. Without bifurcating grand strategies and long -term
objectives into annual objectives and short-term strategies, implementation of the strategies
is not possible. Dividing objectives, into annual plans help to move forward in a systematic
manner.
(ii) Correct: An industry contains only one strategic group when all sellers pursue essentially
identical strategies and have comparable market positions. At the other extreme, there are as
many strategic groups as there are competitors when each rival pursues a distinctively
different competitive approach and occupies a substantially different competitive posi tion in
the marketplace.
(b) (i) Logistics is a process that integrates the flow of supplies into, through and out of an
organization to achieve a level of service that facilitate movement and availability of materials
in a proper manner. When a company creates a logistics strategy, it is defining the service
levels at which its logistics is smooth and is cost effective.
(ii) Demarketing is a marketing strategy to reduce demand temporarily or permanently -the aim is
not to destroy demand, but only to reduce or shift it. This happens when the demand is too
much to handle. For example, buses are overloaded in the morning and evening, roads are
busy for most of times, zoological parks are over-crowded on Saturdays, Sundays and
holidays. Here demarketing can be applied to regulate demand.
(iii) Service Marketing is applying the concepts, tools, and techniques, of marketing to services.
Service is any activity or benefit that one party can offer to another that is essentially intangible
and non-perishing. These may be from business to consumer and from business to business.
3. (a) Product Life cycle (PLC) which is a graphical depiction of sales over time is an ‘ S’ shaped curve
with four stages – introduction, growth, maturity and decline. The pattern is shared by all product
group and families though the duration for each phase is different in each case. Identification of
PLC stages for a product/service offers useful insights for marketing management.
(b) Functional structure is widely used because of its simplicity and low cost. A functional structure
groups tasks and activities by business function. The functional structure consists of a chief
executive officer or a managing director and limited corporate staff with functional line managers
in dominant functions such as production, accounting, marketing, R&D, engineering and human
resources. Disadvantages of a functional structure are that it forces accountabili ty to the top,
minimizes career development opportunities, etc.
(c) Decision making is a managerial process and function of choosing a particular course of action out
of several alternative courses for the purpose of accomplishment of the organizational g oals.
Decisions are routine, tactical or strategic in nature. Strategic decisions are different from other
decisions that are taken at various levels of the organization during day -to-day working of the
organizations. They have long term implications, steer organisation to its future path and have
organisation wide implications and so on. These decisions are taken considering different internal
and external factors. They are also taken with partial or no definite knowledge of different factors
affecting the decision situation.
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4. The model has been used by General Electric Company (developed by GE with the assistance of the
consulting firm McKinsey & Company) known as “Stop-Light” Strategy Model. This model is also known
as Business Planning Matrix, GE Nine-Cell Matrix and GE Model. The strategic planning approach in
this model has been inspired from traffic control lights. The lights that are used at crossings to manage
traffic are: green for go, amber or yellow for caution, and red for stop. This model us es two factors while
taking strategic decisions: Business Strength and Market Attractiveness. The vertical axis indicates
market attractiveness and the horizontal axis shows the business strength in the industry. The market
attractiveness is measured by a number of factors like:
1. Size of the market.
2. Market growth rate.
3. Industry profitability.
4. Competitive intensity.
5. Availability of Technology.
6. Pricing trends.
7. Overall risk of returns in the industry.
8. Opportunity for differentiation of products and services.
9. Demand variability.
10. Segmentation.
11. Distribution structure (e.g. retail, direct, wholesale) etc.
Business strength is measured by considering the typical drivers like:
1. Market share.
2. Market share growth rate.
3. Profit margin.
4. Distribution efficiency.
5. Brand image.
6. Ability to compete on price and quality.
7. Customer loyalty.
8. Production capacity.
9. Technological capability.
10. Relative cost position.
11. Management caliber, etc.
Business Strength
Strong Average Weak
Attractiven

High
ess
Market

Medium

Low

Figure : The GE Portfolio Matrix

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Zone Strategic Signals
Invest/Expand
Green

Yellow Select/Earn

Red Harvest/Divest

If a product falls in the green section, the business is at advantageous position. To reap the benefits,
the strategic decision can be to expand, to invest and grow. If a product is in the amber or yellow zone,
it needs caution and managerial discretion is called for making the strategic choices. If a product is in
the red zone, it will eventually lead to losses that would make things difficult for organisations. In such
cases, the appropriate strategy should be retrenchment, divestment or liquidation.
5. The prominent areas where the human resource manager can play strategic role are as follows:
1. Providing purposeful direction: The human resource manager must be able to lead people and
the organization towards the desired direction involving people. He has to ensure harmony between
organisational objectives and individual objectives. Objectives are specific aims which must be in
the line with the goal of the organization and the all actions of each person must be consistent with
them.
2. Creating competitive atmosphere: In the present business environment, maintaining competitive
position or gains is an important objective of any business. Having a highly committed and
competent workforce is very important for getting a competitively advantageous position.
3. Facilitation of change: The human resource manager will be more concerned about furthering
the organization not just maintaining it. He has to devote more time to promote acceptance of
change rather than maintaining the status quo.
4. Diversion of workforce: In a modern organization, management of diverse workforce is a great
challenge. Workforce diversity can be observed in terms of male and female, young and old,
educated and uneducated, unskilled and professional employee and so on. Maintaining a congenial
healthy work environment is a challenge for HR Manager. Motivation, maintaining morale and
commitment are some of the key task that a HR manager has to perform.
5. Empowerment of human resources: Empowerment involves giving more power to those who, at
present, have little control what they do and little ability to influence the decisions being made
around them.
6. Building core competency: The human resource manager has an important role to play in
developing core competency by the firm. A core competence is a unique strength of an organization
which may not be shared by others. Organization of business around core competence implies
leveraging the limited resources of a firm. It needs creative, courageous and dynamic leadership
having faith in organization’s human resources.
7. Development of works ethics and culture: A vibrant work culture will have to be developed in
the organizations to create an atmosphere of trust among people and to encourage creative ideas
by the people. Far reaching changes with the help of technical knowledge will be required fo r this
purpose.
6. The term business is wide and amenable to different usages. A business for our purposes can be any
activity consisting of purchase, sale, manufacture, processing, and/or marketing of products and/or
services. It is said that a business exists for profits. Profit, as a surplus of business, accrues to the
owners. It is their share, just as wages are the share of workers. People invest in business for getting
return. For business enterprises, profit is often regarded as the overall measure of performance.
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Business efficiency is often expressed in terms of percentage of profit to sales volume, to capital
employed, to market value of corporate shares and so on. Outside investors also equate profit with the
degree of business efficiency and managerial competence and commit their funds in light of such
equation and other related assessments.
Peter F Drucker has drawn two important conclusions about what is a business that are useful for an
understanding of the term business. The first thing about a business is that it is created and managed
by people. There will be a group of people who will take decisions that will determine whether an
organization is going to prosper or decline, whether it will survive or will eventually perish. This is true
of every business. The second conclusion drawn is that the business cannot be explained in terms of
profit.
The economic criterion of maximising profits for a firm has little relevance in the present times. Profit
maximization, in simple terms is selling at a higher price than the cost. Profit maximization has been
qualified with the long-term perspective and has been modified to include development of wealth, to
include several non-financial factors such as goodwill, societal factors, relations and so on.
A business has some purpose. A valid purpose of business is to create customers. It is for the
businesses to create a customer or market. It is the customer who determines what a business is. The
customer is the foundation of business and keeps it in existence. Organisations seek to balance the
objectives in an appropriate manner. Some of the objectives of business are:
1. Survival
2. Stability
3. Growth
4. Efficiency
5. Profitability
7. Many organizations in order to achieve quick growth, expand or diversify use strategies such as mergers
and acquisitions. Mergers and acquisitions also help in deploying surplus funds.
Merger and acquisition in simple words are defined as a process of combining two or more organizations
together. There is a thin line of difference between the two terms but the impact of combination is
completely different in both the cases.
Some organizations prefer to grow through mergers. Merger is considered to be a p rocess when two or
more organizations join together to expand their business operations. In such a case the deal gets
finalized on friendly terms. Owners of pre-merged entities have right over the profits of new entity. In a
merger two organizations combine to increase their strength and financial gains.
When one organization takes over the other organization and controls all its business operations, it is
known as acquisition. In the process of acquisition, one financially strong organization overpowers the
weaker one. Acquisitions often happen during recession in economy or during declining profit margins.
In this process, one that is financially stronger and bigger establishes it power. The combined operations
then run under the name of the powerful entity. A deal in case of an acquisition is often done in an
unfriendly manner, it is more or less a forced association where the powerful organization takes over a
weaker entity.
Types of Mergers
1. Horizontal merger: Horizontal mergers are combinations of firms engaged in the same industry.
It is a merger with a direct competitor. The principal objective behind this type of mergers is to
achieve economies of scale in the production process by shedding duplication of installations and
functions, widening the line of products, decrease in working capital and fixed assets investment,
getting rid of competition and so on. For example, formation of Brook Bond Lipton India Ltd. through
the merger of Lipton India and Brook Bond.

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2. Vertical merger: It is a merger of two organizations that are operating in the same industry but at
different stages of production or distribution system. This often leads to increased synergies with
the merging firms. If an organization takes over its supplier/producers of raw material , then it leads
to backward integration. On the other hand, forward integration happens when an organization
decides to take over its buyer organizations or distribution channels. Vertical merger results in
operating and financial economies. Vertical mergers help to create an advantageous position by
restricting the supply of inputs or by providing them at a higher cost to other players.
3. Co-generic merger: In co-generic merger two or more merging organizations are associated in
some way or the other related to the production processes, business markets, or basic required
technologies. Such merger include the extension of the product line or acquiring components that
are required in the daily operations. It offers great opportunities to businesses to diver sify around
a common set of resources and strategic requirements. For example, an organization
manufacturing refrigerators can diversify by merging with another organization having business in
kitchen appliances.
4. Conglomerate merger: Conglomerate mergers are the combination of organizations that are
unrelated to each other. There are no linkages with respect to customer groups, customer functions
and technologies being used. There are no important common factors between the organizations
in production, marketing, research and development and technology. In practice, however, there is
some degree of overlap in one or more of these factors.

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Test Series: March, 2017
MOCK TEST PAPER
INTERMEDIATE (IPC) : GROUP – II
PAPER – 5: ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
Wherever necessary suitable assumptions may be made and disclosed by way of a note.
Working Notes should form part of the answer.
Time Allowed: 3 Hours Maximum Marks: 100
1. (a) Kunal Ltd. received a specific grant of Rs. 60 lakhs for acquiring the plant of Rs. 300 lakhs
during 2012-13 having useful life of 10 years. The grant received was credited to deferred
income in the balance sheet. During 2015-16, due to non-compliance of conditions laid down
for the grant, the company had to refund the whole grant to the Government. Balance in the
deferred income on that date was Rs. 42 lakhs and written down value of plant was Rs. 210
lakhs.
(i) What should be the treatment of the refund of the grant and the effect on cost of the fi xed
asset and the amount of depreciation to be charged during the year 2015-2016 in profit
and loss account?
(ii) What should be the treatment of the refund, if grant was deducted from the cost of the
plant during 2012-13 assuming plant account showed the balance of Rs. 168 lakhs as on
1.4.2015?
(b) Meena Limited could not recover an amount of Rs. 16 lakhs from a debtor. The company is
aware that the debtor is in great financial difficulty. The accounts of the company for the year
ended 31-3-2017 were finalized by making a provision @ 25% of the amount due from that
debtor. In May 2017, the debtor became bankrupt and nothing is recoverable from him. Do
you advise the company to provide for the entire loss of Rs. 16 lakhs in books of account for
the year ended 31-3-2017?
(c) On 1st April, 2016, Perfact Construction Ltd. obtained a loan of Rs. 64 crores to be utilized as
under:
(i) Construction of sealink across two cities:
(work was held up totally for a month during the year due to : Rs. 50 crores
high water levels)
(ii) Purchase of equipments and machineries : Rs. 6 crores
(iii) Working capital : Rs. 4 crores
(iv) Purchase of vehicles : Rs. 1,00,00,000
(v) Advance for tools/cranes etc. : Rs. 1,00,00,000
(vi) Purchase of technical know-how : Rs. 2 crores
(vii) Total interest charged by the bank for the year ending 31 st : Rs. 1,60,00,000
March, 2017
Show the treatment of interest by Perfact Construction Ltd.
(d) Annual lease rent = Rs. 80,000 at the end of each year
Lease period = 5 years

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Guaranteed residual value = Rs. 28,000
Fair value at the inception (beginning) of lease = Rs. 3,00,000
Interest rate implicit on lease is 12.6%. The present value factors at 12.6% are 0.89, 0.79, 0.7,
0.622, 0.552 at the end of first, second, third, fourth and fifth year respectively.
Show the Journal entry to record the asset taken on finance lease in the books of the lessee.
(4 x 5 = 20 Marks)
2. (a) G Ltd. came up with public issue of 30,00,000 Equity shares of Rs. 10 each at Rs. 15 per
share. A, B and C took underwriting of the issue in 3 : 2 : 1 ratio.
Applications were received for 27,00,000 shares.
The marked applications were received as under:
A 8,00,000 shares
B 7,00,000 shares
C 6,00,000 shares
Commission payable to underwriters is at 5% on the face value of shares.
(i) Compute the liability of each underwriter as regards the number of shares to be taken
up.
(ii) Pass journal entries in the books of G Ltd. to record the transactions relating to
underwriters.
(b) The following particulars relate to a Limited Company which has gone into voluntary
liquidation. You are required to prepare the Liquidator’s Statement of Account allowing for his
remuneration @ 2½% on all assets realized excluding call money received and 2% on the
amount paid to unsecured creditors including preferential creditors.
Share capital issued:
10,000 Preference shares of Rs. 100 each fully paid up.
50,000 Equity shares of Rs. 10 each fully paid up.
30,000 Equity shares of Rs. 10 each, Rs. 8 paid up.
Assets realized Rs. 20,00,000 excluding the amount realized by sale of securities held by
partly secured creditors.
Rs.
Preferential creditors 50,000
Unsecured creditors 18,00,000
Partly secured creditors (Assets realized Rs. 3,20,000) 3,50,000
Debenture holders having floating charge on all assets of the company 6,00,000
Expenses of liquidation 10,000
A call of Rs. 2 per share on the partly paid equity shares was duly received except in case of
one shareholder owning 1,000 shares.
Also calculate the percentage of amount paid to the unsecured creditors to the total unsecured
creditors. (8 + 8 = 16 Marks)
3. From the following balances extracted from the books of General Insurance Company Limited as
on 31.3.2017 you are required to prepare Revenue Accounts in respect of Fire and marine
Insurance business for the year ended 31.3.2017 and a Profit and Loss Account for the same
period:
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Rs. Rs.
Directors’ Fees 80,000 Interest received 19,000
Dividend received 1,00,000 Fixed Assets (1.4.2016) 90,000
Provision for Taxation Income-tax paid during
(as on 1.4. 2016) 85,000 the year 60,000

Fire Marine
Rs. Rs.
Outstanding Claims on 1.4. 2016 28,000 7,000
Claims paid 1,00,000 80,000
Reserve for Unexpired Risk on 1.4.2016 2,00,000 1,40,000
Premiums Received 4,50,000 3,30,000
Agent’s Commission 40,000 20,000
Expenses of Management 60,000 45,000
Re-insurance Premium (Dr.) 25,000 15,000
The following additional points are also to be taken into account:
(a) Depreciation on Fixed Assets to be provided at 10% p.a.
(b) Interest accrued on investments Rs. 10,000.
(c) Closing provision for taxation on 31.3.2017 to be maintained at Rs. 1,24,138.
(d) Claims outstanding on 31.3.2017 were Fire Insurance Rs. 10,000; Marine Insurance
Rs. 15,000.
(e) Premium outstanding on 31.3.2017 were Fire Insurance Rs. 30,000; Marine Insurance
Rs. 20,000.
(f) Reserve for unexpired risk to be maintained at 50% and 100% of net premiums in respect of
Fire and Marine Insurance respectively.
(g) Expenses of management due on 31.3.2017 were Rs. 10,000 for Fire Insurance and
Rs. 5,000 in respect of marine Insurance. (16 Marks)
4. (a) X Ltd has three departments A, B and C. From the particulars given below compute:
(i) the departmental results and
(ii) the values of stock as on 31st Dec. 2016
1.
A B C
Rs. Rs. Rs.
Stock (on 1.1. 2016) 24,000 36,000 12,000
Purchases 1,46,000 1,24,000 48,000
Actual sales 1,72,500 1,59,400 74,600
Gross Profit on normal selling price 20% 25% 33 1/3%

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2. During the year certain items were sold at discount and these discounts were
reflected in the value of sales shown above. The items sold at discount were:
A B C
Rs. Rs. Rs.
Sales at normal price 10,000 3,000 1,000
Sales at actual price 7,500 2,400 600
(b) Mohan, having head office at Mumbai has a branch at Nagpur. The head office does
wholesale trade only at cost plus 80%. The goods are sent to branch at the wholesale price
viz., cost plus 80%. The branch at Nagpur is wholly engaged in retail trade and the goods are
sold at cost to H.O. plus 100%.
Following details are furnished for the year ended 31 st March, 2017:
Head Office Branch
(Rs.) (Rs.)
Opening stock (as on 1.4.2016) 2,25,000 -
Purchases 25,50,000 -
Goods sent to branch (Cost to H.O. plus 80%) 9,54,000 -
Sales 27,81,000 9,50,000
Office expenses 90,000 8,500
Selling expenses 72,000 6,300
Staff salary 65,000 12,000
You are required to prepare Trading and Profit and Loss Account of the head office and branch
for the year ended 31st March, 2017. (8 + 8 = 16 Marks)
5. (a) A, B and C are partners sharing profits and losses in the ratio of 5:3:2. Their capitals were
Rs. 9,600, Rs. 6,000 and Rs. 8,400 respectively.
After paying creditors, the liabilities and assets of the firm were:
Rs. Rs.
Liability for interest on loans from: Investments 1,000
Spouses of partners 2,000 Furniture 2,000
Partners 1,000 Machinery 1,200
Stock 4,000
The assets realised in full in the order in which they are listed above. B is insolvent.
You are required to prepare a statement showing the distribution of cash as and when
available, applying maximum possible loss procedure.
(b) S Ltd. (a Public Sector Company) provides consultancy and engineering services to its clients.
In the year 2016-17, the Government has set up a commission to decide about the pay
revision. The pay will be revised with respect from 1-1-2012 based on the recommendations
of the commission. The company makes the provision of Rs. 680 lakhs for pay revision in the
financial year 2016-17 on the estimated basis as the report of the commission is yet to come.
As per the contracts with the client on cost plus job, the billing is done on the actual payment
made to the employees and allocated to jobs based on hours booked by these employees on
each job.

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The company discloses through notes to accounts:
“Salaries and benefits include the provision of Rs. 680 lakhs in respect of pay revision. The
amount chargeable from reimbursable jobs will be billed as per the contract when the actual
payment is made”.
The accountant feels that the company should also book/recognise the income by
Rs. 680 lakhs in Profit and Loss Account as per the terms of the contract. Otherwise, it will be
the violation of matching concept & understatement of profit. Comment on the opinion of the
Accountant with reference to relevant accounting standards. (10 + 6 = 16 Marks)
6. From the following information, prepare Profit and Loss Account of ABC Bank Ltd. for the year
ended 31.3. 2017:
(Rs. in ’000)
Interest and Discount 8,860
(Includes interest accrued on investments)
Other Income 220
Interest expended 2,720
Operating expenses 2,830
Interest accrued on Investments 10
Additional Information:
(a) Rebate on bills discounted to be provided for 30
(b) Classification of Advances:
(i) Standard assets 4,000
(ii) Sub-standard assets 2,240
(iii) Doubtful assets(fully unsecured) 390
(iv) Doubtful assets – covered fully by security
Less than 1 year 100
More than 1 year, but less than 3 years 600
More than 3 years 600
(v) Loss assets 376
(c) Provide 35% of the profit towards provision for taxation.
(d) Transfer 25% of the profit to Statutory Reserve.
(16 Marks)
7. (a) Explain “monetary item” as per Accounting Standard 11. How are foreign currency monetary
items to be recognized at each Balance Sheet date? Classify the following as monetary or
non-monetary item:
(i) Share Capital
(ii) Trade Receivables
(iii) Investments
(iv) Fixed Assets.
(b) P Ltd. launched a project for producing product A in Nov. 2014. The company incurred
Rs. 30 lakhs towards Research and Development expenses upto 31 st March, 2016. Due to

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unfavourable market conditions the management feels that it is not possible to manufacture
and sell the product in the market for next so many years.
The management hence wants to defer the expenditure write off to future years.
Advise the company as per the applicable Accounting Standard.
(c) Zoo Ltd. had issued 30,000, 15% convertible debentures of Rs. 100 each on 1 st April, 2013.
The debentures are due for redemption on 1 st March, 2016. The terms of issue of debentures
provided that they were redeemable at a premium of 5% and also conferred option to the
debenture holders to convert 20% of their holding into equity shares (Nominal Value Rs. 10)
at a price of Rs. 15 per share. Debenture holders holding 2500 debentures did not exercise
the option. Calculate the number of equity shares to be allotted to the Debenture holders
exercising the option to the maximum.
(d) W paid a premium to other partners of the firm at the time of his admission to the firm, with a
condition that the will not be dissolved before expiry of five years. The firm is dissolved after
three years. W claims refund of premium.
(i) List the criteria for the calculation of the amount of refund.
(ii) Also list any two conditions when no claim in this respect will arise.
(e) On 1st April, 2015, a company offered 100 shares to each of its 500 employees at Rs. 50 per
share. The employees are given a year to accept the offer. The shares issued under the plan
shall be subject to lock-in on transfer for three years from the grant date. The market price of
shares of the company on the grant date is Rs. 60 per share. Due to post-vesting restrictions
on transfer, the fair value of shares issued under the plan is estimated at Rs. 56 per share.
On 31st March, 2016, 400 employees accepted the offer and paid Rs. 50 per share purchased.
Nominal value of each share is Rs. 10.
Record the issue of share in the books of the company under the aforesaid plan.
(4 x 4 = 16 Marks)

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© The Institute of Chartered Accountants of India
Test Series: March, 2017
MOCK TEST PAPER
INTERMEDIATE (IPC): GROUP – II
PAPER – 5: ADVANCED ACCOUNTING
SUGGESTED ANSWERS/HINTS
1. (a) As per AS-12, ‘Accounting for Government Grants’, “the amount refundable in respect of a
grant related to specific fixed asset should be recorded by reducing the deferred income
balance. To the extent the amount refundable exceeds any such deferred credit, the amount
should be charged to profit and loss statement.
(i) In this case the grant refunded is Rs. 60 lakhs and balance in deferred income is Rs. 42
lakhs, Rs. 18 lakhs shall be charged to the profit and loss account for the year 2015 -16.
There will be no effect on the cost of the fixed asset and depreciation charged will be on
the same basis as charged in the earlier years.
(ii) If the grant was deducted from the cost of the plant in the year 2012-13 then, AS-12
states that the amount refundable in respect of grant which relates to specific fixed assets
should be recorded by increasing the book value of the assets, by the amount refundable.
Where the book value of the asset is increased, depreciation on the revised book value
should be provided prospectively over the residual useful life of the asset. Therefore, in
this case, the book value of the plant shall be increased by Rs. 60 lakhs. The increased
cost of Rs.60 lakhs of the plant should be amortized over 7 years (residual life).
Depreciation charged during the year 2015-16 shall be (1,68 + 60)/7 years = Rs. 32.57
lakhs presuming the depreciation is charged on SLM.
(b) As per AS 4, ‘Contingencies and Events Occurring after the Balance Sheet Date’, adjustments
to assets and liabilities are required for events occurring after the balance sheet date if such
event provides/relates to additional information to the conditions existing at the balance sheet
date and is also materially affecting the valuation of assets and liabilities on the balance sheet
date.
As per the information given in the question, the company was aware that the debtor was
already in a great financial difficulty at the time of closing of accounts. Bankruptcy of the debtor
in May 2017 is only an additional information to the condition existing on the balance sheet
date. Also the effect of a debtor becoming bankrupt is material as total amount of Rs. 16 lakhs
will be a loss to the company. Therefore, the company is advised to provide for the entire
amount of Rs. 16 lakhs in the books of account for the year ended 31 st March, 2017.
(c) According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes
substantial period of time to get ready for its intended use.
As per para 6 of the standard, borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalised as part of the cost of that
asset. Other borrowing costs should be recognised as an expense in the period in which they
are incurred.
The treatment of interest by Perfact Construction Ltd. can be shown as:
Qualifying Interest to be Interest to
Asset capitalized be charged
to Profit &
Loss A/c
Rs. Rs.
Construction of sea-link Yes 1,25,00,000 [1,60,00,000*(50/64)]
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Purchase of equipments No 15,00,000 [1,60,00,000*(6/64)]
and machineries
Working capital No 10,00,000 [1,60,00,000*(4/64)]
Purchase of vehicles No 2,50,000 [1,60,00,000*(1/64)]
Advance for tools, cranes No. 2,50,000 [1,60,00,000*(1/64)]
etc.
Purchase of technical No
know-how 5,00,000 [1,60,00,000*(2/64)]
Total 1,25,00,000 35,00,000
(d) Journal entry in the books of Lessee
Rs. Rs.
Asset A/c Dr. 2,99,776
To Lessor 2,99,776
(Being recognition of finance lease as an asset and a liability)
Working Note:
Year Lease Payments Discounting Factor Present Value
Rs. (12.6%) Rs.
1 80,000 0.89 71,200
2 80,000 0.79 63,200
3 80,000 0.70 56,000
4 80,000 0.622 49,760
5 80,000 0.552 44,160
5 28,000 (GRV) 0.552 15,456
2,99,776
2. (a) (i) Computation of liability of underwriters in respect of shares
(In shares)
A B C
Gross liability (Total Issue – Promoters etc.) in
agreed ration of 3 : 2 : 1 15,00,000 10,00,000 5,00,000
Less: Unmarked applications (Subscribed
shares – marked shares) in 3 : 2 : 1 (3,00,000) (2,00,000) (1,00,000)
Marked shares as per agreed ratio 12,00,000 8,00,000 4,00,000
Less: Marked applications actually received (8,00,000) (7,00,000) (6,00,000)
Shortfall / surplus in marked shares 4,00,000 1,00,000 (2,00,000)
Surplus of C distributed to A & B in 3:2 ratio (1,20,000) (80,000) 2,00,000
Net liability for underwriting shares 2,80,000 20,000 Nil
(ii) Journal Entries in the books of G Ltd.
Rs. Rs.
A’s Account Dr. 42,00,000
B’s Account Dr. 3,00,000
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© The Institute of Chartered Accountants of India
To Share Capital Account 30,00,000
To Securities Premium Account 15,00,000
(Being the shares to be taken up by the underwriters)
Underwriting Commission Account Dr. 15,00,000
To A’s Account 7,50,000
To B’s Account 5,00,000
To C’s Account 2,50,000
(Being the underwriting commission due to the
underwriters)
Bank Account Dr. 34,50,000
To A’s Account 34,50,000
(Being the amount received from underwriter A for the
shares taken up by him after adjustment of his
commission)
B’s Account Dr. 2,00,000
To Bank Account 2,00,000
(Being the amount paid to underwriter B after
adjustment of the shares taken by him against
underwriting commission due to him)
C’s Account Dr. 2,50,000
To Bank Account 2,50,000
(Being the underwriting commission paid to C)
Note: C had sold in excess of the underwriting obligation and hence he will not be
required to purchase any shares but will get commission for underwriting.
(b) (i) Liquidator’s Statement of Account
Rs. Rs.
To Assets Realised 20,00,000 By Liquidator’s remuneration
To Receipt of call 2.5% on 23,20,000 58,000
money on 29,000 2% on 50,000 1,000
equity shares @ 2 58,000 2% on 13,12,745 (W.N.3) 26,255 85,255
per share
By Liquidation Expenses 10,000
By Debenture holders
having a floating charge 6,00,000
on all assets

By Preferential creditors 50,000
By Unsecured creditors 13,12,745
20,58,000 20,58,000


Total assets realised excluding call money = Rs. 20,00,000 + Rs. 3,20,000 = Rs. 23,20,000
3

© The Institute of Chartered Accountants of India
(ii) Percentage of amount paid to unsecured creditors to total unsecured creditors
13,12,745
= 100  71.73%
18,30,000
Working Notes:
1. Unsecured portion in partly secured creditors=Rs. 3,50,000-Rs. 3,20,000 = Rs. 30,000
2. Total unsecured creditors = 18,00,000 + 30,000 (W.N.1) = Rs. 18,30,000
3. Liquidator’s remuneration on payment to unsecured creditors
Cash available for unsecured creditors after all payments including payment to
preferential creditors & liquidator’s remuneration on it = Rs. 13,39,000
2
Liquidator’s remuneration on unsecured creditors = 13,39,000  Rs. 26,255
102
or on Rs. 13,12,754 x 2/100 = Rs. 26,255
3. Form B – RA (Prescribed by IRDA)
General Insurance Co. Ltd
Revenue Account for the year ended 31 st March, 2017
Fire and Marine Insurance Businesses
Schedule Fire Marine
Current Year Current Year
Rs. Rs.
Premiums earned (net) 1 4,27,500 1,40,000
Profit / (Loss) on sale / redemption of — —
investments
Others (to be specified)
Interest, Dividends and Rent – Gross — —

Total (A) 4,27,500 1,40,000
Claims incurred (net) 2 82,000 88,000
Commission 3 40,000 20,000
Operating expenses related to Insurance 4 70,000 50,000
business
Premium Deficiency
Total (B) 1,92,000 1,58,000
Profit from Fire / Marine Insurance business
(A-B) 2,35,500 (18,000)
Schedules forming part of Revenue Account
Schedule –1
Premiums earned (net) Fire Current Marine
Year Current
Year
Rs. Rs.
Premiums from direct business written 4,80,000 3,50,000
Less: Premium on reinsurance ceded (25,000) (15,000)
Total Premium earned 4,55,000 3,35,000
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© The Institute of Chartered Accountants of India
Less: Change in provision for unexpired risk (27,500) (1,95,000)
4,27,500 1,40,000
Schedule – 2
Claims incurred (net) 82,000 88,000
Schedule – 4
Operating expenses related to insurance business
Expenses of Management 70,000 50,000
Form B-PL
General Insurance Co. Ltd.
Profit and Loss Account for the year ended 31st March, 2017
Particulars Schedule Current Year Previous Year
Rs. Rs.
Operating Profit/(Loss)
(a) Fire Insurance 2,35,500
(b) Marine Insurance (18,000)
(c) Miscellaneous Insurance —
Income From Investments
Interest, Dividend & Rent–Gross 1,29,000
Other Income (To be specified)
Total (A) 3,46,500
Provisions (Other than taxation) —
Depreciation 9,000
Other Expenses –Director’s Fee 80,000
Total (B) 89,000
Profit Before Tax 2,57,500
Provision for Taxation 99,138
Profit After Tax 1,58,362
Working Notes:
Fire Marine
Rs. Rs.
1. Claims under policies less reinsurance
Claims paid during the year 1,00,000 80,000
Add: Outstanding on 31st March, 2017 10,000 15,000
1,10,000 95,000
Less: Outstanding on 1st April, 2016 (28,000) (7,000)
82,000 88,000
2. Expenses of management
Expenses paid during the year 60,000 45,000
Add: Outstanding on 31st March, 2017 10,000 5,000
70,000 50,000
3. Premiums less reinsurance
Premiums received during the year 4,50,000 3,30,000


Interest and dividend in case can’t be bifurcated between fire and marine thus taken to profit and loss account.
5

© The Institute of Chartered Accountants of India
Add: Outstanding on 31st March, 2017 30,000 20,000
4,80,000 3,50,000
Less: Reinsurance premiums (25,000) (15,000)
4,55,000 3,35,000
4. Reserve for unexpired risks is 50% of net premium for fire insurance and 100% of net
premium for marine insurance. Reserve for unexpired risks for fire insurance
= Rs. 4,55,000 x 50% = Rs. 2,27,500. Opening Balance in reserves for unexpired risk for
fire insurance was Rs. 2,00,000. Hence, additional transfer to reserve for fire insurance
in the year will be Rs. 27,500. On similar basis of calculation, the additional transfer to
reserve for marine insurance will be Rs. 1,95,000
5. Provision for taxation account
Rs. Rs.
31.3.2017 To Bank A/c 1.4.2016 By Balance b/d 85,000
(taxes paid) 60,000 31.3.2017 By P & L A/c (Bal Fig) 99,138
31.3.2017 To Balance c/d 1,24,138
1,84,138 1,84,138
4. (a) 1. Calculation of Departmental Results (Actual Gross Profit):
A (Rs.) B (Rs.) C (Rs.)
Actual Sales 1,72,500 1,59,400 74,600
Add back: Discount (Refer W.N.) 2,500 600 400
Normal sale 1,75,000 1,60,000 75,000
Gross profit % on normal sales 20% 25% 33.33%
Normal gross profit 35,000 40,000 25,000
Less: Discount (2,500) (600) (400)
Actual gross profit 32,500 39,400 24,600
2. Computation of value of stock as on 31st Dec. 2016
Departments A B C
Rs. Rs. Rs.
Stock (on 1.1. 2016) 24,000 36,000 12,000
Add: Purchases 1,46,000 1,24,000 48,000
1,70,000 1,60,000 60,000
Add: Actual gross profit 32,500 39,400 24,600
2,02,500 1,99,400 84,600
Less: Actual Sales (1,72,500) (1,59,400) (74,600)
Closing stock as on 31.12.2016 (bal.fig.) 30,000 40,000 10,000
Working Note:
Calculation of discount on sales:
Departments A B C
Rs. Rs. Rs.
Sales at normal price 10,000 3,000 1,000
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© The Institute of Chartered Accountants of India
Less: Sales at actual price (7,500) (2,400) (600)
2,500 600 400
(b) Trading and Profit and Loss A/c
For the year ended 31 st March 2017
Head Branch Head Branch
office office
Rs. Rs. Rs. Rs.
To Opening stock 2,25,000 - By Sales 27,81,000 9,50,000
To Purchases 25,50,000 - By Goods sent
to branch 9,54,000 -
To Goods received By Closing stock 7,00,000 99,000
from head office - 9,54,000 (W.N.1 & 2)
To Gross profit c/d 16,60,000 95,000
44,35,000 10,49,000 44,35,000 10,49,000
To Office expenses 90,000 8,500 By Gross profit 16,60,000 95,000
b/d
To Selling expenses 72,000 6,300
To Staff salaries 65,000 12,000
To Branch Stock
Reserve (W.N.3) 44,000 -
To Net Profit 13,89,000 68,200
16,60,000 95,000 16,60,000 95,000
Working Notes:
(1) Calculation of closing stock of head office: Rs.
Opening Stock of head office 2,25,000
Goods purchased by head office 25,50,000
27,75,000
 (20,75,000)
Less: Cost of goods sold [37,35,000 x 100/180]
7,00,000
(2) Calculation of closing stock of branch: Rs.
Goods received from head office [At invoice value] 9,54,000
Less: Invoice value of goods sold [9,50,000 x 180/200] (8,55,000)
99,000
(3) Calculation of unrealized profit in branch stock:
Branch stock Rs. 99,000
Profit included 80% of cost
Hence, unrealized profit would be = Rs. 99,000 x 80/180 = Rs. 44,000


Rs. 27,81,000 + Rs. 9,54,000
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© The Institute of Chartered Accountants of India
5. (a)
Realisation Interest on Interest on
loans from loans
partners’
spouses
A B C Total
Rs. Rs Rs. Rs. Rs. Rs. Rs.
Balances due (1) 2,000 1,000 9,600 6,000 8,400 24,000
(i) Sale of investments 1,000 (1,000) -
1,000 1,000
(ii) Sale of furniture 2,000 (1,000) (1,000)

(iii) Sale of machinery 1,200
Maximum possible
loss Rs. 22,800
(total of capitals
Rs. 24,000 less cash
available Rs. 1,200)
allocated to partners in
the profit sharing ratio
i.e. 5 : 3 : 2 (11,400) (6,840) (4,560) (22,800)
Amounts at credit (1,800) (840) 3,840 1,200
Deficiency of A and B written off against C 1,800 840 (2,640)
Amount paid (2) – – 1,200 1,200
Balances in capital accounts (1 – 2) = (3) 9,600 6,000 7,200 22,800
(iv) Sale of stock 4,000
Maximum possible loss 18,800 (22,800 – 4,000)
Allocated to partners in the ratio 5 : 3 : 2 (9,400) (5,640) (3,760) (18,800)
Amounts at credit and cash paid (4) 200 360 3,440 (4,000)
Balances in capital accounts left unpaid —Loss 9,400 5,640 3,760 18,800
(3 – 4) = (5)

(b) As per AS 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, where some or all of
the expenditure required to settle a provision is expected to be reimbursed by another party,
the reimbursement should be recognised when, and only when, it is virtually certain that
reimbursement will be received if the enterprise settles the obligation. The reimbursement
should be treated as a separate asset. The amount recognised for the reimbursement should
not exceed the amount of the provision.
Accordingly, potential loss to an enterprise may be reduced or avoided because a contingent
liability is matched by a related counter-claim or claim against a third party. In such cases, the
amount of the provision is determined after taking into account the probable recovery under
the claim if no significant uncertainty as to its measurability or collectability exists. In this case,
the provision of salary to employees of Rs. 680 lakhs will be ultimately collected from the
client, as per the terms of the contract. Therefore, the liability of Rs. 680 lakhs is matched by
the counter claim from the client. Hence, the provision for salary of employees should be
matched with the reimbursable asset to be claimed from the client. It appears that the whole
amount of Rs. 680 lakhs is recoverable from client and there is no significant uncertainty about
the collection. Hence, the net charge to profit and loss account should be nil.
The opinion of the accountant regarding recognition of income of Rs. 680 lakhs is not as per
AS-29 and also the concept of prudence will not be followed if Rs. 680 lakhs is simultaneously
recognized as income. Rs. 680 lakhs is not the revenue at present but only reimbursement of
8

© The Institute of Chartered Accountants of India
claim for which an asset is created. However, the accountant is correct to the extent as that
non- recognition of Rs. 680 lakhs as income will result in the understatement of profit. To
avoid this, in the statement of profit and loss, expense relating to provision may be presented
net of the amount recognized for reimbursement.
6. ABC Bank Ltd.
Profit and Loss Account for the year ended 31st March, 2017
(Rs. in ’000)
Particulars Schedule Year ended on 31st March, 2013
No.
I. Income
Interest earned (W.N. 1) 13 8,830
Other income 14 220
Total 9,050
II. Expenditure
Interest expended 15 2,720
Operating expenses 16 2,830
Provisions and contingencies (W.N. 4) 2,513.95
Total 8,063.95
III. Profit/Loss
Net profit/(loss) for the year 986.05
Profit/(loss) brought forward Nil
Total 986.05
IV. Appropriations
Transfer to statutory reserve @ 25% 246.51
Balance carried to balance sheet 739.54
Total 986.05
Working Notes:
1. Schedule 13 – Interest Earned
(Rs. ’000s)
(i) Interest and discount 8,860
Less: Rebate on bills discounted not provided (30)
Interest accrued on investments (10) 8,820
(ii) Interest accrued on investments 10
8,830
Note: Interest accrued on investments to be shown separately under Interest Earned.
2. Calculation of Provisions and Contingencies
Assets Amount % of Provision Provision
(Rs. in ’000) (Rs. in ’000)
Standard assets 4,000 0.40 16

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© The Institute of Chartered Accountants of India
Sub-standard assets* 2,240 15 336
Doubtful assets (unsecured) 390 100 390
Doubtful assets – covered by security
Less than 1 year 100 25 25
More than 1 year but less than 3 years 600 40 240
More than 3 years 600 100 600
Loss assets 376 100 376
Total provision 8,306 1,983
*Note: It is assumed that sub-standard assets are fully secured.
3. Calculation of provision on tax = 35% (Total income – Total expenditure)
= 35% of Rs. [(9,050 – (2,720 + 2,830 + 1,983)]
= 35% of Rs. 1,517
= Rs. 530.95
4. Total provisions and contingencies = Rs. 1,983 + Rs. 530.95 = Rs. 2,513.95.
7. (a) As per AS 11 ‘The Effects of Changes in Foreign Exchange Rates’, Monetary items are money
held and assets and liabilities to be received or paid in fixed or determinable amounts of
money.
Foreign currency monetary items should be reported using the closing rate at each balance
sheet date. However, in certain circumstances, the closing rate may not reflect with reasonable
accuracy the amount in reporting currency that is likely to be realised f rom, or required to
disburse, a foreign currency monetary item at the balance sheet date. In such circumstances,
the relevant monetary item should be reported in the reporting currency at the amount which
is likely to be realised from or required to disburse, such item at the balance sheet date.
Share capital Non-monetary
Trade receivables Monetary
Investments Non-monetary
Fixed assets Non-monetary
(b) As per AS 26 “Intangible Assets”, expenditure on research should be recognised as an
expense when it is incurred. An intangible asset arising from development (or from the
development phase of an internal project) should be recognized if and only if, an enterprise
can demonstrate all of the conditions specified in para 44 of the standard. An intangible asset
(arising from development) should be derecognised when no future economic benefits are
expected from its use according to the provisions of AS 26. Therefore, the management
cannot defer the expenditure write off to future years and the company is required to expense
the entire amount of Rs. 30 lakhs in the Profit and Loss account of the year ended 31 st March,
2016.
(c) Calculation of number of equity shares allotted to be debenture holders
No. of debenture
Total number of debentures 30,000
Less: Debenture holders not opted for conversion (2,500)
27,500
Option for conversion 20%

10

© The Institute of Chartered Accountants of India
20 5,500
Number of debentures for conversion (27,500 x )
100
Redemption value at a premium of 5% (5,500 x Rs. 105) Rs. 5,77,500
Rs. 5,77,500 38,500 shares
Number of equity shares to be allotted
Rs. 15
(d) If the firm is dissolved before the term expires, as is the case, W being a partner who has paid
premium on admission will have to be repaid / refunded
The criteria for calculation of refund amount are:
(i) Terms upon which admission was made,
(ii) The time period for which it was agreed that the firm will not be dissolved,
(iii) The time period for which the firm has already been in existence.
No claim for refund will arise if:
(i) The firm is dissolved due to death of a partner,
(ii) If the dissolution of the firm is basically because of misconduct of W,
(iii) If the dissolution is through an agreement and such agreement does not have a
stipulation for refund of premium.
(e) Fair value of an option = Rs. 56 – Rs. 50 = Rs. 6
Number of shares issued = 400 employees x 100 shares/employee = 40,000 shares
Fair value of ESPP = 40,000 shares x Rs. 6 = Rs. 2,40,000
Vesting period = 1 month
Expenses recognized in 2015-16 = Rs. 2,40,000
Date Particulars Rs. Rs.
31.03.2016 Bank (40,000 shares x Rs. 50) Dr. 20,00,000
Employees compensation expense A/c Dr. 2,40,000
To Share Capital (40,000 shares x Rs.10) 4,00,000
To Securities Premium (40,000 shares x 18,40,000
Rs. 46)
(Being option accepted by 400 employees &
payment made @ Rs. 56 share)
Profit & Loss A/c Dr. 2,40,000
To Employees compensation expense A/c 2,40,000
(Being Employees compensation expense
transferred to Profit & Loss A/c)

11

© The Institute of Chartered Accountants of India
Test Series: March, 2017
MOCK TEST PAPER
INTERMEDIATE (IPC) GROUP – II
PAPER – 6: AUDITING AND ASSURANCE
Question No. 1 is compulsory.
Attempt any five questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100

1. Discuss the following:
(a) Weaknesses in the design of the internal control system and non-compliance with identified
control procedures amongst other conditions or events which increase the risk of fraud or
error.
(b) The report of an independent auditor is the only real safeguard available to the various parties
interested in the financial affairs of the entity. It is due to the independence of the auditor,
leading to an objective report, that the risk of people being misled by untrue or fraudulent
financial statement is minimized.
(c) Even when information to be used as audit evidence is obtained from sources external to the
entity, circumstances may exist that could affect its reliability. While recognising that
exceptions may exist, generalisations about the reliability of audit evidence may b e useful.
(d) SA 320 on ‘Materiality in Planning and Performing an Audit’ requires that the auditor should
consider materiality and its relationship with audit risk when conducting an audit.
(5 x 4 = 20 Marks)
2. State with reason (in short) whether the following statements are correct or incorrect (Answer any
eight):
(i) Fraudulent financial reporting does not involves intentional misstatements including omissions
of amounts or disclosures in financial statements to deceive financial statement users.
(ii) An auditor conducting an audit in accordance with SAs is responsible for obtaining absolute
assurance that the financial statements taken as a whole are free from material misstatement,
whether caused by fraud or error.
(iii) ‘Significant Risk’ is an identified and assessed risk of material misstatement that, in the
auditor’s judgment, requires special audit consideration.
(iv) Teeming and lading is one of the techniques of inflating cash payments.
(v) Observation consists of seeking information of knowledgeable persons, both financial and
non- financial, within the entity or outside the entity.
(vi) Sufficiency is the measure of the quality of audit evidence.
(vii) As per section 138 of the Companies Act, 2013 private companies are not required to appoint
internal auditor.
(viii) The first auditor of a Government company was appointed by the Board in its meeting after 10
days from the date of registration.
(ix) Director's relative can act as an auditor of the company.
(x) If an LLP (Limited Liability Partnership Firm) is appointed as an auditor of a company, every
partner of a firm shall be authorized to act as an auditor. (8 x 2 = 16 Marks)

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3. How will you vouch and/or verify the following:
(a) Sale proceeds of Scrap Material.
(b) Trade Marks and Copyrights.
(c) Machinery acquired under Hire-purchase system.
(d) Work-in-progress. (4 x 4 = 16 Marks)
4. (a) State the circumstances which could lead to any of the following in an Auditor’s Report:
(i) Modification of opinion
(ii) Disclaimer of opinion
(iii) Adverse opinion
(iv) Qualified opinion. (4 x 2 = 8 Marks)
(b) State the significant difficulties encountered during audit with reference to SA -260
(Communication with Those Charged with Governance). (4 Marks)
(c) Explain what do you mean by Analytical procedures. How such procedures are helpful in
auditing? (4 Marks)
5. (a) What are accounting estimates according to the Standards on Auditing 540? Give examples.
(6 Marks)
(b) “An auditor who before the completion of the engagement is requested to change the
engagement to one which provides a lower level of assurance should consider the
appropriateness of doing so.” Discuss. (6 Marks)
(c) How would you assess the reliability of internal control system in Computerised Information
System (CIS) environment? (4 Marks)
6. (a) Anandbhai & Co. Ltd. issued shares to the equity shareholders in the proportion of one bonus
share for every three existing shares. As an auditor of the Company, how would you verify this
issue? (6 Marks)
(b) An audit of Expenditure is one of the major components of Government Audit. In the context
of ‘Government Expenditure Audit’, write in brief, what do you understand by:
(i) Audit against Rules and Orders
(ii) Audit of Sanctions
(iii) Audit against Provision of Funds
(iv) Propriety Audit
(v) Performance Audit. (5 x 2 = 10 Marks)
7. Write short notes on any four of the following:
(a) Issue of Shares at a Discount
(b) Filling of a casual vacancy of auditor in respect of a company audit.
(c) Appointment of First Auditor of a Government Company.
(d) Meaning of the term “subsequent events” as used in the SA 560.
(e) General principles of verification of Assets (4 x 4 = 16 Marks)

2

© The Institute of Chartered Accountants of India
Test Series: March, 2017
MOCK TEST PAPER
INTERMEDIATE (IPC): GROUP – II
PAPER – 6: AUDITING AND ASSURANCE
SUGGESTED ANSWERS / HINTS
1. (a) Conditions which Increases the Risk of Fraud or Error: In planning and performing an
examination, the auditor should take into consideration the risk of material misstatements of
the financial information caused by fraud or error. Weaknesses in the design of the internal
control system and non-compliance with identified control procedures amongst other
conditions or events which increase the risk of fraud or error are-
(i) Weaknesses in the design of internal control system and non-compliance with the laid
down control procedures, e.g., a single person is responsible for the receipt of all dak
and marking it to the relevant sections or two persons are responsible for receipt of dak
but the same is not followed in actual practice, etc.
(ii) Doubts about the integrity or competence of the management, e.g., domina tion by one
person, high turnover rate of employees, frequent change of legal counsels or auditors,
significant and prolonged understaffing of the accounts department, etc.
(iii) Unusual pressures within the entity, for example, industry is doing well but the company
is not performing accordingly, heavy dependence on a single line of product, inadequate
working capital, entity needs raising share prices to support the market price in the wake
of public offer, etc.
(iv) Unusual transactions such as transactions with related parties, excessive payment for
certain services to lawyers, etc.
(v) Problems in obtaining sufficient and appropriate audit evidence, e.g., inadequate
documentation, significant differences between the figures as per the accounting records
and confirmation received from third parties, etc.
(b) Importance of Audit by an Independent Professional Auditor: The principal advantage of
an independent audit lies in the fact that the society is able to get an informed, objective and
forthright opinion on the financial statements of enterprises which are used in making
significant economic decisions by interested segments of the society, e.g., shareholders, trade
payables, bankers, etc. Irrespective of the fact whether audit is compulsory, statutory or
voluntary, the audit of accounts by an independent professional auditor becomes important
for every individual and every type of organisation.
It is only through audited accounts by an independent professional auditor that the
shareholders of a company are assured that the funds invested by them are safe and they are
being used for only the purposes for which they were raised and collected. The chief utility of
audit lies in ensuring reliable financial statements on the basis of which the state of affa irs
may be easy to understand. Information contained in the statement of accounts of a business
are primarily intended for the owners.
However, many others make use of the information for different purposes -
 Management of the business uses it for decision-making purposes.
 Lenders and trade payables examine it to establish the degree of safety of their money.

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© The Institute of Chartered Accountants of India
 Government levies tax putting a prima facie reliance on the statements and regulates the
socio-economic state of affairs on a summary view of the information contained in various
accounting statement made available to it.
 Investors review the information for making investment decisions.
 Financial analysts can use the information to assess the performance of an entity.
Financial statements are of great significance to workers as well. They want to be assured
that reasonable and legitimate share of the revenue earned by the organisation has been paid
to them as bonus and the distribution pattern has not violated the norms of social justice.
To ensure the acceptable degree of reliability and accuracy of the financial statements,
examination and appraisal of accounts and the financial picture by an independent auditor is
necessary.
In the company form of organisation, there is a divorce between ownership and management
- shareholders are so scattered that they have no direct control on the day -to-day
administration of the company while in a proprietary concern, accounts may be audited to get
funds from financial institution, etc. and a partnership firm may get its accounts audited to
decide questions such as valuation of goodwill at the time of admission, retirement and death
of a partner.
The report of an independent auditor is, therefore, the only real safeguard available to the
various parties interested in the financial affairs of the entity. It is due to the independence of
the auditor, leading to an objective report, that the risk of people being misled by untrue or
fraudulent financial statement is minimized. As a by-product, managements get attuned to
open and truthful financial statements.
(c) Reliability of Audit Evidence: SA 500 on “Audit Evidence” provides that the reliability of
information to be used as audit evidence, and therefore of the audit evidence itself, is
influenced by its source and its nature, and the circumstances under which it is obtained,
including the controls over its preparation and maintenance where relevant. Therefore,
generalisations about the reliability of various kinds of audit evidence are subject to important
exceptions. Even when information to be used as audit evidence is obtained from sources
external to the entity, circumstances may exist that could affect its reliability. For example,
information obtained from an independent external source may not be relia ble if the source is
not knowledgeable, or a management’s expert may lack objectivity. While recognising that
exceptions may exist, the following generalisations about the reliability of audit evidence may
be useful:
(1) The reliability of audit evidence is increased when it is obtained from independent
sources outside the entity.
(2) The reliability of audit evidence that is generated internally is increased when the related
controls, including those over its preparation and maintenance, imposed by the entity are
effective.
(3) Audit evidence obtained directly by the auditor (for example, observation of the
application of a control) is more reliable than audit evidence obtained indirectly or by
inference (for example, inquiry about the application of a control).
(4) Audit evidence in documentary form, whether paper, electronic, or other medium, is more
reliable than evidence obtained orally (for example, a contemporaneously written record
of a meeting is more reliable than a subsequent oral representation of the matters
discussed).

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(5) Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles, or documents that have been filmed, digitized or
otherwise transformed into electronic form, the reliability of which may depend on the
controls over their preparation and maintenance.
(d) Relationship between Materiality and Audit Risk: SA 320 on ‘Materiality in Planning and
Performing an Audit’ requires that the auditor should consider materiality and its relationship
with audit risk when conducting an audit. Materiality depends on the size and the nature of the
items judged in the particular circumstances of its misstatement.
The audit should be planned so that audit risk is kept at an acceptably low leve l. There is an
inverse relationship between Materiality and the degree of audit risk. Higher the materiality
level the lower the audit risk and vice-versa. After the auditor has assessed the inherent and
control risks, he should consider the level of detection risk that he is prepared to accept and,
based upon his judgment, select appropriate substantive audit procedures. If the auditor does
not perform any substantive procedures, detection risk, that is, the risk that the auditor will fail
to detect a misstatement, will be high.
The auditor’s assessment of audit risk may change during the course of an audit according to
the need and development of the circumstances.
2. (i) Incorrect: Fraudulent financial reporting involves intentional misstatements including omissions of
amounts or disclosures in financial statements to deceive financial statement users. It can be
caused by the efforts of management to manage earnings in order to deceive financial statement
users by influencing their perceptions as to the entity’s performance and profitability.
(ii) Incorrect: An auditor conducting an audit in accordance with SAs is responsible for obtaining
reasonable assurance that the financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error.
(iii) Correct: SA 315 “Identifying and Assessing the Risk of Material Misstatement through
understanding the Entity and its Environment” defines ‘significant risk’ as an identified and
assessed risk of material misstatement that, in the auditor’s judgment, requires special audit
consideration.
(iv) Incorrect: Teeming and Lading is one of the techniques of suppressing cash receipts and
not of inflating cash payments. Money received from one customer is misappropriated and the
account is adjusted with the subsequent receipt from another customer and so on.
(v) Incorrect: Inquiry consists of seeking information of knowledgeable persons, both financial
and non- financial, within the entity or outside the entity.
(vi) Incorrect: Appropriateness is the measure of the quality of audit evidence. On the other hand,
sufficiency is the measure of the quantity of audit evidence.
(vii) Incorrect: Section 138 of the Companies Act, 2013 requires every private company to appoint
an internal auditor having turnover of ` 200 crore or more during the preceding financial year;
or outstanding loans or borrowings from banks or public financial institutions exceeding ` 100
crore or more at any point of time during the preceding financial year.
(viii) Incorrect: According to section 139(7) of the Companies Act, 2013, in the case of a
Government company, the first auditor shall be appointed by the Comptroller and Auditor -
General of India within 60 days from the date of registration of the company. If CAG fails to
make the appointment within 60 days, the Board shall appoint in next 30 days.
(ix) Incorrect: As per section 141(3) of the Companies Act, 2013, a person shall not be eligible
for appointment as an auditor of a company whose relative is a Director or is in the employment
of the Company as a director or key Managerial Personnel.
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(x) Incorrect: As per section 141(2) of the Companies Act, 2013, where a firm including a limited
liability partnership (LLP) is appointed as an auditor of a company, only the partners who are
Chartered Accountants shall be authorised to act and sign on behalf of the firm.
3. (a) Sale Proceeds of Scrap Material:
(i) Review the internal control on scrap materials, as regards its generation, storage and
disposal and see whether it was properly followed at every stage.
(ii) Ascertain whether the organisation is maintaining reasonable records for the sale and
disposal of scrap materials.
(iii) Review the production and cost records for determination of the extent of scrap materials
that may arise in a given period.
(iv) Compare the income from the sale of scrap materials with the corresponding figures of
the preceding three years.
(v) Check the rates at which different types of scrap materials have been sold and compare
the same with the rates that prevailed in the preceding year.
(vi) See that scrap materials sold have been billed and check the calculations on the invoices.
(vii) Ensure that there exists a proper procedure to identify the scrap material and good quality
material is not mixed up with it.
(viii) Make an overall assessment of the value of the realisation from the sale of scrap
materials as to its reasonableness.
(b) Trade Marks and Copyrights:
(i) Obtain schedule of Trade Marks and Copyrights duly signed by the responsible officer
and scrutinise the same and confirm that all of them are shown in the Balance Sheet.
(ii) Examine the written agreement in case of assignment of Copyrights and Assignment
Deed in case of transfer of trade marks. Also ensure that trade marks and copyrights
have been duly registered.
(iii) Verify existence of copyright by reference to contract between the author & the entity and
note down the terms of payment of royalty.
(iv) See that the value has been determined properly and the costs incurred for the purpose
of obtaining the trade marks and copyrights have been capitalised.
(v) Ascertain that the legal life of the trade marks and copyrights have not expired.
(vi) Ensure that amount paid for both the intangible assets is properly amortised having
regard to appropriate legal and commercial considerations, as per the principles
enunciated under AS 26 on Intangible Assets.
(c) Machinery Acquired Under Hire-Purchase System:
(i) Examine the Board’s Minute Book approving the purchase on hire-purchase terms.
(ii) Examine the hire-purchase agreement carefully and note the description of the
machinery, cost of the machinery, hire purchase charges, and terms of payment and rate
of purchase.
(iii) Assets acquired under Hire Purchase System should be recorded at the full cash value
with corresponding liability of the same amount. In case cash value is not readily
available, it should be calculated presuming an appropriate rate of interest.

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(iv) Hire purchased assets are shown in the balance sheet with an appropriate narration to
indicate that the enterprise does not have full ownership thereof. The interest payable
along with each installments, whether separately or included therein should be debited
to the interest account and not to the asset account.
(d) Work-in-Progress: The audit procedures regarding work-in-progress are similar to those
used for raw materials and finished goods. However, the auditor has to carefully assess the
stage of completion of the work-in-progress for assessing the appropriateness of its valuation.
For this purpose, the auditor may examine the production/costing records (i.e., cost sheets),
hold discussions with the personnel concerned, and obtain expert opinion, where necessary.
The auditor may advise his client that where possible the work-in-progress should be reduced
to the minimum before the closing date. Cost sheets of work-in-progress should be verified as
follows-
(i) Ascertain that the cost sheets are duly attested by the works engineer and works
manager.
(ii) Test the correctness of the cost as disclosed by the cost records by verification of
quantities and cost of materials, wages and other charges included in the cost sheets by
reference to the records maintained in respect thereof.
(iii) Compare the unit cost or job cost as shown by the cost sheet with the standard cost or
the estimated cost expected.
(iv) Ensure that the allocation of overhead expenses had been made on a rational basis.
(v) Compare the cost sheet in detail with that of the previous year. If they vary materially,
investigate the cause thereof.
(vi) Ensure that the Work-in-Progress as at Balance Sheet date has been appropriately
disclosed in Balance Sheet as per the requirements of Part I of Schedule III of t he
Companies Act, 2013.
4. (a) (i) Modification of Opinion: The auditor shall modify the opinion in the auditor’s report when-
(1) The auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or
(2) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that
the financial statements as a whole are free from material misstatement.
(ii) Disclaimer of Opinion: The auditor shall disclaim an opinion when the auditor is unable
to obtain sufficient appropriate audit evidence on which to base the opinion, and the
auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive.
The auditor shall disclaim an opinion when, in extremely rare circumstances involving
multiple uncertainties, the auditor concludes that, notwithstanding having obtained
sufficient appropriate audit evidence regarding each of the individual uncertainties, it is
not possible to form an opinion on the financial statements due to the potential interaction
of the uncertainties and their possible cumulative effect on the financial statements.
(iii) Adverse Opinion: The auditor shall express an adverse opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that misstatements, individually
or in the aggregate, are both material and pervasive to the financial statements.
(iv) Qualified Opinion: The auditor shall express a qualified opinion when-
(i) The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to
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the financial statements; or
(ii) The auditor is unable to obtain sufficient appropriate audit evidence on which to
base the opinion, but the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be material but not pervasive.
(b) Significant Difficulties Encountered During the Audit: As per SA 260 “Communication with
Those Charged with Governance”, significant difficulties encountered during the audit may
include such matters as:
 Significant delays in management providing required information.
 An unnecessarily brief time within which to complete the audit.
 Extensive unexpected effort required to obtain sufficient appropriate audit evid ence.
 The unavailability of expected information.
 Restrictions imposed on the auditor by management.
 Management’s unwillingness to make or extend its assessment of the entity’s ability to
continue as a going concern when requested.
(c) SA 520 ‘Analytical Procedures’: As per SA 520, the term “analytical procedures” means
evaluations of financial information through analysis of plausible relationships among both
financial and non-financial data. Analytical procedures also encompass such investigation as
is necessary of identified fluctuations or relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount. The auditor’s choice
of procedures, methods and level of application is a matter of professional judgement.
Analytical procedures include the consideration of comparisons of the entity’s financial
information with, for example: comparable information for prior periods; anticipated results of
the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation
of depreciation; and similar industry information, such as a comparison of the entity’s ratio of
sales to accounts receivable with industry averages or with other entities of comparable size
in the same industry.
Analytical procedures also include consideration of relationships, for example: among
elements of financial information that would be expected to conform to a predictable pattern
based on the entity’s experience, such as gross margin percentages; and be tween financial
information and relevant non-financial information, such as payroll costs to number of
employees.
Various methods may be used to perform analytical procedures. These methods range from
performing simple comparisons to performing complex analyses using advanced statistical
techniques. Analytical procedures may be applied to consolidated financial statements,
components and individual elements of information.
Analytical procedures are used for the following purposes:
(a) To obtain relevant and reliable audit evidence when using substantive analytical
procedures; and
(b) To design and perform analytical procedures near the end of the audit that assist the
auditor when forming an overall conclusion as to whether the financial statements are
consistent with the auditor’s understanding of the entity.
5. (a) Accounting Estimates: According to the SA 540, “Auditing Accounting Estimates, Including Fair
Value Accounting Estimates, and Related Disclosure”, accounting estimate means an
approximation of a monetary amount in the absence of a precise means of measurement. This

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term is used for an amount measured at fair value where there is estimation uncertainty, as well
as for other amounts that require estimation. SA 540 addresses only accounting estimates
involving measurement at fair value, the term “fair value accounting estimates” is used.
Because of the uncertainties inherent in business activities, some financial statement items
can only be estimated. Further, the specific characteristics of an asset, liability or component
of equity, or the basis of or method of measurement prescribed by the financial reporting
framework, may give rise to the need to estimate a financial statement item. Some financial
reporting frameworks prescribe specific methods of measurement and the disclosures that are
required to be made in the financial statements, while other financial reporting frameworks are
less specific.
Some accounting estimates involve relatively low estimation uncertainty and may give rise to
lower risks of material misstatements, for example:
 Accounting estimates arising in entities that engage in business activities that are not
complex.
 Accounting estimates that are frequently made and updated because they relate to
routine transactions.
For some accounting estimates, however, there may be relatively high estimation uncertainty,
particularly where they are based on significant assumptions, for example:
 Accounting estimates relating to the outcome of litigation.
 Fair value accounting estimates for derivative financial instruments not publicly traded.
 Additional examples of accounting estimates are:
 Allowance for doubtful accounts.
 Inventory obsolescence.
 Warranty obligations.
 Depreciation method or asset useful life.
 Provision against the carrying amount of an investment where there is uncertainty
regarding its recoverability.
 Outcome of long term contracts.
 Financial Obligations / Costs arising from litigation settlements and judgments.
(b) Acceptance of a Change in Engagement: An auditor who, before the completion of the
engagement, is requested to change the engagement to one which provides a lower level of
assurance, should consider the appropriateness of doing so.
A request from the client for the auditor to change the engagement may result from a change
in circumstances affecting the need for the service, a misunderstanding as to the nature of an
audit or related service originally requested or a restriction on the scope of the engagement,
whether imposed by management or caused by circumstances. The auditor would consider
carefully the reason given for the request, particularly the implications of a restriction on the
scope of the engagement, especially any legal or contractual implications.
If the auditor concludes that there is reasonable justification to change the engagement and if
the audit work performed complied with the SAs applicable to the changed engagement, the
report issued would be appropriate for the revised terms of engagement. In order to avoid
confusion, the report would not include reference to-
(i) the original engagement; or

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(ii) any procedures that may have been performed in the original engagement, except where
the engagement is changed to an engagement to undertake agreed-upon procedures
and thus reference to the procedures performed is a normal part of the report.
The auditor should not agree to a change of engagement where there is no reasonable
justification for doing so.
If the terms of the audit engagement are changed, the auditor and management shall agree
on and record the new terms of the engagement in an engagement letter or other suitable form
of written agreement.
If the auditor is unable to agree to a change of the terms of the audit engagement and is not
permitted by management to continue the original audit engagement, the auditor shall -
(i) Withdraw from the audit engagement where possible under applicable law or regulation;
and
(ii) Determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as those charged with governance, owners or
regulators.
(c) Reliability of Internal Control System in CIS Environment: For evaluating the reliability of
internal control system in CIS environment, the auditor would consider the following -
(i) That authorised, correct and complete data is made available for processi ng.
(ii) That it provides for timely detection and corrections of errors.
(iii) That in case of interruption due to mechanical, power or processing failures, the system
restarts without distorting the completion of entries and records.
(iv) That it ensures the accuracy and completeness of output.
(v) That it provides security to application softwares & data files against fraud etc.
(vi) That it prevents unauthorised amendments to programs.
6. (a) Verification of Issue of Bonus Shares: Section 63 of the Companies Act, 2013 allows a company
to issue fully paid-up bonus shares to its members, in any manner whatsoever, out of-
(i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account.
The auditor should ensure that no issue of bonus shares shall be made by capitalising reserves
created by the revaluation of assets.
Further, he should also ensure the compliance of condition for capitalization of profits or
reserves for the issuing fully paid-up bonus shares like -
(i) it is authorised by its articles;
(ii) it has, on the recommendation of the Board, been authorised in the general meeting of
the company;
(iii) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt
securities issued by it;
(iv) it has not defaulted in respect of the payment of statutory dues of the employees, such
as, contribution to provident fund, gratuity and bonus;
(v) the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-
up;
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(vi) it complies with such conditions as may be prescribed like the company which has once
announced the decision of its Board recommending a bonus issue, shall not subsequently
withdraw the same;
(vii) the bonus shares shall not be issued in lieu of dividend.
(b) Government Expenditure Audit: Audit of government expenditure is one of the major
components of government audit conducted by the office of C&AG. The basic standards set
for audit of expenditure are to ensure that there is provision of funds authorised by competent
authority fixing the limits within which expenditure can be incurred. Briefly, these standards
are explained below:
(i) Audit against Rules & Orders: The auditor has to see that the expenditure incurred
conforms to the relevant provisions of the statutory enactment and is in accordance with
the financial rules and regulations framed by the competent authority.
(ii) Audit of Sanctions: The auditor has to ensure that each item of expenditure is covered
by a sanction, either general or special, accorded by the competent authority, authorising
such expenditure.
(iii) Audit against Provision of Funds: It contemplates that there is a provision of funds out
of which expenditure can be incurred and the amount of such expenditure does not
exceed the appropriations made.
(iv) Propriety Audit: It is required to be seen that the expenditure is incurred with due regard
to broad and general principles of financial propriety. The auditor aims to bring out cases
of improper, avoidable, or in fructuous expenditure even though the expenditure has been
incurred in conformity with the existing rules and regulations. Audit aims to secure a
reasonably high standard of public financial morality by looking into th e wisdom,
faithfulness and economy of transactions.
(v) Performance Audit: This involves that the various programmes, schemes and projects
where large financial expenditure has been incurred are being run economically and are
yielding results expected of them. Efficiency-cum-performance audit, wherever used, is
an objective examination of the financial and operational performance of an organisation,
programme, authority or function and is oriented towards identifying opportunities for
greater economy, and effectiveness.
7. (a) Issue of Shares at a Discount: According to Section 53 of the Companies Act, 2013, except
sweat equity issued as mentioned in section 54, any share issued by a company at a discounted
price shall be void.
Where a company contravenes the provisions of this section, the company shall be punishable
with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees
and every officer who is in default shall be punishable with imprisonment for a term which may
extend to six months or with fine which shall not be less than one lakh rupees but which may
extend to five lakh rupees, or with both.
(b) Filling of a Casual Vacancy: As per Section 139(8) of the Companies Act, 2013, any casual
vacancy in the office of an auditor shall-
(i) In the case of a company other than a company whose accounts are subject to audit by
an auditor appointed by the Comptroller and Auditor-General of India, be filled by the
Board of Directors within 30 days.
If such casual vacancy is as a result of the resignation of an auditor, such appointment
shall also be approved by the company at a general meeting convened within 3 months
of the recommendation of the Board and he shall hold the office till the conclusion of the
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next annual general meeting;
(ii) In the case of a company whose accounts are subject to audit by an auditor appointed
by the Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-
General of India within 30 days.
It may be noted that in case the Comptroller and Auditor-General of India does not fill the
vacancy within he said period the Board of Directors shall fill the vacancy within next 30
days.
(c) Appointment of First Auditor of a Government Company: Section 139(7) of the Companies
Act, 2013 provides that in the case of a Government company or any other company owned
or controlled, directly or indirectly, by the Central Government, or by any State Government,
or Governments, or partly by the Central Government and partly by one or more State
Governments, the first auditor shall be appointed by the Comptroller and Auditor-General of
India within 60 days from the date of registration of the company.
In case the Comptroller and Auditor-General of India does not appoint such auditor within the
above said period, the Board of Directors of the company shall appoint such auditor within the
next 30 days. Further, in the case of failure of the Board to appoint such auditor within next
30 days, it shall inform the members of the company who shall appoint such auditor with in 60
days at an extraordinary general meeting. Auditors shall hold office till the conclusion of the
first annual general meeting.
(d) Meaning of Subsequent Events: SA 560 on “Subsequent Events”, defines the term
“subsequent events” as events occurring between the date of the financial statements and the
date of the auditor’s report, and facts that become known to the auditor after the date of the
auditor’s report., “subsequent events” also refer to significant events which occurred upto the
date of report of the auditor of that component. Thus, subsequent events are those events
which occur after the date of the balance sheet till the audit report is signed by the auditor.
(e) General Principles of Verification of Assets: It is not sufficient for the auditors only to verify
correctness of the amount of assets shown in the balance sheet, he must verify them by actual
inspection or otherwise and establish the existence of assets.
Points requiring auditor’s attention for verification are as under:
(i) Cost - In regard to assets, verification procedure need not generally be extended to
determination of the correctness of costs and authority to incur costs unless the items
concerned were purchased during the accounting period under review. In such cases the
auditor should check the correctness of costs through normal vouching method. He
should ensure that adequate distinction has been made between ‘revenue’ and ‘capital’
nature of costs.
(ii) Ownership - Where ownership of assets is evidenced by documents of title etc. as in the
case of immovable property, a reference should be made to such documents. If the
documents are held by third person the auditor should either obtain a certificate directly
from that party or arrange to inspect them at the third party’s pl ace of business.
(iii) Valuation - It must be ascertained that all assets are valued in accordance with
appropriate accounting policy. For the valuation made, the basis must be consistently
applied, unless circumstances necessitated a change. Even then a disclosure is required
for the change and its monetary effect.
(iv) Existence - Physical inspection should be done wherever possible. Where physical
inspection is not possible, the possibility of obtaining indirect evidence be considered
e.g. machinery imported held in customs godown or materials sent to subcontractor for

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job work or fabrication. In such circumstances certificating of such parties should be
obtained and if considered necessary even physical verification may be requested.
(v) Presentation in accounts - Material assets must be properly disclosed and correctly
described in the accounts. It should be seen that the description given to them is clear
and complete and is not misleading e.g. stating loans on the assets side of the balance
sheet “as dependent upon realization” is just misleading as was held in the case of
London and General Bank Ltd. care must be taken to see that disclosures required under
the statute or statement issued by ICAI are complied with.

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Test Series: March, 2017
MOCK TEST PAPER
INTERMEDIATE (IPC): GROUP – II
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – A: INFORMATION TECHNOLOGY
Question No. 1 is compulsory.
Attempt any five questions from the rest.
Time Allowed – 1½ Hours Maximum Marks – 50

1. Answer all the following questions in brief.
(i) What are the advantages of using Data Flow Diagram (DFD)?
(ii) Explain the term Micro-Architecture.
(iii) What do you understand by the term “Telecommunications Control Software”?
(iv) Define “Information System”. Also, briefly mention the components of the Information System.
(v) Discuss some disadvantages of Cloud Computing. (2 x 5 = 10 Marks)
2. (a) Differentiate between Hardware Encryption and Software Encryption. (4 Marks)
(b) Discuss the risks associated with e-Commerce. (4 Marks)
3. (a) Discuss about ‘Core Banking System’ and its elements. (4 Marks)
(b) Discuss Human Resource Management System (HRMS), in brief. (4 Marks)
4. (a) Differentiate between Hardware Virtualization and Network Virtualization. (4 Marks)
(b) Discuss in brief “Grid Computing Security”. (4 Marks)
5. (a) Discuss some of the reasons of failure of Business Process Management Systems (BPMS).
(4 Marks)
(b) Discuss Business Process Management Life Cycle (BPM-L Cycle). (4 Marks)
6. (a) Discuss multiple types of cloud in Cloud Computing. (4 Marks)
(b) Discuss Information System Life Cycle, in brief. (4 Marks)
7. Write short notes on any four of the following.
(a) Process Management
(b) Application Software
(c) Virtual Private Network (VPN)
(d) Business Intelligence
(e) Application based on Source of Application (4 × 2 = 8 Marks)

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© The Institute of Chartered Accountants of India
Test Series: March, 2017
MOCK TEST PAPER
INTERMEDIATE (IPC): GROUP – II
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – B: STRATEGIC MANAGEMENT
Question No. 1 is compulsory.
Attempt any five questions from the rest.
Time Allowed – 1½ Hours Maximum Marks – 50

1. (a) ABC Ltd. is a marketing services company which provides consultancy to its clients. It has
persuaded its entire staff to sign a new contract which does not allows them to work for any
rival company for a period of two years. Evaluate and explain the factor according to Porter’s
Five Forces Model. (3 Marks)
(b) A manufacturing company launch an extremely innovative product two years ago and attain
high sales growth. Although the sales is still high, but has fallen in recent months due to a
number of rivals launching similar product. Company has started investing in advertising etc.
Identify and explain the stage of the product life cycle within which this product exists?
(3 Marks)
(c) XYZ is a large supermarket chain. It is considering the purchase of a number of farms that
provide XYZ with a significant amount of its fresh produce. XYZ feels that by purchasing the
farms, it will have greater control over its supply chain. Identify and explain which type of
diversification XYZ follows. (3 Marks)
(d) A company manufactures high quality bicycles and earn high profits. In recent years, its profits
are declining due to entry of competitors which provide cheaper, high quality bicycles from
abroad where labour costs are lower. Company has decided to adjust its strategy and adopt
a focus approach, targeting its bicycles towards professional athletes. This will increase the
margin of profits. Evaluate and explain the strategy which it follows? (3 Marks)
(e) Specify the steps that is needed to initiate & bring changes in the strategic building of any
organization. (3 Marks)
2. (a) State with reasons which of the following statements is correct/incorrect:
(i) Cooperation is generated automatically in businesses owned by members of same
family.
(ii) The concept of experience curve is relevant for a number of areas in strategic
management. (2  2 = 4 Marks)
(b) Explain the meaning of the following concepts:
(i) Opportunity
(ii) Outbound logistics
(iii) Key success factors (3  1 = 3 Marks)
3. Write short notes on the following:
(a) Strategic Group Mapping (2 Marks)
(b) Best-cost provider strategy (2 Marks)
(c) Components of Value Chain (3 Marks)
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4. What is Corporate Strategy? How would you argue that 'corporate strategy 'ensures the correct
alignment of the firm with its environment'? (7 Marks)
5. What are the issues to be considered while implementing strategies? (7 Marks)
6. Distinguish between the TQM and Traditional Management Practices. (7 Marks)
7. What are strategic roles of a human resource manager in a large manufacturing and distribution
company? (7 Marks)

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© The Institute of Chartered Accountants of India
Test Series: March, 2017
MOCK TEST PAPER
INTERMEDIATE (IPC): GROUP – II
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – A: INFORMATION TECHNOLOGY
SUGGESTED ANSWERS/HINTS
1. (i) Advantages of using Data Flow Diagram (DFD) are as follows:
 It aids in describing the boundaries of the system.
 It is beneficial for communicating existing system knowledge to the users.
 A straightforward graphical technique which is easy to recognize.
 DFDs can provide a detailed representation of system components.
 It is used as the part of system documentation file.
 DFDs are easier to understand by technical and nontechnical audiences
 It supports the logic behind the data flow within the system .
(ii) Micro Architecture, also known as Computer Organization, is a lower level detailed
description of the system that is sufficient for completely describing the operation of all parts
of the computing system, and how they are inter-connected and inter-operate in order to
implement the ISA. This describes the data paths, data processing elements and data storage
elements, and describes how they should implement ISA. The Micro architecture can be seen
as how the ISA does and what it does. It’s how everything is ultimately organized on the chip
or processor.
Micro architecture is the term used to describe the resources and methods used to achieve
architecture specification. The term typically includes the way in which these resources a re
organized as well as the design techniques used in the processor to reach the target cost and
performance goals. The micro architecture essentially forms a specification for the logical
implementation.
(iii) Telecommunications Control Software: This consists of programs that control
telecommunications activities and manage the functions of telecommunications networks.
They include Telecommunication Monitors (mainframe host computers), Network Operating
Systems (microcomputer network servers) for network servers, Network Management
Components and Communication Packages (Microcomputer Web browsers). This software
can reside on almost any component of the network and can provide such features as
performance monitoring, activity monitoring, priority assigning, transmission error
correction and network problem mitigation.
(iv) Information System: Information System (IS) is a combination of people, hardware, software,
communication devices, network and data resources that processes (can be storing,
retrieving, transforming information) data and information for a specific purpose. The system
needs inputs from user (key in instructions and commands, typing, scanning) which will then
be processed (calculating, reporting) using technology devices such as computers, and
produce output (printing reports, displaying results) that will be sent to another use r or other
system via a network and a feedback method that controls the operation. People, Hardware,
Software, Data and Networks are the five basic resources of information systems.

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(v) Disadvantages of Cloud Computing are as follows:
 Technical Issues: This technology is always prone to outages and other technical
issues. Even the best cloud service providers run into this kind of trouble, in spite of
keeping up high standards of maintenance. We will invariably be stuck in case of network
and connectivity problems.
 Security in the Cloud: Surrendering all the company’s sensitive information to a third-
party cloud service provider could potentially put the company to great risk.
 Prone to Attack: Storing information in the cloud could make the company vulnerable to
external hack attacks and threats. Nothing on the Internet is completely secure and
hence, there is always the lurking possibility of stealth of sensitive data.
2. (a) Hardware Encryption: Hardware Encryption devices are available at a reasonable cost, and
can support high- speed traffic. If the Internet is being used to exchange information among
branch offices or development collaborators, for instance, use of such devices can ensure that
all traffic between these offices is secure.
Software Encryption: These are typically employed in conjunction with specific applications.
Certain electronic mail packages, for example, provide encryption and decryption for message
security.
(b) Some of the risks that are associated with e-Commerce are multi-faceted and are as follows:
 Problem of anonymity: There is need to identify and authenticate users in the virtual
global market where anyone can sell to or buy from anyone, anything from anywhere.
 Repudiation of contract: There is possibility that the electronic transaction in the form
of contract, sale order or purchase by the trading partner or customer may be denied.
 Lack of authenticity of transactions: The electronic documents that are produced
during an e-Commerce transaction may not be authentic and reliable.
 Data Loss or theft or duplication: The data transmitted over the Internet may be lost,
duplicated, tampered with or replayed.
 Attack from hackers: Web servers used for e-Commerce may be vulnerable to hackers.
 Denial of Service: Service to customers may be denied due to non-availability of system
as it may be affected by viruses, e-mail bombs and floods.
 Non-recognition of electronic transactions: e-Commerce transactions, as electronic
records and digital signatures may not be recognized as evidence in courts of law.
 Lack of audit trails: Audit trails in e-Commerce system may be lacking and the logs may
be incomplete, too voluminous or easily tampered with
 Problem of piracy: Intellectual property may not be adequately protected when such
property is transacted through e-Commerce
3. (a) Core Banking System: Core Banking System may be defined as the set of basic software
components that manage the services provided by a bank to its customers through its
branches (branch network). In other words, the platform where communication technology and
information technology are merged to suit core needs of banking is known as Core Banking
Solutions (CBS). Normal core banking functions will include deposit accounts, loans,
mortgages and payments. Banks make these services available across multiple channels like
ATMs, Internet banking, and branches.
The various elements of core banking include:
 Making and servicing loans;
 Opening new accounts;
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 Processing cash deposits and withdrawals;
 Processing payments and cheques;
 Calculating interest;
 Customer relationship management (CRM) activities;
 Managing customer accounts;
 Establishing criteria for minimum balances, interest rates, number of withdrawals allowed
and so on;
 Establishing interest rates; and
 Maintaining records for all the bank’s transactions.
(b) Human Resource Management Systems (HRMS): A Human Resources Management
System (HRMS) is a software application that coalesce many human resources functions,
together with benefits administration, payroll, recruiting and training, and performance analysis
and assessment into one parcel. In other words, HRMS refers to the systems and processes
at the intersection between human resource management (HRM) and information technology.
Some of the key modules of HRMS are as below:
 Workforce Management: Integrated across the strategic Human Capital Management
(HCM) solution, Workforce Management provides powerful tools to effectively manage
labor rules, ensure compliance, and control labor costs and expenses.
 Time and Attendance Management: The time and attendance module gathers
standardized time and work related efforts.
 Payroll Management: This module of the system is designed to automate manual payroll
functions and facilitate salary, deductions etc. calculations, eliminates errors and free up
HR staff for more productive tasks.
 Training Management: The module tracks the trainer or training organization, costs
associated with training schedules, training locations, required supplies and equipment
and registered attendees.
 Compensation Management: Compensation Management allows integrating employee
processes, information and programs with organizational processes and strategies to
achieve optimal organizational results.
 Recruitment Management: This module helps in hiring the right people with the right
target skills and includes processes for managing open positions/requisitions, applicant
screening, assessments, selection and hiring, correspondence, reporting and cost
analysis.
 Personnel Management: The personnel management comprises of HR master-data,
personnel administration, recruitment and salary administration.
 Organizational Management: Organizational management includes, organizational
structure, staffing schedules & job description.
 Employee Self Service (ESS): The employee self-service module allows employees to
query HR related data and perform some HR transactions over the system. The module
also lets supervisors approve Over-Time requests from their subordinates through the
system without overloading the task on HR department.
 Analytics: The Analytics module enables organizations to extend the value of an HRMS
implementation by extracting HR related data for use with other business intelligence
platforms.
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4. (a) Hardware Virtualization: Hardware Virtualization or Platform Virtualization refers to the
creation of a virtual machine that acts like a real computer with an operating system. Software
executed on these virtual machines is separated from the underlying hardware resources. For
example, a computer that is running Microsoft Windows may host a virtual machine that looks
like a computer with the Linux operating system; based software that can be run on the virtual
machine. The basic idea of Hardware virtualization is to consolidate many small physical
servers into one large physical server so that the processor can be used more effectively. The
software that creates a virtual machine on the host hardware is called a hypervisor or Virtual
Machine Manager. The hypervisor controls the processor, memory and other components by
allowing several different operating systems to run on the same machine without the need for
a source code. The operating system running on the machine will appear to have its own
processor, memory and other components.
Network Virtualization: Network virtualization is a method of combining the available
resources in a network by splitting up the available bandwidth into channels, each of which is
independent from the others, and each of which can be assigned (or reassigned) to a server
or device in real time. This allows a large physical network to be provisioned into multiple
smaller logical networks and conversely allows multiple physical LANs to be combined into a
larger logical network. This behaviour allows administrators to improve network traffic control,
enterprise and security. Network virtualization involves platform virtualization, often combined
with resource virtualization. Various equipment and software vendors offer network
virtualization by combining any of the Network hardware such as switches and network
interface cards (NICs); Network elements such as firewalls and load balancers; Networks such
as virtual LANs (VLANs); Network storage devices; Network machine-to-machine elements
such as telecommunications devices; Network mobile elements such as laptop computers,
tablet computers, smart phones and Network media such as Ethernet and Fibre Channel.
Network virtualization is intended to optimize network speed, reliability, flexibility, scalability,
and security.
(b) Grid Computing Security: Grid systems and applications require standard security functions
which are Authentication, Access Control, Integrity, Privacy, and No n-Repudiation.
Authentication and access control issues are to provide authentication to verify the users,
process which have user’s computation and resources used by the processes to authenticate;
and to allow local access control mechanisms to be used without change. To develop security
architecture, following constraints are taken from the characteristics of grid environment and
application.
 Single Sign-on: A user should authenticate once and they should be able to acquire
resources, use them, and release them and to communicate internally without any further
authentication.
 Protection of Credentials: User passwords, private keys, etc. should be protected.
 Interoperability with local security solutions: Access to local resources should have
local security policy at a local level. Despite of modifying every local resource there is an
inter-domain security server for providing security to local resource.
 Exportability: The code should be exportable i.e. they cannot use a large amount of
encryption at a time. There should be a minimum communication at a time.
 Support for secure group communication: In a communication, there are number of
processes which coordinate their activities. This coordination must be secure and for this
there is no such security policy.
 Support for multiple implementations: There should be a security policy which should
provide security to multiple sources based on public and private key cryptography.

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5. (a) Some of the reasons for failure of Business Process Management Systems (BPMS) include
the following:
 Superficial or deficient executive involvement
 Deficient project management
 Breakdown in gap analysis
 Limited options for customization of the BPM software is required
 Not flexible enough or too complicated to be customized to meet the precise workflow
and business process.
 Failure to identify future business needs
 Inadequate assessment of the need for change management
 Persistent compatibility problems with the diverse legacy systems of the partners.
 Resources not available when desirable
 Software fails to meet business needs
 System may be over-engineered when compared to the actual requirements.
 Technological obsolescence.
(b) BPM Life Cycle (BPM-L Cycle): An Enterprise Resource Planning (ERP) application divides
BPM into the following phases:
(i) Analysis phase: This involves analysis of the current environment and current
processes, identification of needs and definition of requirements.
(ii) Design phase: This involves evaluation of potential solutions to meet the identified
needs, business process designing and business process modeling.

Analysis

Optimize BPM Life Design
Cycle

Run & Monitor Implementation

BPM Life Cycle
(iii) Implementation phase: This involves project preparation, blue printing, realization, final
preparation, go live and support.
(iv) Run and Monitor phase: This involves business process execution or deployment and
business process monitoring.
(v) Optimize: Iterate for continuous improvement.
6. (a) The Cloud Computing environment can consist of multiple types of clouds based on their
deployment and usage. These are explained as follows:
 Public Cloud: The public cloud is made available to the public or a large industry group
and is administrated by third parties or vendors over the Internet, and services are offered
on pay-per-use basis. It is widely used in the development, deployment and management
of enterprise applications, at affordable costs; and allows organizations to deliver highly
scalable and reliable applications rapidly and at more affordable costs.
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 Private Clouds: This cloud computing environment resides within the boundaries of an
organization and is used exclusively for the organization’s benefits. They are built
primarily by IT departments within enterprises who seek to optimize utilization of
infrastructure resources within the enterprise by provisioning the infrastructure with
applications using the concepts of grid and virtualization. The benefit of a Private Cloud
is that it enables an enterprise to manage the infrastructure and have more control, but
this comes at the cost of IT department creating a secure and scalable cloud.
 Community Clouds: This is the sharing of computing infrastructure in between
organizations of the same community. For example, all Government organizations within
India may share computing infrastructure on the cloud to manage data. The risk is that
data may be stored with the data of competitors.
 Hybrid Clouds: It is a composition of two or more clouds (Private, Community or Public)
and is maintained by both internal and external providers. They must maintain their
unique identity, but are bound together by standardized data and application portability.
With a hybrid cloud, organizations might run non-core applications in a public cloud, while
maintaining core applications and sensitive data in-house in a private cloud.
(b) Information System Life Cycle: This is commonly referred as Software/System
Development Life Cycle (SDLC), which is a methodology used to describe the process of
building information systems. It is the logical starting point in the entire life cycle of a
computerized system. Activities start when any enterprise decides to go for computerization
or migrate from existing computerized system to a new one.
Phase 1: System Investigation - This phase examines that ‘What is the problem and is it
worth solving’? Feasibility study is done under the following dimensions:
 Technical feasibility: Does the technology exist to implement the proposed system or
is it a practical proposition?
 Economic feasibility: Is proposed system cost-effective: if benefits do not outweigh
costs, it’s not worth going ahead?
 Legal feasibility: Is there any conflict between the proposed system and legal
requirements?
 Operational feasibility: Are the current work practices and procedures adequate to
support the new system?
 Schedule feasibility: How long will the system take to develop, or can it be done in a
desired time-frame?
Phase 2: System Analysis - This phase examines that ‘What must the Information System
do to solve the problem’? The Systems Analyst examines data and information flows in the
enterprise using data flow diagrams; establishes what the proposed system will do (not how it
will do it); analyzes costs and benefits; outlines system implementation options (e.g. in -house
or using consultants); considers possible hardware configurations; and makes
recommendations.
Phase 3: System Designing - This phase examines that ‘How will the Information System do
what it must do to obtain the solution to the problem’? This phase specifies the technical
aspects of a proposed system in terms of Hardware platform, Software, Outputs, Inputs, User
interface, Modular design, Test plan, Conversion plan and Documentation.
Phase 4: System Implementation - This phase examines that ‘How will the Solution be put
into effect’? This phase involves Coding and testing of the system; Acquisition of hardware
and software; and either installation of the new system or conversion of the old system to the
new one. In Installation, new hardware, which may involve extensive re-cabling and changes
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in office layouts are installed; Training the users on the new system; and Conversion of master
files to the new system or creation of new master files.
Phase 5: System Maintenance and Review - This phase evaluates results of solution and
modifies the system to meet the changing needs. Post implementation review would be done
to address Programming amendments, Adjustment of clerical procedures, Modification of
Reports, and Request for new programs.
7. (a) Process Management: Process management is based on a view of an organization as a
system of interlinked processes which involves concerted efforts to map, improve and adhere
to organizational processes. To manage a process,
 The first task is to define it. This involves defining the steps (tasks) in the process and
mapping the tasks to the roles involved in the process.
 Once the process is mapped and implemented, performance measures can be
established. Establishing measurements creates a basis to improve the process.
 The last piece of the process management definition describes the organizational setup
that enables the standardization of and adherence to the process throughout the
organization. Assigning enterprise process owners and aligning employees’ performance
reviews and compensation to the value creation of the processes could accomplish this.
(b) Application Software: Application software includes all that computer software that cause a
computer to perform useful tasks beyond the running of the computer itself. It is a collection
of programs which address a real-life problem of its end users which may be business or
scientific or any other problem. The different types of application software are Application
Suite, Enterprise Software, Enterprise Infrastructure Software, Information Worker Software,
Content Access Software, Educational Software, Media Development Software etc.
Some of the most popular and widely accepted benefits of Application Software are to address
user needs, less threat from virus and Regular updates. However, there are certain
disadvantages of such software as well. Development is costly and may be Infected from
Malware.
(c) Virtual Private Network (VPN): Virtual Private Network (VPN) is a secure network that uses
the Internet as its main backbone network, but relies on the firewalls and other security
features of the Internet and Intranet connections and those of participating organizations.
Many organizations use Virtual Private Networks (VPNs) to establish secure intranets and
extranets. A VPN is a private network that uses a public network (usually the Internet) to
connect remote sites or users together. The VPN uses "virtual” connections routed through
the Internet from the business's private network to the remote site or employee. By using a
VPN, businesses ensure security - anyone intercepting the encrypted data can't read it.
(d) Business Intelligence: Business Intelligence (BI) is the delivery of accurate, useful
information to the appropriate decision makers within the necessary time frame to support
effective decision making for business processes. It is comprised of information that contains
patterns, relationships, and trends about customers, suppliers, business partners and
employees. Business intelligence systems process, store and provide useful informat ion to
the user who need it, when they need it. It can handle large amounts of information to help
identify and develop new opportunities. BI, in simple words, refers to the process of collecting
and refining information from many sources, analysing and presenting the information in useful
ways so that users can make better business decisions. It is essentially timely, accurate, high-
value, and actionable business insights, and the work processes and technologies used to
obtain them.

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(e) Applications based on ‘Source of Application’ are as follows:
 Custom-built Application: Whether they are for one function or integrate processes
across the company like an ERP – these are the easiest ones to customize. These
applications can however be configured to meet a company’s requirements.
Customization involves additional coding while configuration is based on settings which
are inputted by the user . Example – Billing, Inventory, Attendance etc.
 Packaged Software: These are the standard applications which are not free but are
licensed. Customization to suit business requirements may or may not be allowed. For
Example -Tally, Oracle 9i, etc.
 Leased application: A new method for getting applications is being used today, i.e.
leased applications, where user pays fixed rent for using the application for agreed terms.
Many specialized vendors provide users with option to get their job done by paying
monthly rent; this is referred to as outsourcing.

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Test Series: March, 2017
MOCK TEST PAPER
INTERMEDIATE (IPC): GROUP – II
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – B: STRATEGIC MANAGEMENT
SUGGESTED ANSWERS/HINTS
1. (a) Bargaining power of suppliers: ABC Ltd. has managed to tie with its staff, who are the key
suppliers to the organization. This reduces their power to leave and move to one of ABC’s Ltd.
rivals. Quite often suppliers, too, exercise considerable bargaining power over companies.
The more specialised the offering from the supplier, greater is his clout. And, if the suppliers
are also limited in number they stand a still better chance to exhibit their bargaining power.
The bargaining power of suppliers determines the cost of raw materials and other inputs of
the industry and, therefore, industry attractiveness and profitability.
(b) Growth Stage: The second phase of PLC is growth stage. In the growth stage, the demand
expands rapidly, prices fall, competition increases and market expands. The customer has
knowledge about the product and shows interest in purchasing it. The product is still
experiencing strong growth. This has been reduced as the large number of new competitors
are entering. It has yet to reach maturity as it is still growing strongly.
(c) Backward vertical integration: Backward integration is a step towards, creation of effective
supply by entering business of input providers. Strategy employed to expand profits and gain
greater control over production of a product whereby a company will purchase or build a
business that will increase its own supply capability or lessen its cost of production (as in the
case for XYZ).
(d) Turnaround strategy: When firms are losing their grips over market, profits due to several
internal and external factors, and if they have to survive under the competitive environment
they have to identify danger signals as early as possible and undertake rectification steps
immediately.
(e) The changes in the environmental forces often require businesses to make modifications in
their existing strategies and bring out new strategies. For initiating strategic change, three
steps can be identified as under:
(i) Recognize the need for change: The first step is to diagnose facets of the corporate
culture that are strategy supportive or not. The idea is to determine where the lacuna lies
and scope for change exists.
(ii) Create a shared vision to manage change: Objectives and vision of both individuals
and organization should coincide. Senior managers need to constantly and consistently
communicate the vision not only to inform but also to overcome resistance .
(iii) Institutionalize the change: Creating and sustaining a different attitude towards change
is essential to ensure that the firm does not slip back into old ways of thinking or doing
things. All these changes should be set up as a practice to be followed by the organization
and be able to transfer from one level to another as a well settled practice.
2. (a) (i) Incorrect: Although, cooperation should generate automatically in businesses owned by
members of a same family, many times internal strifes and tussles lead to challenges in
cooperation. Sometimes, quarrels and conflicts among the managing members of the
family on family matters tend to distort their behaviour in management of business and
thereby damage its functioning. Family owned organisations often face succession and
ownership issues that are tough to resolve and lead fights and divisions.
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(ii) Correct: Experience curve results from a variety of factors such as learning effects,
economies of scale, product redesign and technological improvements in production. The
concept of experience curve is relevant for a number of areas in strategic management.
For instance, experience curve is considered a barrier for new firms contemplating entry
in an industry. It is also used to build market share and discourage competition.
(b) (i) An opportunity is a favourable condition in the organization's environment which
enables it to consolidate and strengthen its position. An example of an opportunity is
growing demand for the products or services that a company provides.
(ii) Outbound logistics relate to collection, storage and distribution of the product to
customers. It includes all activities such as storage/warehousing of finished goods, order
processing, scheduling deliveries, operation of delivery vehicles, etc.
(iii) Key success factors vary from industry to industry and even from time to time within
the same industry as driving forces and competitive conditions change. Only rarely does
an industry have more than three or four key success factors at any one time. And even
among these three or four, one or two usually outrank the others in importance.
3. (a) Strategic group mapping is a technique for displaying the different markets or competitive
positions that rival firms occupy in the industry. A strategic group is a cluster of firms i n an
industry with similar competitive approaches and market positions. An industry contains only
one strategic group when all sellers pursue essentially identical strategies and have
comparable market positions. It involves plotting firms on a two-variable map using pairs of
differentiating characteristics such as price/quality range; geographic coverage and so on.
(b) Best-cost provider strategy: Best-cost provider strategy involves providing customers more
value for the money by emphasizing low cost and better quality difference. It can be done:
(a) through offering products at lower price than what is being offered by rivals for products
with comparable quality and features or
(b) charging similar price as by the rivals for products with much higher quality and better
features.
(c) Value chain. It describes the activities within an organization that go to make up a product /
service. Value chain of a manufacturing organization comprises of primary and supportive
activities.
Primary Activities are inclusive of:
 inbound logistics,
 operations,
 outbound logistics,
 marketing and sales; and
 services.
Supportive Activities relate to:
 procurement,
 human resource management,
 technology development; and
 infrastructure.
4. Corporate strategy helps an organisation to achieve and sustain success. It is basically concerned
with the choice of businesses, products and markets. It is often correlated with the growth of the
firm.
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Corporate strategy in the first place ensures the growth of the firm and its correct alignment with
the environment. Corporate strategies are concerned with the broad and long -term questions of
what businesses the organization is in or wants to be in, and what it wants to do with those
businesses. They set the overall direction the organization will follow. It serves as the design for
filling the strategic planning gap. It also helps to build the relevant competitive advantages. A right
fit between the firm and its external environment is the primary contribution of corporate strategy.
Basically the purpose of corporate strategy is to harness the opportunities available in the
environment and countering the threats embedded therein. With the help of corporate strategy,
organizations match their unique capabilities with the external environment so as to achieve its
vision and mission.
5. The different issues involved in strategy implementation cover practically everything that is included
in the discipline of management studies. A strategist, therefore, has to bring to his or her task a
wide range of knowledge, skills, attitudes, and abilities. The implementation tasks put to test the
strategists' abilities to allocate resources, design structures, formulate functional policies, and take
into account the leadership styles required, besides dealing with various other issues.
 The strategic plan devised by the organization proposes the manner in which the strategies
could be put into action. Strategies, by themselves, do not lead to action.
 Strategies should lead to plans. For instance, if stability strategies have been formulated, they
may lead to the formulation of various plans. Plans result in different kinds of program mes. A
programme is a broad term, which includes goals, policies, procedures, rules, and steps to be
taken in putting a plan into action.
 Programmes lead to the formulation of projects. A project is a highly specific programme for
which the time schedule and costs are predetermined. It requires allocation of funds based on
capital budgeting by organizations.
 Projects create the needed infrastructure for the day-to-day operations in an organization.
They may be used for setting up new or additional plants, modernising the existing facilities,
installation of newer systems, and for several other activities that are needed for the
implementation of strategies.
Implementation of strategies is not limited to formulation of plans, programmes, and projects.
Projects would also require resources. After that is provided, it would be essential to see that a
proper organizational structure is designed, systems are installed, functional policies are devised,
and various behavioural inputs are provided so that plans may work.
Given below in sequential manner the issues in strategy implementation which are to be considered:
 Project implementation
 Procedural implementation
 Resource aIIocation
 Structural implementation
 Functional implementation
 Behavioural implementation
6. Total Quality Management is different from traditional management practices, requiring changes in
organisational processes, beliefs and attitudes, and behaviours. ‘Traditional management’ means
the way things are usually done in most organisations in the absence of a TQM focus. The nature
of TQM differs from common management practices in many respects. Some of the key differences
are as follows:
(i) Strategic Planning and Management: Quality planning and strategic business planning is
indistinguishable in TQM. Customer satisfaction, defect rates and process cycle times receive
very high attention on TQM which is not the case in traditional management.
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(ii) Changing Relationships with customers and suppliers: Distinguishable, innovation is
essential to meet and exceed customers’ needs. In TQM quality is defined as product and
services. Traditional management places customers outside of the enterprises and within the
domain of marketing and sales.
(iii) Organizational Structure: TQM is also distinguishable as it views enterprise as a system of
interdependent processes. Every process contains sub-processes and is also contained within
a higher process.
(iv) Organizational Change: In TQM the environment in which the enterprise interacts is considered
to be changing constantly. Management's job, therefore, is to provide the leadership for continual
improvement and innovation in processes and systems, products, and services. TQM recognises
the inevitability of external change and focuses on shaping the future.
(v) Teamwork: In TQM, individuals cooperate in team structure such as quality circles, steering
committees, and self-directed work teams. Departments work together toward system
optimization through cross-functional teamwork.
(vi) Motivation and Job Design: TQM managers provide leadership and motivation rather than
overt intervention in the processes of their subordinates who are viewed as process managers
rather than functional specialists.
7. The prominent areas where the human resource manager can play strategic role are as follows:
1. Providing purposeful direction: The human resource management must be able to lead
people and the organization towards the desired direction involving people. The management
has to ensure harmony between organisational objectives and individual objectives.
Objectives are specific aims which must be in the line with the goal of the organization and
the all actions of each person must be consistent with them.
2. Creating competitive atmosphere: In the present business environment, maintaining
competitive position or gains is an important objective of any business. Having a highly
committed and competent workforce is very important for getting a competitively
advantageous position.
3. Facilitation of change: The human resource manager will be more concerned about
furthering the organization not just maintaining it. He has to devote more time to promote
acceptance of change rather than maintaining the status quo.
4. Diversion of workforce: In a modern organization, management of diverse workforce is a
great challenge. Workforce diversity can be observed in terms of male and female, young and
old, educated and uneducated, unskilled and professional employee and so on. Maintaining a
congenial healthy work environment is a challenge for HR Manager. Motivation, maintaining
morale and commitment are some of the key task that a HR manager has to perform.
5. Empowerment of human resources: Empowerment involves giving more power to those
who, at present, have little control what they do and little ability to influence the decisions
being made around them.
6. Building core competency: The human resource manager has an important role to play in
developing core competency by the firm. A core competence is a unique strength of an
organization which may not be shared by others. Organization of business around core
competence implies leveraging the limited resources of a firm. It needs creative, courageous
and dynamic leadership having faith in organization’s human resources.
7. Development of works ethics and culture: A vibrant work culture will have to be developed
in the organizations to create an atmosphere of trust among people and to encourage creative
ideas by the people. Far reaching changes with the help of technical knowledge will be
required for this purpose.
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© The Institute of Chartered Accountants of India
Test Series: September, 2016
MOCK TEST PAPER – 2
INTERMEDIATE (IPC) : GROUP – II
PAPER – 5: ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
Wherever necessary suitable assumptions may be made and disclosed by way of a note.
Working Notes should form part of the answer.
(Time allowed: Three hours) (Maximum marks: 100)

1. (a) Path Ltd. purchased a fixed asset for US $ 50 lakhs on 01.04.2014 and the same
was fully financed by the foreign currency loan [i.e. US $] repayment in five equal
instalments annually. (Exchange rate at the time of purchase was 1 US $=Rs. 60].
As on 31.03.2015 the first instalment was paid when 1 US $ fetched Rs. 62.00. The
entire loss on exchange was included in cost of goods sold. Path Ltd. normally
provides depreciation on fixed assets at 20% on WDV basis and exercised the
option to adjust the cost of asset for exchange difference arising out of loan
restatement and payment. Calculate the amount of exchange loss and its
treatment.
(b) Power Ltd. has acquired a generator on 1.4.2013 for Rs. 100 lakhs. On 2.4.2013, it
applied to Indian Renewal Energy Development Authority (IREDA) for a subsidy.
The subsidy was granted in June, 2014 after the accounts for 2013-14 were
finalized. The company has not accounted for the subsidy for the year ended
31.3.2014.
State
(i) Is this a prior period item?
(ii) How should the subsidy be accounted in the accounting year 2014-15?
(c) F Ltd. has finalized their financial statements for the year ending 31 st March, 2015
and approved by their approving authority on 30 th June, 2015.
(1) A major fire broke out in the night of 31st May, 2015 destroying factory
premises. Loss of property estimated to be Rs. 25 lakhs.
(2) Negotiations with another company started in April 2015 for acquisition of two
manufacturing units which may involve additional investments of Rs. 50 lakhs.
(3) Foreign exchange loss during the period 1 st April, 2015 and 1 st June 2015 has
resulted that assets being reduced by Rs. 30 lakhs.

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© The Institute of Chartered Accountants of India
You are requested to state how to deal with the above information in the annual
accounts.
(d) Ryan International Limited has given a machinery on lease for 36 months, and its
useful life is 60 months. Cost & fair market value of the machinery is Rs. 5,00,000.
The amount will be paid in 3 equal annual installments and the lessee will return the
machinery to lessor at termination of lease. The unguaranteed residual value at the
end of 3 years is Rs. 50,000. IRR of investment is 10% and present value of annuity
factory of Rs. 1 due at the end of 3 years at 10% IRR is 2.4868 and present value of
Rs. 1 due at the end of 3rd year at 10% IRR is 0.7513.
You are required to comment with reason whether the lease constitute finance lease
or operating lease. (4 x 5 = 20 Marks)
2. Aman, Baal and Chand share profits and losses of a business as to 3:2:1 respectively.
Their balance sheet as at 31 st March, 2016 was as follows:
Liabilities Rs. Assets Rs.
Capital Accounts: Goodwill 10,000
Aman 70,000 Land 20,000
Baal 80,000 Buildings 1,10,000
Chand 10,000 Machinery 50,000
General Reserve 18,000 Motor Car 28,000
Investment Fluctuation Fund 4,000 Furniture 12,000
Chand’s Loan 33,000 Investments 18,000
Mrs. Aman’s loan 15,000 Loose tools 7,000
Creditors 96,000 Stock 18,000
Bills Payable 14,000 Bills receivable 20,000
Bank overdraft 60,000 Debtors: 40,000
Less: Provision 2,000 38,000
Cash 1,000
Chand’s current A/c 56,000
Profit and Loss A/c 12,000
4,00,000 4,00,000
The partners decide to convert their firm into a Joint Stock Company. For this purpose
ABC Ltd. was formed with an authorized capital of Rs. 10,00,000 divided into Rs. 100
equity Shares. The business of the firm was sold to the company as at the date of
balance sheet given above on the following terms:

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© The Institute of Chartered Accountants of India
(i) Motor car, furniture, investments, loose tools, debtors and cash are not to be taken
over by the company.
(ii) Liabilities for bills payable and bank overdraft are to be taken over by the company.
(iii) The purchase price is settled at Rs. 1,95,500 payable as to Rs. 75,500 in cash and
the balance in company’s fully paid shares of Rs. 100 each.
(iv) The remaining assets and liabilities of the firm are directly disposed of by the firm as
per details given below:
Investments are taken over by Aman for Rs. 13,000; debtors realize in all
Rs. 20,000; Motor Car, furniture and loose tools fetch Rs. 24,000, Rs. 4,000, and
Rs. 1,000 respectively. Aman agrees to pay his wife’s loan. The creditors were paid
Rs. 94,000 in final settlement of their claims. The realization expenses amount to
Rs. 500.
(v) The equity share received from the vendor company are to be divided among the
partners in profit-sharing ratio.
You are required to prepare the necessary ledger accounts. (16 Marks)
3. (a) On 31st March, 2016 the books of Shah Insurance Company Limited, contained the
following particulars in respect of fire insurance:
Particulars Amount Rs.
Reserve for unexpired risks on March 31, 2015 10,00,000
Additional Reserve for unexpired risks on March 31, 2015 2,00,000
Premiums 22,40,000
Claims paid 12,80,000
Estimated liability in respect of outstanding claims:
On March 31, 2015 1,30,000
On March 31, 2016 1,80,000
Expenses of management (including Rs. 60,000 legal expenses paid 5,60,000
in connection with the claims)
Interest and dividend (Gross) 1,28,500
Income tax on the above 13,040
Profit on sale of investments 22,000
Commission paid 3,04,000
On 31st March, 2016 provide Rs. 11,20,000 as unexpired risk reserve and
Rs. 1,50,000 as additional reserve.

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© The Institute of Chartered Accountants of India
You are required to prepare the Fire Insurance Revenue account as per the
regulations of IRDA, for the year ended 31 st March, 2016.
(b) M/s P and Co., had four departments A,B,C and D. Each department being
managed by manager whose commission was 10% of the respective departmental
profit, subject to a minimum of Rs. 6,000 in each case. Interdepartmental transfers
took place at a 'loaded' price as follows:
From Department A to Department B 10% above cost
From Department A to Department D 20% above cost
From Department C to Department D 20% above cost
From Department C to Department B 20% above cost
For the year ending on 31 st March, 2016 the firm had already prepared and closed
the departmental Trading and Profit and Loss Account. Subsequently, it was
discovered that the closing stocks of departments had included interdepartmentally
transferred goods at loaded price instead of cost price. From the following
information prepare a statement recomputing the departmental profit or loss:
Dept. A Dept. B Dept. C Dept D
Rs. Rs. Rs. Rs.
Final Profit (Loss) (38,000) 50,400 72,000 1,08,000
Inter departmental 70,000 - 4,800
transfers included at
loaded price in the
departmental stock
(Rs. 22,000 from (Rs.3,600 from
Dept. A and Dept. C and
Rs. 48,000 from Rs. 1,200 from
Dept. C Dept. A)
(10 + 6 = 16 Marks)
4. The following figures have been taken from the books of Centura Bank Limited as on 31 st
March, 2016:
Rs.
Paid up share capital 20,00,000
Interest and discount received 74,11,000
Interest paid on deposits 40,74,000
Salaries and allowances 4,00,000
Rent and taxes paid 1,80,000

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© The Institute of Chartered Accountants of India
Directors' fees and allowances 60,000
Statutory reserve fund 16,00,000
Postages and telegrams 1,20,000
Rent received 1,30,000
Commission, exchange and brokerage 3,80,000
Profit on sale of investments 4,00,000
Depreciation on bank's property 60,000
Law charges 80,000
Auditors' fees 10,000
The following additional information is given to you:
(i) One customer to whom a sum of Rs. 20 lakhs was advanced has become insolvent
and it is expected that only 50% of the amount will be recovered from his estate.
(ii) Auditors find that a provision of Rs. 3 lakhs is necessary against other debts.
(iii) Rebate on bills discounted on 31 st March, 2015 was Rs. 24,000 and on
31st March, 2016 was Rs. 32,000.
(iv) Provide Rs. 13,00,000 for income tax.
(v) The Board of Directors decides to declare dividend @ 10% after transfer of 25% of
the year's profit to Statutory Reserve.
You are required to prepare Profit and Loss Account of the bank with all the necessary
schedules for the year ended 31st March, 2016. Ignore figures for the previous year and
corporate dividend tax. (16 Marks)
5. (a) From the following particulars relating to Pune branch for the year ending December
31, 2015, prepare Branch Account in the books of Head office.
Rs.
Stock at Branch on January1, 2015 10,000
Branch Debtors on January 1, 2015 4,000
Branch Debtors on Dec. 31, 2015 4,900
Petty cash at branch on January 1, 2015 500
Furniture at branch on January 1, 2015 2000
Prepaid fire insurance premium on January 1, 2015 150
Salaries outstanding at branch on January 1, 2015 100
Good sent to Branch during the year 80,000
Cash Sales during the year 1,30,000

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© The Institute of Chartered Accountants of India
Credit Sales during the year 40,000
Cash received form debtors 35,000
Cash paid by the branch debtors directly to the Head Office 2,000
Discount allowed to debtors 100
Cash sent to branch for Expenses:
Rent 2,000
Salaries 2,400
Petty Cash 1,000
Insurance up to March 31, 2016 600 6,000
Goods returned by the Branch 1,000
Goods returned by the debtors 2,000
Stock on December 31,2015 5000
Petty Cash spent by branch 850
Provide depreciation on furniture 10% p.a.
Goods costing Rs. 1,200 were destroyed on account of fire and a sum of Rs. 1,000
was received from the Insurance Company.
(b) Alia Ltd. took over the assets of Rs. 5,00,000 and creditors of Rs. 70,000 of Bharat
& Co. for an agreed amount of Rs. 5,50,000 by the issue of fully paid 12%
Debentures of Rs. 100 each at a premium of 10%. These Debentures are
redeemable at a premium of 5% after 3 years. Pass the necessary journal entries
both at the time of issue and Redemption of Debentures without providing for the
interest. (10 + 6 = 16 Marks)
6. The summarized Balance Sheet of Reckless Ltd. as on 31st March, 2015 is as follows:
Rs.
Assets:
Freehold premises 2,20,000
Machinery 1,77,000
Furniture & fittings 90,800
Inventory 3,87,400
Trade receivables 95,000
Less: Provision for doubtful debts (4,000) 91,000
Cash in hand 2,300
Cash at bank 1,56,500
11,25,000

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© The Institute of Chartered Accountants of India
Liabilities:
60,000 Equity shares of Rs.10 each 6,00,000
Pre-incorporation profit 21,000
Contingency reserve 1,35,000
Profit and loss account 1,26,000
Trade payables 1,33,000
Provision for income-tax 1,10,000
11,25,000
Trade receivables consist of debtors amounting Rs. 80,000 and bill receivables worth
Rs. 15,000. Trade payables consist of creditors amounting to Rs. 1,13,000 and
acceptances worth Rs. 20,000.
Careful Ltd. decided to take over Reckless Ltd. from 31st March, 2015 with the following
assets at value noted against them:
Rs.
Bills receivable 15,000
Freehold premises 4,00,000
Furniture and fittings 80,000
Machinery 1,60,000
Stock 3,45,000
¼ of the consideration was satisfied by the allotment of fully paid preference shares of
Rs. 100 each at par which carried 13% dividend on cumulative basis. The balance was
paid in the form of Careful Ltd’s equity shares of Rs. 10 each, Rs. 8 paid up.
Sundry Debtors realised Rs. 79,500. Acceptances were settled for Rs. 19,000. Income-
tax authorities fixed the taxation liability at Rs. 1,11,600. Creditors were finally settled
with the cash remaining after meeting liquidation expenses amounting to Rs.4,000.
You are required to :
(i) Calculate the number of equity shares and preference shares to be allotted by
Careful Ltd. in discharge of consideration.
(ii) Prepare the important ledger accounts in the books of Reckless Ltd. (16 Marks)
7. Answer any four of the following:
(a) From the following information, you are required to compute the basic and adjusted
eamings per share:
Net profit for 2013-14 11 lakh
Net profit for 2014-15 15 lakh

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© The Institute of Chartered Accountants of India
No. of shares issued before rights issue 5 lakhs
Right issue One for every 5 held
Right issue price 15 per share
Last date of exercising right option 1-06-2014
Fair value of shares before right issue 21 per share
(b) On 31-03-2015, the Balance Sheet of Alpha Ltd. shows an item of Intangible assets
at Rs. 30 Lakhs. The asset was acquired on 1-4-2010 for Rs. 80 lakhs and was
available for use on that date. The company has been following a policy of
amortizing intangible assets over a period of 8 years on straight line basis. How you
will deal in the books of accounts if the company determines by applying the best
estimate of its useful life on 1-4-2015, and the amortization period to be 10 years,
being the best estimate of its useful life from the date, it was available for use.
(c) A company capitalizes interest cost of holding investments and adds to cost of
investment every year, thereby understating interest cost in profit and loss account.
State whether the accounting done by the company is usual or not?
(d) What financial disclosures and returns are required to be filed by an LLP as per the
LLP Act, 2008?
(e) Beta Ltd. has its share capital divided into shares of Rs. 10 each. On 1 st April, 2015,
it granted 25,000 employees stock options at Rs. 50 when the market price was
Rs. 140 per share. The options were to be exercised between 1 st January, 2016 and
28th February, 2016. The employees exercised options for 24,000 shares only; the
remaining options lapsed. The company closes its books of account on 31 st March
every year. You are required to show necessary journal entries reflecting these
transactions. (4 x 4 = 16 Marks)

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© The Institute of Chartered Accountants of India
Test Series: September, 2016
MOCK TEST PAPER - 2
INTERMEDIATE (IPC): GROUP – I
PAPER – 5: ADVANCED ACCOUNTING
SUGGESTED ANSWERS/HINTS

1. (a) Exchange differences arising on restatement or repayment of liabilities incurred for
the purpose of acquiring fixed assets should be adjusted in the carrying amount of
the respective fixed assets as Path Ltd. has exercised the option and it is long term
foreign currency monetary item.
Thus, the entire exchange loss due to variation of Rs. 20 lakhs on 31.03.2015 on
payment of US $ 10 lakhs, should be added to the carrying amount of fixed assets
and not to the cost of goods sold.
Calculation of Exchange loss:
Foreign currency loan (in Rs.) = (50 lakhs $ x Rs. 60) = Rs. 3,000 lakhs
Exchange loss on outstanding loan on 31.03.2015 = Rs. 40 lakhs US $ x (62.00-
60.00) = Rs. 80 lakhs.
So, Rs. 80 lakhs should also be added to cost of fixed asset with corresponding
credit to outstanding loan in addition to Rs. 20 lakhs on account of exchange loss
on payment of instalment. The total cost of fixed asset to be increased by Rs. 100
lakhs.
Total depreciation to be provided for the year 2014-15 = 20% of (Rs. 3,000 Iakhs +
100 lakhs) = Rs. 620 lakhs.
(b) (i) Whether a subsidy applied is to be classified as prior period item as pe r AS 5,
depends upon whether the company has committed an error in 2013-14 by not
recognising the subsidy? The answer is in para 13 of AS 12 “Accounting for
Government Grants” which permits recognition of grant only when there is
reasonable assurance that (i) the enterprise will comply with the conditions
attached to them and (ii) the subsidy will be received. Mere making of an
application does not provide the reasonable assurance that the subsidy will be
received. Letter of sanction from IREDA is required to provide this assurance.
Since, the subsidy was granted in June, 2014 after approval of accounts, non -
recognition of grant in 2013-14 will not be considered as an error. Hence, this
is not a prior period item. Therefore, the company was right in not recognizing
the grant.
Further, AS 4 requires adjustment of events occurring after the balance sheet
date only upto the date of approval of accounts by the Board of Directors. In

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© The Institute of Chartered Accountants of India
view of this, the company is correct in not adjusting the same in the accounts
in the year 2013-14.
(ii) The subsidy should be deducted from the cost of the generator. The revised
unamortised amount of generator should be written off over the remaining
useful life.
Alternatively, the same may be treated as Deferred Income and allocated over
the remaining useful life in the proportion in which depreciation is charged.
(c) For the information given, the following will be recommended treatment with
reference to the provisions of AS 4: Contingencies and Events Occurring After t he
Balance Sheet Date.
(1) The event is a non-adjusting event since it occurred after the year-end and
does not relate to the conditions existing at the year-end. However, the event
would appear to be of such significance as to require a disclosure in the report
of the approving authority to enable users of the financial statements to make
proper evaluation and decision, hence, such disclosure is recommended.
(2) AS 4 defines events occurring after the balance sheet date as those significant
event- both favorable and unfavorable – that occur between the balance sheet
date and the date on which the financial statements are approved by the
approving authority. Accordingly, negotiation for acquisitions of two
manufacturing units which started on 30 th April, 2015 should be disclosed in
the Board‟s Report. No adjustments of assets and liabilities are required, as
the negotiation does not affect the determination and the conditions of the
amounts stated in the financial statements for the year ended 31 st March,
2015.
(3) The foreign exchange loss due to changes in exchange rates during the period
1st April 2015 and 1st June 2015, is a non adjusting event since it does not
relate to the conditions existing at the balance sheet date. The amount of loss
appears material and may be of such significance that requires disclosure in
the report of the approving authority.
(d) Determination of Nature of Lease
Present value of unguaranteed residual value at the end of 3 rd year
= Rs. 50,000 x 0.7513 = Rs. 37,565
Present value of lease payments = Rs. 5,00,000 – Rs. 37,565
= Rs. 4,62,435
The percentage of present value of lease payments to fair value of the
equipment is (Rs. 4,62,435/ Rs. 5,00,000) x 100 = 92.487%.

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© The Institute of Chartered Accountants of India
Since, it substantially covers the major portion of the lease payments, the lease
constitutes a finance lease.
2. Realisation Account
Particulars Rs. Rs. Particulars Rs. Rs.
To Goodwill 10,000 By provision to doubtful 2,000
Debts
To land 20,000 By Trade creditors 96,000
To Buildings 1,10,000 By Bills Payable 14,000
To Machinery 50,000 By Bank overdraft 60,000
To Motor Car 28,000 By Mrs. Aman‟s loan 15,000
To Furniture 12,000 By ABC Ltd. (Purchase 1,95,500
price)
To Investments 18,000 By Aman‟s Capital A/c 13,000
(Investments)
To Loose tools 7,000 By Cash A/c:
To Stock 18,000 Debtors 20,000
To Bill receivable 20,000 Motor Car 24,000
To Debtors 40,000 Furniture 4,000
To Aman‟s Capital A/c 15,000 Loose tools 1,000 49,000
(Mrs. Aman‟s Loan)
To Cash A/c:
Creditors 94,000
Realisation expenses 500 94,500
To Profit on Realisation
t/f to:
Aman‟s Capital A/c 1,000
Baal‟s Capital A/c 667
Chand‟s Capital A/c 333 2,000
4,44,500 4,44,500

ABC Ltd. Account
Particulars Rs. Particulars Rs.
To Realisation A/c 1,95,500 By Cash A/c 75,500
By Shares in ABC Ltd. 1,20,000
1,95,500 1,95,500

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© The Institute of Chartered Accountants of India
Partners’ Capital Accounts
Particulars Aman Baal Chand Particulars Aman Baal Chand
Rs. Rs. Rs. Rs. Rs. Rs.
To Profit and 6,000 4,000 2,000 By Balance b/d 70,000 80,000 10,000
Loss A/c
To Realisation 13,000 - - By Chand‟s Loan - - 33,000
A/c A/c
To Chand‟s - - 56,000 By General 9,000 6,000 3,000
Current A/c reserve
To shares in 60,000 40,000 20,000 By Investment
ABC Ltd. Fluctuation 2,000 1,333 667
Fund
To Cash A/c 18,000 44,000 - By Realization 1,000 667 333
A/c
By Realisation 15,000 - -
A/c (Mrs. Aman‟s
loan A/c)
By Cash A/c - 31,000
97,000 88,000 78,000 97,000 88,000 78,000

Chand’s Current Account
Particulars Rs. Particulars Rs.
To Balance 56,000 By Chand‟s Capital A/c-transfer 56,000
b/d
56,000 56,000
Shares in ABC Ltd. Account
Particulars Rs. Particulars Rs.
To ABC Ltd. Account 1,20,000 By Aman‟s Capital A/c 60,000
By Baal‟s Capital A/c 40,000
By Chand‟s Capital A/c 20,000
1,20,000 1,20,000
Cash Account
Particulars Rs. Particulars Rs.
To Balance b/d 1,000 By Realisation A/c 94,500
(Liabilities and expenses)
To ABC Ltd. 75,500 By Aman‟s Capital A/c 18,000

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© The Institute of Chartered Accountants of India
To Realisation A/c (sale 49,000 By Baal‟s Capital A/c 44,000
of assets)
To Chand‟s Capital A/c 31,000 -
1,56,500 1,56,500
Note: Investment Fluctuation Fund Account may be transferred to Realisation
Account.
3. (a) FORM B– RA
Name of the Insurer: Shah Insurance Company Limited
Registration No. and Date of registration with IRDA: ……………………..
Revenue Account for the year ended 31 st March, 2016
Particulars Schedule Amount
(Rs.)
Premium earned (net) 1 21,70,000
Profit or loss on sale/redemption of investment 22,000
Others -
Interest dividend & rent (Gross) 1,28,500
Total (A) 23,20,500
Claim incurred (Net) 2 13,90,000
Commission 3 3,04,000
Operating expenses related to insurance 4 5,00,000
Total (B) 21,94,000
Operating profit/loss from fire insurance business 1,26,500
Schedule –1 (Premium earned net) Rs.
Premium received 22,40,000
Less: Adjustment for change in Reserve for Unexpired risk (as per 70,000
W.N.)
Total premium earned 21,70,000
Schedule -2 (Claims incurred net)
Claim paid 12,80,000
Add: Legal expenses regarding claims 60,000
13,40,000
Add: Claims outstanding as on 31st March 2016 1,80,000
15,20,000
Less: Claims outstanding as on 31st March 2015 1,30,000
13,90,000

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© The Institute of Chartered Accountants of India
Schedule-3 (Commission)
Commission paid 3,04,000
Schedule-4 (Operating expenses related to Insurance -
Business)
Expenses of management (5,60,000 – 60,000) 5,00,000
Working Note:
Calculation for change in Reserve for Rs.
Unexpired risk:
As on 31 st March, 2016:
Reserve for Unexpired Risk 11,20,000
Additional Reserve 1,50,000 12,70,000
Less: Reserve for Unexpired risks as on 31 st 10,00,000
March, 2015
Additional reserve as on 31 st March, 2015 2,00,000 (12,00,000)
70,000
Note: Interest and dividends are shown at gross value in Revenue A/c. Income tax
on the above will not be included in Revenue A/c of an insurance company.
(b) Statement showing the recomputation of Departmental Profit or Loss
Particulars A B C D
Rs. Rs. Rs. Rs.
A Final Profit/(Loss) (Computed earlier) (38,000) 50,400 72,000 1,08,000
B Add: Departmental Manager‟s Commission 6,000 6,000 8,000 12,000
@ 10% of Deptt. Profit subject to a minimum
of Rs. 6,000 [Working Note (i)]
C Profit before Deptt. Manager‟s commission (32,000) 56,400 80,000 1,20,000
(A+B)
D Less: Profit earned through transfer of goods (2,200) - (8,600) -
at loaded price remaining in stock at transfer
department (W.N. 2)
E Correct Departmental Profit (before (34,200) 56,400 71,400 1,20,000
manager‟s commission)(C-D)
F Less: Manager‟s commission @ 10% of profit
subject to a minimum of (6,000) (6,000) (7,140) (12,000)
Rs. 6,000
G Departmental Profit after Manager‟s (40,200) 50,400 64,260 1,08,000
commission (E-F)

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© The Institute of Chartered Accountants of India
Working Note:
1. Manager’s Commission:
Deptt. Profit/Loss Commission
A (-) 38,000 6,000
B 50,400 6,000 i.e. (50,400 x 1/9 = Rs. 5,600 less
than Rs. 6,000

C 72,000 8,000 i.e. (72,000 x 1/9 = Rs. 8,000)
D 1,08,000 12,000 i.e. (1,08,000 x 1/9 = Rs. 12,000)
2. Unrealised Profit on stock transfer:
Rs.
Dept. A Rs. 22,000 to Deptt. B @ 110%, Profit thereon 22,000 2,000
x 10/110
Rs. 1,200 to Deptt. D @ 120% Profit thereon 1,200 x 20/120 200
2,200
Dept. C Rs. 48,000 to Deptt. B 120% Profit thereon 48,000
x 20/120 8,000
Rs. 3,600 to Deptt. D @ 120 % Profit thereon 3,600
x 20/120 600
8,600
4. Centura Bank Limited
Profit and Loss account for the year ended 31 st March, 2016
Schedule No. Year ended
31.3.2016
Rs.
I. Income
Interest earned 13 74,03,000
Other income 14 9,10,000
83,13,000
II. Expenditure
Interest expended 15 40,74,000
Operating expenses 16 9,10,000
Provisions and contingencies (W.N.2) 26,00,000

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© The Institute of Chartered Accountants of India
75,84,000
III. Profit
Net profit for the year 7,29,000
Profit brought forward -
7,29,000
IV. Appropriations
Transfer to Statutory Reserve 1,82,250
Proposed dividend 2,00,000
Balance carried over to balance sheet 3,46,750
7,29,000
Schedule 13 – Interest earned
Rs.
Interest and discount earned (W.N.1) 74,03,000
74,03,000
Schedule 14 - Other Income
Rs.
Commission, exchange and brokerage 3,80,000
Profit on sale of investment 4,00,000
Rent 1,30,000
9,10,000
Schedule 15-Interest Expended
Rs.
Interest paid on deposits 40,74,000
40,74,000
Schedule 16-Operating Expenses
Rs.
Payment and provisions for employees 4,00,000
Rent and taxes paid 1,80,000
Depreciation on bank‟s property 60,000
Directors‟ fees and allowances 60,000
Auditors‟ fees 10,000

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© The Institute of Chartered Accountants of India
Law charges 80,000
Postage and Telegrams 1,20,000
9,10,000
Working Notes:
Rs.
1. Calculation of interest earned
Interest and discount received 74,11,000
Add: Rebate on bills discounted as on 31 st March, 2013 24,000
74,35,000
Less: Rebate on bills discounted as on 31 st March, 2014 (32,000)
74,03,000
2. Provisions and Contingencies
Provision for doubtful debts:
Doubtful debts due to insolvency of a
customer (50% of Rs. 20 lakhs) 10,00,000
Provision for other debts 3,00,000 13,00,000
Provision for income tax 13,00,000
26,00,000
5. (a) Pune Branch Account
Particulars Rs. Particulars Rs. Rs.
To Opening Balance By Opening Balance:
Stock 10,000 Salaries outstanding 100
Debtors 4,000 By Remittances:
Petty Cash 500 Cash sales 1,30,000
Furniture 2,000 Cash received from 35,000
debtors
Prepaid 150 Cash paid by debtors 2,000
Insurance directly to H.O.
To Goods sent to 80,000 Received from 1,68,000
Branch Account Insurance Company 1,000
To Bank (expenses) By Goods sent to branch 1,000
(return of goods by the
branch to H.O.)
Rent 2,000 By Closing Balances:

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© The Institute of Chartered Accountants of India
Salaries 2,400 Stock 5,000
Petty Cash 1,000 Petty Cash 650
Insurance 600 6,000 Debtors 4,900
To Net Profit 78,950 Furniture (2,000 – 1,800
10% depreciation)
Prepaid insurance 150
(1/4 x Rs. 600)
1,81,600 1,81,600

Working Note:
Calculation of petty cash balance at the end: Rs.
Opening balance 500
Add: Cash received form the Head Office 1,000
Total Cash with branch 1,500
Less : Spent by the branch 850
Closing balance 650
(b) Journal of Alia Ltd.
(Rs.) (Rs.)
1 Sundry Assets A/c Dr. 5,00,000
Goodwill [Balancing Figure] Dr. 1,20,000
To Creditors 70,000
To Bharat & Co. 5,50,000
(Being the purchase of Business from Bharat
& Co.)
2 Bharat & Co. Dr. 5,50,000
Loss on Issue of Debentures A/c Dr. 25,000
To 12% Debentures A/c 5,00,000
To Securities Premium A/c 50,000
To Premium on Redemption of 25,000
Debenture A/c
(Being the issue of 5000, 12% Debentures
at a premium of 10% and repayable at a
premium of 5%)
4 Profit & Loss A/c Dr. 1,25,000
To Debenture Redemption Reserve A/c 1,25,000

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© The Institute of Chartered Accountants of India
(Being the creation of DRR @ 25% of the
value of debentures issued)
5 Debenture Redemption Reserve Dr. 75,000
Investments A/c
To Bank A/c 75,000
(Being the DRR Investments made equal
to 15% of the value of debentures)
6 Bank A/c Dr. 75,000
To Debenture Redemption Reserve 75,000
Investments A/c
(Being the DRR investments realized)
7 12% Debentures A/c Dr. 5,00,000
Premium on Redemption of Debentures Dr. 25,000
A/c
To Debentureholders A/c 5,25,000
(Being the amount due on redemption)
8 Debentureholders A/c Dr. 5,25,000
To Bank A/C 5,25,000
(Being the payment made to
Debentureholders)
9 Debenture Redemption Reserve A/c Dr. 1,25,000
To General Reserve 1,25,000
(Being the transfer of DRR to General
Reserve)
6. (i) Calculation of the number of equity shares and preference shares to be
allotted by Careful Ltd. in discharge of purchase consideration
Calculation of purchase consideration: Rs.
Agreed value of assets taken over:
Bills receivable 15,000
Freehold premises 4,00,000
Furniture & fittings 80,000
Machinery 1,60,000
Inventory 3,45,000
10,00,000

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© The Institute of Chartered Accountants of India
Discharge of purchase consideration:
1. Amount paid by allotment of 13% preference shares
1
= Rs. 10,00,000 × = Rs. 2,50,000
4
Number of 13% preference shares of Rs. 100 each
2,50,000
=  2,500 preference shares
100
2. Amount paid by allotment of equity shares
= Rs. 10,00,000 – Rs. 2,50,000 = Rs. 7,50,000
Paid up value of one equity share = Rs. 8 each
Hence, the number of equity shares allotted =
Rs. 7,50,000
=93,750equity shares
Rs. 8
(ii) Ledger accounts in the books of Reckless Ltd.
Realisation Account
Rs. Rs.
To Freehold Premises 2,20,000 By Creditors 1,13,000
To Machinery 1,77,000 By Acceptances 20,000
To Furniture & Fittings 90,800 By Provision for tax 1,10,000
To Inventory 3,87,400 By Provision for doubtful 4,000
debts
To Sundry Debtors 80,000 By Careful Ltd. 10,00,000
To Bills Receivable 15,000 By Cash/Bank:
To Cash/ Bank: Sundry Debtors 79,500
Acceptances 19,000
Provision for tax 1,11,600
Creditors 1,03,700
To Cash/Bank:
Liquidation expenses 4,000
To Profit 1,18,000
13,26,500 13,26,500
Cash and Bank Account
Rs. Rs.
To Balance b/d 1,56,500 By Realisation A/c 19,000

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© The Institute of Chartered Accountants of India
(cash at bank) (Acceptances)
To Cash in hand 2,300 By Provision for tax 1,11,600
To Realisation A/c 79,500 By Realisation (Expenses) 4,000
By Realisation A/c [Creditors (bal 1,03,700
fig.)]
2,38,300 2,38,300
Equity Shareholders Account
Rs. Rs.
To 13% Cumulative 2,50,000 By Equity Share Capital 6,00,000
preference By Pre-incorporation 21,000
shares in profit
Careful Ltd. By Contingency reserve 1,35,000
To Equity Shares in 7,50,000 By Profit & Loss Account 1,26,000
Careful Ltd. By Realisation Account 1,18,000
10,00,000 10,00,000
Careful Ltd. Account
Rs. Rs.
To Realisation 10,00,000 By 13% Cumulative preference 2,50,000
Account shares in Careful Ltd.
By Equity shares in Careful Ltd. 7,50,000
10,00,000 10,00,000
7. (a) Computation of theoretical ex-rights fair value per share
Fair value of all outstanding shares immediately prior to exercise of rights + Total amount received from exercise of rights

Number of shares outstanding prior to exercise + number of shares issued in the exercise
(Rs. 21.00 x 5,00,000 shares) + (Rs. 15.00 x 1,00,000 shares)
5,00,000 shares + 1,00,000 shares
Theoretical ex-rights fair value per share = Rs. 20.00
(a) Computation of adjustment factor
Fair value per share prior to exercise of rights Rs. (21.00)
(b) = =1.05
Theoretica l ex - rights value per share Rs. (20.00)

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Computation of earnings per share
Year Year
2013-14 2014-15
EPS for the year 2013-14 as originally reported: Rs. 2.20
(Rs. 11,00,000/5,00,000 shares)
EPS for the year 2013-14 restated for rights issue: Rs. 2.10
[Rs. 11,00,000/ (5,00,000 shares x 1.05)]
EPS for the year 2014-15 including effects of rights
Rs. 15,00,000 Rs. 2.55
issue
(5,00,000 x 1.05 x 2 / 12) + (6,00,000 x 10 / 12)

(b) As per AS 26 „Intangible Assets‟, the depreciable amount of an intangible asset
should be allocated on a systematic basis over its useful life. Also there is a
rebuttable presumption that the useful life of an intangible asset will not ex ceed 10
years from the date it is available for use. The amortization should commence when
the asset is available for use. As per para 78 of AS 26, if there has been a
significant change in the expected pattern of economic benefits from the asset, the
amortisation method should be changed to reflect the changed pattern.
The company has been following a policy of amortization over a period of 8 years.
As on 01-4-2015, 5 years have passed and the carrying amount stands at Rs. 30
lakhs. If the same treatment were to be continued, this would have been amortized
over the next 3 years. But the revised estimate of remaining useful life would extend
the period by another 5 years to amortize the carrying amount, the Company would
be advised to amortise the carrying value over the next 5 years. Thus after revision
in estimated useful life, the amount of Rs. 30 lacs would be amortised over next 5
years.
(c) Investments other than investment properties are not qualifying assets as per AS 16
“Borrowing Costs”. Therefore, interest cost of holding such investments cannot be
capitalized. Further, even interest in respect of investment properties can only be
capitalized if such properties meet the definition of qualifying asset, namely, that it
necessarily takes a substantial period of time to get ready for its intended use or
sale. Even where the investment properties meet the definition of 'qualifying asset',
for the capitalisation of borrowing costs the other requirements of the standard such
as that borrowing cost should be directly attributable to the acquisition or
construction of the investment property and suspension of capitalization as per
paragraphs 17 and 18 of AS 16 have to be complied with.
(d) As per section 34 of the LLP Act, 2008, every LLP shall maintain s uch proper books
of accounts as may be prescribed relating to its affairs for each year of its existence
on cash basis or accrual basis and according to the double entry system of

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accounting and shall maintain the same at its registered office for such per iod as
may be prescribed. Every LLP shall, within six months of the end of each financial
year, prepare a Statement of Account and Solvency for the said financial year as at
the last day of the said financial year, in such form as may be prescribed, and su ch
statement shall be signed by the designated partners of the LLP. Every LLP shall
also file within the prescribed time, the Statement of Account and Solvency with the
Registrar every year in such form and manner and accompanied by such fee as
may be prescribed. The accounts of an LLP must be audited in accordance with
such rules as may be prescribed.
Under Section 35 (1) of the LLP Act every LLP is required to file an Annual Return
which is duly authenticated with the registrar within sixty days of the closure of its
financial year in such form and manner and with such fees as may be prescribed
(e) Journal Entries
Rs. Rs.
1.1.16 Bank A/c Dr. 12,00,000
to Employees compensation expense Dr. 21,60,000
28.2.16 A/c
To Equity Share Capital A/c 2,40,000
To Securities Premium A/c 31,20,000
(Allotment of 24,000 equity shares
of Rs.10 each at a premium of
Rs.130 per share to the employees)
31.3.16 Profit and Loss A/c Dr. 21,60,000
To Employees Compensation
Expense A/c 21,60,000
(For transfer of employees
compensation expense to profit and
loss account)

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© The Institute of Chartered Accountants of India
Test Series: September, 2016
MOCK TEST PAPER – 2
INTERMEDIATE (IPC) GROUP – II
PAPER – 6: AUDITING AND ASSURANCE
Question No. 1 is compulsory.
Attempt any five questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100

1. Discuss the following:
(a) The auditor is faced with sampling risk in both tests of control and substantive
procedures.
(b) Mention any four information which assists the auditor in accepting and continuing
of relationship with the client as per SA 220.
(c) State the significant difficulties encountered during audit with reference to SA-260
(communication with those charged with governance).
(d) Despite of several disadvantages, audit programme is required to start an audit .
(5 x 4 = 20 Marks)
2. State with reason (in short) whether the following statements are correct or incorrect
(Answer any eight):
(i) The Board of Directors of a company may contribute any amount to charitable funds
without any prior permission of the company in general meeting.
(ii) A Chartered Accountant holding securities of S Ltd. having face value of Rs. 950 is
qualified for appointment as an auditor of S Ltd.
(iii) None of the joint auditors shall be held responsible in respect of the work not
divided among them.
(iv) Reporting on adequate internal financial controls system of a company is out of the
scope of statutory auditor.
(v) The auditor shall disclaim an opinion when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the
aggregate, are both material and pervasive to the financial statements.
(vi) A company can issue its sweat equity shares at discounted price.
(vii) An auditor appointed under section 139 may be removed from his office before the
expiry of his term by an ordinary resolution of the company.

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(viii) Premium received on issue of shares prior to the date of Balance Sheet has been
transferred to Statement of Profit and Loss for arriving at the figure of commission
payable to the managing director.
(ix) Observation consists of seeking information of knowledgeable persons, both,
financial and non- financial, within the entity or outside the entity.
(x) Test checks refers to the routine audit checks that are carried out in the normal
course of audit. (2 x 8 = 16 Marks)
3. How will you vouch/verify the following:
(a) Petty Cash.
(b) Borrowings from Bank.
(c) Sale Proceeds of Junk Material.
(d) Repayment of amount of foreign loan for purchase of an asset. (4 x 4 = 16 Marks)
4. (a) The auditor may exercise his judgement to identify which risks are significant risks.
Explain the above in context of SA-315. (4 Marks)
(b) The auditor shall perform additional audit procedures to determine whether or not a
material uncertainty exists, when an event has been identified that may cast
significant doubt on the entity’s ability to continue as a going concern . Mention the
audit procedures need to be performed in accordance with SA 570. (6 Marks)
(c) In case of initial audit engagements, the auditor may consider additional matters in
establishing the overall audit strategy and audit plan. Explain those additional
matters need to be considered as per SA 300. (6 Marks)
5. (a) “Provisions regarding rotation of auditors affect only specific class of companies”.
Discuss. (4 Marks)
(b) State the manner of rotation of auditors on expiry of their term. (6 Marks)
(c) Mention any eight important points which an auditor will consider while conducting
audit of a club? (6 Marks)
6. (a) The management of an entity informed you that Work-in-Progress (WIP) is not
valued since it is difficult to know the same in view of multiple processes involved
and in any case opening & closing WIP would be more or less the same. Comment
as an auditor. (4 Marks)
(b) What are sweat equity shares? How an auditor would verify issue of such sweat
equity shares? (4 Marks)
(c) Mr. A was appointed auditor of AAS Ltd. by Board to fill the casual vacancy that arose
due to death of the auditor originally appointed in AGM. Subsequently, Mr. A also
resigned on health grounds during the tenure of appointment. The Board filled this
vacancy by appointing you through duly passed Board resolution. Comment. (4 Marks)

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(d) Discuss how would you as an auditor report under CARO, 2016 in respect of
statutory dues. (4 Marks)
7. Write short notes on any four of the following:
(a) Statistical Sampling.
(b) Manipulation of Accounts.
(c) Removal of company auditor before expiry of term.
(d) Assertions about account balances at the period end.
(e) Disclosure requirements of bank balances of a limited company. (4 x 4 = 16 Marks)

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© The Institute of Chartered Accountants of India
Test Series: September, 2016
MOCK TEST PAPER – 2
INTERMEDIATE (IPC): GROUP – II
PAPER – 6: AUDITING AND ASSURANCE
SUGGESTED ANSWERS / HINTS

1. (a) Sampling Risk: As per SA 530 ―Audit Sampling‖, audit sampling enables the
auditor to obtain and evaluate audit evidence about some characteristic of the items
selected in order to form or assist in forming a conclusion concerning the population
from which the sample is drawn. Audit sampling can be applied using either non -
statistical or statistical sampling approaches.
When designing a sample, the auditor determines tolerable misstatement in order to
address the risk that the aggregate of individually immaterial misstatements may
cause the financial statements to be materially misstated and provide a margin for
possible undetected misstatements.
Sampling Risk is the risk that the auditor‘s conclusion based on a sample may be
different from the conclusion if the entire population were subjected to the same
audit procedure. Sampling risk can lead to two types of erroneous conclusions:
(i) In the case of a test of controls, that controls are more effective than they
actually are, or in the case of a substantive procedure i.e. test of details, that a
material misstatement does not exist when in fact it does. The auditor is
primarily concerned with this type of erroneous conclusion because it affects
audit effectiveness and is more likely to lead to an inappropriate audit opinion.
(ii) In the case of a test of controls, that controls are less effective than they
actually are, or in the case of a substantive procedure i.e. test of details, that a
material misstatement exists when in fact it does not. This type of erroneous
conclusion affects audit efficiency as it would usually lead to additional work to
establish that initial conclusions were incorrect.
(b) Information which assist the Auditor in accepting and continuing of
relationship with Client: As per SA 220, ―Quality Control for an Audit of Financial
Statements‖ the auditor should obtain information considered necessary in the
circumstances before accepting an engagement with a new client, when deciding
whether to continue an existing engagement and when considering acceptance of a
new engagement with an existing client. The following information would assist th e
auditor in accepting and continuing of relationship with the client:
(i) The integrity of the principal owners, key management and those charged with
governance of the entity;

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(ii) Whether the engagement team is competent to perform the audit engagemen t
and has the necessary capabilities, including time and resources;
(iii) Whether the firm and the engagement team can comply with relevant ethical
requirements; and
(iv) Significant matters that have arisen during the current or previous audit
engagement, and their implications for continuing the relationship.
(c) Significant Difficulties Encountered During the Audit: As per SA 260
―Communication with Those Charged with Governance‖, significant difficulties
encountered during the audit may include such matters as:
 Significant delays in management providing required information.
 An unnecessarily brief time within which to complete the audit.
 Extensive unexpected effort required to obtain sufficient appropriate audit
evidence.
 The unavailability of expected information.
 Restrictions imposed on the auditor by management.
 Management‘s unwillingness to make or extend its assessment of the entity‘s
ability to continue as a going concern when requested.
(d) Audit Programme: Despite of several disadvantages, the audit programme is
required to start an audit due to the following considerations-
(i) The audit programme lists down areas of audit before commencement.
(ii) The audit timing is built therein; thereby it becomes a schedule of audit plan .
(iii) The staff who are entrusted with the audit assignment is also specified. It is a
plan of resource allocation of the firm.
(iv) It specifies the procedures to be checked during the audit.
(v) As the audit work is split into various elements of procedures to be performed,
the audit programme acts as a guiding chart or check list during the
performance of audit.
(vi) Since the staff-in-charge of each work is specified and they sign the
programme, it extracts the responsibility from the audit assistants.
(vii) The working papers of the audit staff can be reviewed against the audit
programme which helps a base of reference for evaluation of the performance
before reporting on the financial statements.
(viii) It also helps in preparing a diary of the performance and plan and also base for
billing the clients for the time and manpower involved in the audit.

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2. (i) Incorrect: As per section 181 of the Companies Act, 2013, the Board of Directors of a
company may contribute to bona fide charitable and other funds. However, prior
permission of the company in general meeting is required in case any amount the
aggregate of which, in any financial year, exceeds 5 per cent of its average net profits
for the three immediately preceding financial years.
(ii) Incorrect: As per the provisions of the Companies Act, 2013, a person is
disqualified to be appointed as an auditor of a company if he is holding any security
of or interest in the company.
(iii) Incorrect: According to SA 299 ―Responsibilities of Joint Auditors‖, all the joint
auditors are jointly and severally responsible in respect of the work which is not
divided among joint auditors and is carried out by all of them.
(iv) Incorrect: Section 143(3) of the Companies Act, 2013 requires the statutory auditor
of the company to state in auditor‘s report whether the company has adequate
internal financial controls system in place and the operating effectiveness of such
controls.
(v) Incorrect: The auditor shall disclaim an opinion when the auditor is unable to obtain
sufficient appropriate audit evidence on which to base the opinion, and the auditor
concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive.
(vi) Correct: According to section 53 of the Companies Act, 2013, a company shall not
issue shares at a discount. However, exception has been given in the case of an
issue of sweat equity shares.
(vii) Incorrect: As per sub-section (1) of Section 140 of the Companies Act, 2013, an
auditor appointed under section 139 may be removed from his office before the
expiry of his term only by a special resolution of the company, after obtaining the
prior approval of the Central Government in that behalf as per Rule 7 prescribed
under Companies (Audit & Auditors) Rules, 2014:
(viii) Incorrect: Premium received on issue of shares is capital receipt and should not be
credited to Statement of Profit and Loss. As per the provisions of Section 198 of the
Companies Act, 2013, premium on issue of shares should not be considere d in
computation of net profit for the purpose of managerial remuneration.
(ix) Incorrect: Inquiry consists of seeking information of knowledgeable persons, both,
financial and non- financial, within the entity or outside the entity.
Observation consists of looking at a process or procedure being performed by
others.
(x) Incorrect: Test checks refers to an audit procedure wherein only a part is checked
to form an opinion instead of checking all the transactions.

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3. (a) Petty Cash
(i) Trace the amounts advanced to the petty cashier for meeting petty office
expenses from the Cash Book in the Petty Cash Book.
(ii) Vouch payments with docket vouchers which must be supported, wherever
possible, by external evidence e.g., payee‘s receipted bill or invoices, cash
memo, etc.
(iii) Trace payments made for the purchase of postage stamps recorded in the
Postage Book. The totals of the Postage Book should be test checked. The
amounts of postage stamps in hand, at the end of the year, should be credited
to Postage Account by debiting the amounts to Postage in Hand Account. It
should be seen that the amount paid for postage stamps is not unduly large
and the Postage Book is normally checked by the petty cashier from time to
time before the amount of imprest is reimbursed. Confirm that the postage
expenses for the year are reasonable as compared with that in the postage
expenses from month to month.
(iv) See where a columnar Petty Cash Book is maintained, that the extension have
been carried forward into appropriate amount columns.
(v) Check the column totals and cross totals.
(vi) Trace posting of the various columns in which payments are classified to the
respective ledger accounts.
(vii) Verify the cash balance in hand.
(viii) Auditor should also verify whether the amount of petty cash imprest is fixed. Is
this amount reasonable considering the total amount of petty cash payments
made during a month or so?
(b) Borrowings from a Bank: Borrowings from a bank may be either in the form of
overdraft limits; or short term or medium term or long term loans. The audit
procedures which an auditor may adopt are outlined below-
(i) Ensure that balance as per books of the client and the bank statement tally. In
case of difference between the two amounts, reconciliation statement prepared
by the client should account for reasons.
(ii) Examine whether borrowings from the bank have been duly authorized.
(iii) Examine documents to ensure that statutory requirements, if any, with regards
to creation and registration charges have been met.
(iv) Examine the loan agreement and ensure that the terms therein have been duly
complied with.
(v) Ascertain the purpose for which loan has been raised and examine whether
end use of the funds have been accordingly made.

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(c) Sale Proceeds of Junk Material
(i) Review the internal control on junk material, as regards its generations,
storage and disposal & see whether it was properly followed at every stage.
(ii) Ascertain whether the organisation is maintaining reasonable records for the
sale and disposal of junk material.
(iii) Review the production and cost records for the determination of the extent of
junk material that may arise in a given period.
(iv) Compare the income from the sale of junk material with the corresponding
figures of the preceding three years.
(v) Check the rates at which different types of junk material have been sold and
compare the same with the rates that prevailed in the preceding year.
(vi) See that all junk material sold has been billed and check the calculations on
the invoices.
(vii) Ensure that there exists a proper procedure to identify the junk material and
good quality material is not mixed up with it.
(viii) Make an overall assessment of the value of the realisation from the sale of
junk material as to its reasonableness.
(d) Repayment of Amount of Foreign Loan for Purchase of an Asset
(i) Check the loan agreement, rate of interest, terms of security.
(ii) Check the remittances made during the year towards installments of
repayments made.
(iii) Check the receipted voucher/account confirmation for the balance of
outstanding.
(iv) The year end liability of foreign loan should be translated to the rate of
exchange prevalent as on the closing date.
(v) The gain or loss arising on exchange conversion is to be credited or debited to
Statement of Profit and Loss in accordance with the Accounting Standard 11.
(vi) Check banker exchange rate chart for correctness of the conversion.
(vii) Check RBI or other agencies‘ permission for remittances outside India.
4. (a) Identification of Significant Risks: SA 315 ―Identifying and Assessing the Risk of
Material Misstatement through understanding the Entity and its Environment‖ defines
‗significant risk‘ as an identified and assessed risk of material misstatement that, in
the auditor‘s judgment, requires special audit consideration.

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© The Institute of Chartered Accountants of India
As part of the risk assessment, the auditor shall determine whether any of the risks
identified are, in the auditor‘s judgment, a significant risk. In exercising this judgment,
the auditor shall exclude the effects of identified controls related to the risk.
In exercising judgment as to which risks are significant risks, the auditor shall
consider at least the following-
(i) Whether the risk is a risk of fraud;
(ii) Whether the risk is related to recent significant economic, accounting or other
developments like changes in regulatory environment etc. and therefore
requires specific attention;
(iii) The complexity of transactions;
(iv) Whether the risk involves significant transactions with related parties;
(v) The degree of subjectivity in the measurement of financial information related
to the risk, especially those measurements involving a wide range of
measurement uncertainty; and
(vi) Whether the risk involves significant transactions that are outside the normal
course of business for the entity or that otherwise appear to be unusual.
(b) Audit Procedures to be Performed When There Exist Significant Doubt on
Entity’s Ability to Continue as a Going Concern: According to SA 570 ―Going
Concern‖, when events or conditions have been identified that may cast significant
doubt on the entity‘s ability to continue as a going concern, the auditor shall obtain
sufficient appropriate audit evidence to determine whether or not a material
uncertainty exists through performing additional audit procedures, including
consideration of mitigating factors. These procedures shall include-
(i) Analysing and discussing cash flow, profit and other relevant forecasts with
management.
(ii) Analysing and discussing the entity‘s latest available interim financial
statements.
(iii) Reading the terms of debentures and loan agreements and determining
whether any have been breached.
(iv) Reading minutes of the meetings of shareholders, those charged with
governance and relevant committees for reference to financing difficulties.
(v) Inquiring of the entity‘s legal counsel regarding the existence of litigation and
claims and the reasonableness of management‘s assessments of their
outcome and the estimate of their financial implications.
(vi) Confirming the existence, legality and enforceability of arrangements to
provide or maintain financial support with related and third parties and
assessing the financial ability of such parties to provide additional funds.

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© The Institute of Chartered Accountants of India
(vii) Evaluating the entity‘s plans to deal with unfilled customer orders.
(viii) Performing audit procedures regarding subsequent events to identify those
that either mitigate or otherwise affect the entity‘s ability to continue as a going
concern.
(ix) Confirming the existence, terms and adequacy of borrowing facilities.
(x) Obtaining and reviewing reports of regulatory actions.
(xi) Determining the adequacy of support for any planned disposals of assets.
(c) Consideration of Additional Matters in Case of Initial Audit Engagements: In
accordance with SA 300 ―Planning an Audit of Financial Statements‖, the purpose
and objective of planning the audit are the same whether the audit is an initial or
recurring engagement. However, for an initial audit, the auditor may need to expand
the planning activities because the auditor does not ordinarily have the previous
experience with the entity that is considered when planning recurring engagements.
For initial audits, additional matters the auditor may consider in establishing the
overall audit strategy and audit plan include the following-
(i) Unless prohibited by law or regulation, arrangements to be made with the
predecessor auditor, for example, to review the predecessor auditor‘s working
papers.
(ii) Any major issues (including the application of accounting principles or of
auditing and reporting standards) discussed with management in connection
with the initial selection as auditor, the communication of these matters to
those charged with governance and how these matters affect the overall audit
strategy and audit plan.
(iii) The audit procedures necessary to obtain sufficient appropriate audit evidence
regarding opening balances (SA 510 ―Initial Audit Engagements –Opening
Balances‖).
(iv) Other procedures required by the firm‘s system of quality control for initial audit
engagements (for example, the firm‘s system of quality control may require the
involvement of another partner or senior individual to review the overall audit
strategy prior to commencing significant audit procedures or to review re ports
prior to their issuance).
5. (a) Applicability of Provisions Related to Rotation of Auditors: The provisions
related to rotation of auditor as provided under section 139(2) of the Companies
Act, 2013 are applicable to all listed companies and other class or classes of
companies as prescribed under Companies (Audit and Auditors) Rules, 2014.
As per rules prescribed in Companies (Audit and Auditors) Rules, 2014, for
applicability of section 139(2) the class of companies shall mean the following
classes of companies excluding one person companies and small companies-

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(i) all unlisted public companies having paid up share capital of Rs. 10 crore
or more;
(ii) all private limited companies having paid up share capital of Rs. 20 crore
or more;
(iii) all companies having paid up share capital of below threshold limit mentioned
above, but having public borrowings from financial institutions, banks or public
deposits of Rs. 50 crores or more.
(b) Manner of Rotation of Auditors on Expiry of their Term: Prescribed manner of
rotation of auditors on expiry of their term is given below-
(1) The Audit Committee shall recommend to the Board, the name of an individual
auditor or of an audit firm who may replace the incumbent auditor on expiry
of the term of such incumbent.
(2) Where a company is required to constitute an Audit Committee, the Board shall
consider the recommendation of such committee and in other cases, the Board
shall itself consider the matter of rotation of auditors and make its
recommendation for appointment of the next auditor by the members in annual
general meeting.
(3) For the purpose of the rotation of auditors-
(i) in case of an auditor (whether an individual or audit firm), the period for
which the individual or the firm has held office as auditor prior to the
commencement of the Act shall be taken into account for calculating the
period of five consecutive years or ten consecutive years, as the case may
be;
(ii) the incoming auditor or audit firm shall not be eligible if such auditor or
audit firm is associated with the outgoing auditor or audit firm under the
same network of audit firms.
The term ―same network‖ includes the firms operating or functioning, hitherto or
in future, under the same brand name, trade name or common control.
Further, for the purpose of rotation of auditors,-
(a) a break in the term for a continuous period of five years shall be
considered as fulfilling the requirement of rotation;
(b) if a partner, who is in charge of an audit firm and also certifies the financial
statements of the company, retires from the said firm and joins another
firm of chartered accountants, such other firm shall also be ineligible to be
appointed for a period of five years.

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(4) Where a company has appointed two or more individuals or firms or a
combination thereof as joint auditors, the company may follow the rotation of
auditors in such a manner that both or all of the joint auditors, as the case may
be, do not complete their term in the same year.
(c) Audit of Club: A club is usually constituted as a company limited by guarantee.
Therefore, various provisions of the Companies Act, 2013 relating to the audit of
accounts of companies are also applicable to its audit. The special steps involved in
such an audit are stated below-
(i) Vouch the receipt on account of entrance fees with members‘ applications,
counterfoils issued to them, as well as on a reference to minutes of the
Managing Committee.
(ii) Vouch members‘ subscriptions with the counterfoils of receipt issued to them,
trace receipts for a selected period to the Register of Members; also reconcile
the amount of total subscriptions due with the amount collected and that
outstanding.
(iii) Ensure that arrears of subscriptions for the previous year have been correctly
brought over and arrears for the year under audit and subscriptions received in
advance have been correctly adjusted.
(iv) Check totals of various columns of the Register of members and tally them
across.
(v) See the Register of Members to ascertain the Member‘s dues which are in
arrear and enquire whether necessary steps have been taken for their
recovery; the amount considered irrecoverable should be mentioned in the
Audit Report.
(vi) Verify the internal check as regards members being charged with the price of
foodstuffs and drinks provided to them and their guests, as well as, with the fees
chargeable for the special services rendered, such as billiards, tennis, etc.
(vii) Trace debits for a selected period from subsidiary registers maintained in
respect of supplies and services to members to confirm that the account of
every member has been debited with amounts recoverable from him.
(viii) Vouch purchase of sports items, furniture, crockery, etc. and trace their entries
into the respective inventory registers.
(ix) Vouch purchases of foodstuffs, cigars, wines, etc. and test their sale price so
as to confirm that the normal rates of gross profit have been earned on their
sales. The inventory of unsold provisions and stores, at the end of year, should
be verified physically and its valuation checked.
(x) Check the inventory of furniture, sports material and other assets physically
with the respective inventory registers or inventories prepared at the end of the

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year.
(xi) Inspect the share scrips and bonds in respect of investments, check their
current values for disclosure in final accounts; also ascertain that the
arrangements for their safe custody are satisfactory.
(xii) Examine the financial powers of the secretary and, if these have been
exceeded, report specific case for confirmation by the Managing Committee.
6. (a) Valuation of Work-in-Progress: AS 2 ―Valuation of Inventories‖ deals with the
principles and methods for determining the value at which inventories should be carried
in the financial statements. Thus, items which are held up in the process of production
are included in the definition of inventory.
Work-in-Progress (WIP) is normally valued by taking the basic cost of materials,
labour and proportionate factory overheads incurred upto the stage of completion.
In view of the above, the argument that the value of opening and closing WIP is
more or less same is not tenable as the cost of material, labour and overhead mig ht
be different and accordingly arriving at the different valuation of opening and closing
WIP is possible.
In the given case, the management should have determined the stage of completion
of the production and valued the work in process accordingly.
If the management refuses to value the work in process then the auditor shall
modify auditor‘s report accordingly.
(b) Meaning of Sweat Equity Shares: ―Sweat Equity Shares‖ means equity shares
issued by the company to employees or directors at a discount or for consideration
other than cash for providing know-how or making available rights in the nature of
intellectual property rights or value additions, by whatever name called.
Verification of Issue of Sweat Equity Shares: As per section 54 of the Companies
Act, 2013, the employees may be compensated in the form of ‗Sweat Equity
Shares‖.
The auditor may check that the Sweat Equity Shares issued by the company are of
a class of shares already issued and following conditions are fulfilled:
(i) the issue is authorised by a special resolution passed by the company;
(ii) the resolution specifies the number of shares, the current market price,
consideration, if any, and the class or classes of directors or employees to
whom such equity shares are to be issued;
(iii) not less than one year has, at the date of such issue, elapsed since the date
on which the company had commenced business; and
(iv) where the equity shares of the company are listed on a recognised stock
exchange, the sweat equity shares are issued in accordance with the

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regulations made by the Securities and Exchange Board in this behalf and if
they are not so listed, the sweat equity shares are issued in accordance with
such rules as may be prescribed.
The rights, limitations, restrictions and provisions as are for the time being
applicable to equity shares shall be applicable to the sweat equity shares issued
under this section and the holders of such shares shall rank pari passu with other
equity shareholders.
(c) Filling of a Casual Vacancy: Section 139(8) of the Companies Act, 2013 provides
that any casual vacancy in the office of an auditor shall be filled by the Board of
Directors within 30 days. However, if such casual vacancy is as a result of the
resignation of an auditor, such appointment shall also be approved by the company
at a general meeting convened within 3 months of the recommendation of the Board
and he shall hold the office till the conclusion of the next annual general meeting.
In the present case, the auditor Mr. A resigned and the vacancy had been filled in
by Board. But, the vacancy caused by resignation cannot be filled by Board itself,
such appointment shall also be approved by the company at general meeting.
The fact that the Mr. A was appointed by Board originally is a matter irrelevant in
this situation. If the cause of vacancy is resignation, then the power of appointment
shall vest with the general meeting only. As such, the appointment made by Board
is invalid.
(d) As per clause (vii) of CARO, 2016, reporting requirements in respect of statutory
dues are :
(a) whether the company is regular in depositing undisputed statutory dues
including provident fund, employees' state insurance, income-tax, sales-tax,
service tax, duty of customs, duty of excise, value added tax, cess and any
other statutory dues to the appropriate authorities and if not, the extent of the
arrears of outstanding statutory dues as on the last day of the financial year
concerned for a period of more than six months from the date they became
payable, shall be indicated;
(b) where dues of income tax or sales tax or service tax or duty of customs or duty
of excise or value added tax have not been deposited on account of any
dispute, then the amounts involved and the forum where dispute is pending
shall be mentioned. (A mere representation to the concerned Department shall
not be treated as a dispute).
7. (a) Statistical Sampling: Statistical sampling has reasonably wide application where a
population to be tested consists of a large number of similar items and more in the
case of transactions involving compliance testing, trade receivables‘ co nfirmation,
payroll checking, vouching of invoices and petty cash vouchers. Audit testing done
through this approach is more scientific than testing based entirely on the auditor‘s

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own judgment because it involves use of mathematical laws of probability in
determining the appropriate sample size in varying circumstances.
It is unnecessary for the auditor to gain in depth knowledge of statistics before
making use of statistical sampling for audit testing since published statistical tables
are available which indicate the sample size based on pre-determined criteria.
(b) Manipulation of Accounts: Accounts are falsified in order to conceal the true
position of the business for some purpose. They are always intentional, for a
predetermined purpose and are generally committed either by the owners or top
management personnel or senior officers of the business. This type of fraud is
generally committed-
(i) to avoid incidence of income-tax or other taxes by showing profits at a lower
figure.
(ii) for delaying a dividend when there are insufficient profits by showing profits at
inflated figures.
(iii) to withhold declaration of dividend even there is adequate profit (this is often
done to manipulate the value of shares in stock market to make it possible for
selected persons to acquire shares at a lower cost).
(iv) for receiving higher remuneration where managerial remuneration is payable
by reference to profits.
Such frauds are difficult to be detected as they are committed by persons holding
position of trust and use carefully guarded by them. Such frauds are generally of the
following nature:
(i) Recording fictitious sales or omission of sales.
(ii) Recording fictitious purchases or suppression of purchases.
(iii) Over valuation or under valuation of stock.
(iv) Recording fictitious expenses or omission of expenses.
(v) Taking credit for accrued income not likely to be received or omission of
income.
(vi) Revenue expenses changed to capital and vice-versa.
SA 240 ―The Auditor‘s Responsibilities relating to fraud in an Audit of Financial
Statements‖ states that the auditor is responsible for obtaining reasonable
assurance that the financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error. If an auditor identifies a fraud or
has obtained information that indicates that a fraud may exist, it is his responsibility
to communicate the matter with those charged with the governance on a timely
basis and, in some circumstances, when so required by laws or regulations, to
regulatory and enforcement authorities also.

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In addition, as per sub-section (12) of section 143 of the Companies Act, 2013, if an
auditor of a company, in the course of the performance of his duties as auditor, has
reason to believe that an offence involving fraud is being or has been committed
against the company by officers or employees of the company, he shall immediately
report the matter to the Central Government within 60 days of his knowledge and
after following the prescribed procedure.
The auditor is also required to comment under clause (xii) of Para 3 of CARO, 2015
whether any fraud on or by the company has been noticed or reported during the
year. If yes, the nature and the amount involved is to be indicated.
(c) Removal of Auditor Before Expiry of Term: According to section 140(1) of the
Companies Act, 2013, the auditor appointed under section 139 may be removed
from his office before the expiry of his term only by a special resolution of the
company, after obtaining the previous approval of the Central Government in that
behalf as per rule 7 of Companies (Audit and Auditors) Rules, 2014-
(i) The application to the Central Government for removal of auditor shall be
made in Form ADT-2 and shall be accompanied with fees as provided for this
purpose under the Companies (Registration Offices and Fees) Rules, 2014.
(ii) The application shall be made to the Central Government within 30 days of the
resolution passed by the Board.
(iii) The company shall hold the general meeting within 60 days of receipt of
approval of the Central Government for passing the special resolution.
It is important to note that before taking any action for removal before expiry of
terms, the auditor concerned shall be given a reasonable opportunity of being
heard.
(d) Assertions about Account Balances at the Period End: As per SA 315
―Identifying and Assessing the Risk of Material Misstatement through understanding
the Entity and its Environment‖, assertions used by the auditor to consider the
different types of potential misstatements that may occur, fall into the three
categories out of which ―assertions about account balances at the period end‖ is
one of the category. It may take the following forms-
(i) Existence—assets, liabilities, and equity interests exist.
(ii) Rights and obligations—the entity holds or controls the rights to assets, and
liabilities are the obligations of the entity.
(iii) Completeness—all assets, liabilities and equity interests that should have
been recorded have been recorded.
(iv) Valuation and allocation—assets, liabilities, and equity interests are included in
the financial statements at appropriate amounts and any resulting valuation or
allocation adjustments are appropriately recorded.

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(e) Disclosure Requirements for Bank Balance: As per Part I of Schedule III to the
Companies Act, 2013, the disclosure of bank balances is under the head ―Cash and
Cash Equivalents‖ in Current Assets as -
(i) Balances with Banks.
(ii) Earmarked balances with banks (for example, for unpaid dividend).
(iii) Balances with banks to the extent held as margin money or security against
borrowings, guarantees, other commitments.
The extract of the Schedule III, under Companies Act, 2013 regarding disclosure
requirements is given below:
[General Instructions for Current Assets under Schedule III to the
Companies Act, 2013]:
 Cash and cash equivalents:
1. Cash and cash equivalents shall be classified as:
(a) Balances with banks;
(b) Cheques, drafts on hand;
(c) Cash on hand;
(d) Others (specify nature).
2. Earmarked balances with banks (for example, for unpaid dividend) shall
be separately stated;
3. Balances with banks to the extent held as margin money or security
against the borrowings, guarantees, other commitments shall be
disclosed separately;
4. Repatriation restrictions, if any, in respect of cash and bank balances
shall be separately stated;
5. Bank deposits with more than 12 months maturity shall be disclosed
separately.

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Test Series: September, 2016
MOCK TEST PAPER – 2
INTERMEDIATE (IPC): GROUP – II
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – A: INFORMATION TECHNOLOGY
Question No. 1 is compulsory.
Attempt any five questions from the rest.
Time Allowed – 1½ Hours Maximum Marks – 50

1. Answer all the following questions in brief.
(i) What are the limitations of using Flowchart?
(ii) What are the concerns relating to Mobile Computing?
(iii) Discuss Virtual Private Networks (VPN) in brief.
(iv) Mention the components of Supply Chain Management (SCM)?
(v) What do you understand by the term “Real Time Processing”? (2 x 5 = 10 Marks)
2. (a) Discuss the reasons why documentation is important to Information Systems.
(4 Marks)
(b) Discuss the basic functions of an Accounting Information Systems. (4 Marks)
3. (a) Discuss some advantages and disadvantages of application software. (4 Marks)
(b) Discuss Information Systems Life Cycle, in brief. (4 Marks)
4. (a) Discuss Peer-to-Peer Network. (5 Marks)
(b) Discuss in brief, the steps involved in Security Programs to ensure safeguarding of
assets and maintenance of data integrity. (3 Marks)
5. (a) You are requested to implement the Online Transaction Processing in an e-
Commerce environment. Briefly explain step by step online transaction processing
in such environment. (4 Marks)
(b) Discuss in brief, the commercial applications of Artificial Intelligence (AI). (4 Marks)
6. (a) Differentiate between Manual Information Processing Cycle and Computerized
Information Processing Cycle. (4 Marks)
(b) Discuss in brief, the benefits of Grid Computing. (4 Marks)

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7. Write short notes on any four of the following.
(a) Total Quality Management (TQM)
(b) Communication as a Service
(c) Parallel Transmission
(d) General Purpose Planning Languages
(e) Travel Management Systems (4 × 2 = 8 Marks)

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© The Institute of Chartered Accountants of India
Test Series: September, 2016
MOCK TEST PAPER – II
INTERMEDIATE (IPC): GROUP – II
PAPER –7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – B: STRATEGIC MANAGEMENT
Question No.1 is compulsory.
Attempt any five questions from the rest.
Time Allowed – 1½ Hours Maximum Marks – 50
1. (a) Premise control is a tool for systematic and continuous monitoring of the
environment. Discuss. (3 Marks)
(b) Is it possible to simultaneously adopt both low-cost and differentiation strategies?
Explain with help of an example. (3 Marks)
(c) Globalization means different things to different people. Elucidate the statement. (3 Marks)
(d) The first step in strategic management model is developing a strategic vision and
mission. Explain. (3 Marks)
(e) BCG growth share matrix classifies businesses on two dimensional scales. Explain.
(3 Marks)
2. (a) State with reasons which of the following statements is correct/incorrect:
(i) “Efficiency and effectiveness mean the same in strategic management” .
(ii) Publicity is a non-personal form of promotion similar to advertising.
(2  2 = 4 Marks)
(b) Explain the meaning of the following concepts:
(i) Joint venture
(ii) Strategic change
(iii) Product development (3  1 = 3 Marks)
3. Write short notes on the following:
(a) Demographic Environment. (2 Marks)
(b) Corporate culture (2 Marks)
(c) Components of marketing mix (3 Marks)
4. Why is it necessary to do a SWOT analysis before selecting a particular strategy for a
business organization? (7 Marks)

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5. What do you understand by „Strategy‟? Explain the four generic strategies as discussed
by Glueck and Jauch. (7 Marks)
6. What is the rationale behind Business Process Reengineering (BPR)? What steps would
you recommend to implement BPR in an organization? (7 Marks)
7. Strategic leadership involves two approaches transformational and transactional.
Discuss. (7 Marks)

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Test Series: September, 2016
MOCK TEST PAPER – 2
INTERMEDIATE (IPC): GROUP – II
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – A: INFORMATION TECHNOLOGY
SUGGESTED ANSWERS/HINTS

1. (i) Limitations of using Flowchart are as follows:
(a) Complex logic – Flowchart becomes complex and clumsy where the problem
logic is complex. The essentials of what is done can easily be lost in the
technical details of how it is done.
(b) Modification – If modifications to a flowchart are required, it may require
complete re-drawing.
(c) Reproduction – Reproduction of flowcharts is often a problem because the
symbols used in flowcharts cannot be typed.
(d) Link between conditions and actions – Sometimes it becomes difficult to
establish the linkage between various conditions and the actions to be taken
there upon for a particular condition.
(e) Standardization – Program flowcharts, although easy to follow, are not such a
natural way of expressing procedures as writing in English, nor are they easily
translated into Programming language.
(ii) Major concerns relating to mobile computing are given as follows:
 Mobile computing has its fair share of security concerns as any other
technology.
 Dangers of misrepresentation - Another problem plaguing mobile computing
are credential verification.
 Power consumption: When a power outlet or portable generator is not
available, mobile computers must rely entirely on battery power.
 Potential health hazards.
Being an ever growing and emerging technology, mobile computing will continue to
be a core service in computing, Information Communication and Technology.
(iii) Virtual Private Networks (VPN): VPN is a secure network that uses the Internet as
its main backbone network, but relies on the firewalls and other security features of
the Internet and Intranet connections and those of participating organizations.

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(iv) Components of SCM are as follows:
(a) Procurement/Purchasing—begins with the purchasing of parts, components,
or services.
(b) Operations – This includes transformation of raw materials and production of
the products or the services that meet the needs of its consumers.
(c) Distribution - This involves several activities—transportation (logistics),
warehousing, and customer relationship management (CRM).
(d) Integration - It is critical that all participants in the service chain recognize the
entirety of the service chain.
(v) Real-time Processing: Real time processing is a subset of interactive or online
processing. Input is continuously, automatically acquired from sensors, for example,
which is processed immediately in order to respond to the input in as little time as
possible. After the system is finished responding, it reads the next set of input data
immediately to process that.
2. (a) Some of the reasons why documentation is important to Information Systems are as
follows:
(i) Depicting how the system works: In computerized systems, the processing
is electronic and invisible. Therefore documentation is required to help
employees understand how a system works, assist accountants in designing
controls for it, demonstrates to managers that it will meet their information
needs, and assists auditors in understanding the systems that they test and
evaluate.
(ii) Training users: Documentation also includes user guides, manuals, and
similar operating instructions that help people learn how an Information
System operates. These documentation aids help train users to operate
Information systems hardware and software, solve operational problems, and
perform their jobs better.
(iii) Designing new systems: Documentation helps system designers develop
new systems in much the same way that blueprints help architects design
building, Well-written documentation and related graphical systems-design
methodologies play key roles in reducing system failures and decreasing the
time spent correcting emergency errors.
(iv) Controlling system development and maintenance costs: Personal
computer applications typically employ prewritten, off-the-shelf software that is
relatively reliable and inexpensive. Good documentation helps system
designers develop object-oriented software, which is software that contains

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modular, reusable code that further avoid writing duplicate programs and
facilitate changes when programs must be modified later.
(v) Standardizing communications with others: Documentation aids such as E-
R Diagrams, System Flowcharts, and Data Flow Diagrams are more
standardized tools, and they are more likely to be interpreted the same way by
all parties viewing them. Thus, documentation tools are important because
they help describe an existing or proposed system in a common language and
help users communicate with one another about these systems.
(vi) Auditing Information Systems: Documentation helps depict audit trails, For
example- when investigation and Accounting Information system, the auditors
typically focus on internal controls. In such circumstances, documentation
helps auditors determine the strengths and weaknesses of a system‟s controls
and therefore the scope and complexity of the audit.
(vii) Documenting business processes: Understanding business processes can
lead to better systems and better decision. Documentation helps managers
better understand how their businesses operate what controls are involved or
missing from critical organizational activities, and how to improve core
business activities.
(b) The three basic functions of Accounting Information Systems (AIS) are as follows:
(i) Collect and store data: Collect and store data about organization‟s business
activities and transactions by capturing transaction data from source
documents and posting data from journals to ledgers. Source documents are
special forms used to capture transaction data such as sales order, sales
invoice, order processing, purchase order, etc. Control over data collection is
improved by pre-numbering each source document.
(ii) Record transaction: Record transactions data into journals. These journals
present a chronological record of what occurred and provide management with
information useful for decision making. These documents are in the form of
reports like financial statements, managerial reports, etc.
(iii) Safeguard organisational assets: Provide adequate controls to ensure that
data are recorded and processed accurately by safeguarding organizational
assets (data and systems). The two important methods for accomplishing this
objective are by providing adequate documentation of all business activities
and an effective segregation of duties. Documentation allows management to
verify that assigned responsibilities were completed correctly. Segregation of
duties refers to dividing responsibility for different portions of a transaction
among several people.

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3. (a) Some of the most popular advantages of Application Software are:
 Addressing User needs: Their single biggest advantage is that it meets the
exact needs of the user. Since it is designed specifically with one purpose in
mind, the user knows that he has to use the specific software to accomplish
his task.
 Less threat from virus: The threat of viruses invading custom-made
applications is very small, since any business that incorporates it can restrict
access and can come up with means to protect their network as well.
 Regular updates: Licensed application software gets regular updates from the
developer for security reasons. Additionally, the developer also regularly sends
personnel to correct any problems that may arise from time to time.
Certain disadvantages of Application software are as follows:
 Development is costly: Developing application software designed to meet
specific purposes can prove to be quite costly for developers.
 Infection from Malware: If application software is used commonly by many
people and shared online, it carries a highly real threat of infection by a
computer virus or other malicious programs.
(b) Various phases for developing an information system are as follows:
Phase 1: System Investigation - This phase examines that „What is the problem
and is it worth solving‟? We would be doing a feasibility study under the follo wing
dimensions:
 Technical feasibility: Does the technology exist to implement the proposed
system or is it a practical proposition?
 Economic feasibility: Is proposed system cost-effective: if benefits do not
outweigh costs, it‟s not worth going ahead?
 Legal feasibility: Is there any conflict between the proposed system and legal
requirements?
 Operational feasibility: Are the current work practices and procedures
adequate to support the new system?
 Schedule feasibility: How long will the system take to develop, or can it be
done in a desired time-frame?
Phase 2: System Analysis - This phase examines that „What must the Information
System do to solve the problem‟? System analyst would be gathering details about
the current system and will involve:
 Interviewing staff: at different levels from end-users to senior management;

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 Examine current business: systems documents and output including current
order documents, computer system procedures and reports used by operations
and senior management;
 Sending out questionnaires: that have to be carefully constructed to elicit
unambiguous answers; and
 Observation of current procedures: by spending time in various
departments. A time and motion study can show where procedures could be
more efficient or to detect bottlenecks.
Phase 3: System Designing - This phase examines that „How will the Information
System do that it must do to obtain the solution to the problem‟? This phase
specifies the technical aspects of a proposed system in terms of:
 Hardware platform: Computer, network capabilities, input, storage and output
devices;
 Software: Programming language, package and database;
 Outputs: Report layouts and screen designs;
 Inputs: Documents, screen layouts and validation procedures;
 User interface: How users will interact with the computer system;
 Modular design: Of each program in the application;
 Test plan: Develop test data;
 Conversion plan: How the new system is to be implemented; and
 Documentation: Including systems and operations documentation. Later, a
user manual will be produced.
Phase 4: System Implementation: This phase examines that „How will the
Solution be put into effect‟? This phase involves the following steps:
 Coding and testing of the system;
 Acquisition of hardware and software; and
 Either installation of the new system or conversion of the old system to the
new one.
Phase 5: System Maintenance and Review - This phase evaluates results of
solution and modifies the system to meet the changing needs. Post implementation
review would be done to address Programming amendments; Adjustment of clerical
procedures; Modification of Reports, and Request for new programs.
System maintenance could be with following different objectives:
 Perfective Maintenance: This implies that while the system runs satisfactorily,
there is still room for improvement.

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 Adaptive Maintenance: All systems will need to adapt to changing needs
within a company.
 Corrective Maintenance: Problems frequently surface after a system has
been in use for a short time, however thoroughly it was tested. Any errors must
be corrected.
This is often the longest of the stages since it is an on-going process having some
sort of long term continuum.
4. (a) Peer-to-Peer Network: A Peer-to-Peer (P2P) network is created with two or more
PCs connected together and share resources without going through a separate
server computer. A P2P network can be an ad hoc connection - a couple of
computers connected via a universal serial bus to transfer files. A P2P network also
can be a permanent infrastructure that links half-dozen computers in a small office
over copper wires. Example – Napster, Freenet etc. Refer to the Fig. 3.6.2.
The prime objective goal of a P2P (Peer-to-Peer) file-sharing network is that many
computers come together and pool their resources to form a content distribution
system. The computers are often simply home computers. They do not need to be
machines in Internet data centers. The computers are called peers because each
one can alternately act as a client to another peer, fetching its content, and as a
server, providing content to other peers. Though there is no dedicated
infrastructure, P2P networks handle a very high volume of file sharing traffic by
distributing the load across many computers on the Internet. Everyone participates
in the task of distributing content, and there is often no central point of control.
Configured computers in P2P workgroups allow sharing of files, printers and other
resources across all of the devices. Peer networks allow data to be shared easily in
both directions, whether for downloads to the computer or uploads from the
computer. Because they do not rely exclusively on central servers, P2P networks
both scale better and are more resilient than client-server networks in case of
failures or traffic bottlenecks. A P2P network can be a network on a much grander
scale in which special protocols and applications set up direct relationships among
users over the Internet.
Advantages
Following are the major advantages of Peer-to-Peer networks:
(i) Peer-to-Peer Networks are easy and simple to set up and only require a Hub
or a Switch to connect all the computers together.
(ii) It is very simple and cost effective.
(iii) If one computer fails to work, all other computers connected to it continue to
work.

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Disadvantages
The major disadvantages of peer-to-peer networks are as below:
(i) There can be problem in accessing files if computers are not connected
properly.
(ii) It does not support connections with too many computers as the performance
gets degraded in case of high network size.
(iii) The data security is very poor in this architecture.
(b) The steps involved in Security Programs to ensure safeguarding of assets and
maintenance of data integrity are as follows –
(i) Preparing project plan for enforcing security: The project plan components
are at first outlining the objectives of the review followed by in sequence
determining the scope of the review and tasks to be accomplished, assigning
tasks to the project team after organizing it, preparing resources budge t which
will be determined by the volume and complexity of the review and fixing a
target / schedule for task completion.
(ii) Asset identification: Assets which need to be safeguarded can be identified
and subdivided into Personnel, Hardware, Facilities, Documentation, Supplies,
Data, Application Software and System Software.
(iii) Asset valuation: This step of valuation of assets can pose a difficulty. The
process of valuation can differ depending on who is asked to render the
valuation, the way in which the asset can be lost and the period for which it is
lost and how old is the asset.
(iv) Threat identification: The source of a threat can be external or internal and
the nature of a threat can be accidental / non-deliberate or deliberate. The
example of a non-deliberate external threat is an act of God, non-deliberate
internal threat is pollution, deliberate external threat is hackers, and deliberate
internal threat is employees.
(v) Threats probability of occurrence assessment: This step is an assessment
of the probability of occurrence of threats over a given time period. This
exercise is not so difficult if prior period statistical data is available. If however,
prior period data is not available, it has to be elicited from the associated
stakeholders like end users (furnishing the data aspect) and the management
(furnishing the control aspect).
(vi) Exposure analysis: This step is the Exposures Analysis by first identifying the
controls in the place, secondly assessing the reliability of the existing co ntrols,
thirdly evaluating the probability that a threat can be successful and lastly
assessing the resulting loss if the threat is successful. For each asset and
each threat the expected loss can be estimated as the product of the

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probability of threat occurrence, probability of control failure and the resulting
loss if the threat is successful.
(vii) Controls adjustment: The involves the adjustment of controls which means
whether over some time period any control can be designed, implemented and
operated such that the cost of control is lower than the reduction in the
expected losses. The reduction in the expected losses is the difference
between expected losses with the (i) existing set of controls and (ii) improved
set of controls.
(viii) Report generation outlining the levels of security to be provided for
individual systems, end user, etc.: This is the last step that involves report
generation documenting, the findings of the review and specially
recommending new assets safeguarding techniques that should be
implemented and existing assets safeguarding mechanisms that should be
eliminated / rectified, and also recommending the assignment of the levels of
security to be pervaded for individual end users and systems.
5. (a) Step by step explanation of online transaction is as follows:
 Advertising: The company communicates its products and services
(catalogue);
 Offering: The company offers specific goods and services;
 Selling: The company agrees with the customer on the content of a specific
order;
 Billing: The company produces the invoice;
 Paying: The buyer pays the seller by giving a payment instruction;
 Matching: The seller matches the payment information (the authorization
results and the actual crediting of account) with the orders and feeds the result
into the back-office;
 Delivering: The seller delivers to the buyer; and
 Resolving: The seller and buyer try to resolve delivery or payment issues
related to the purchase.
(b) Some of the commercial applications of AI are as follows: Applications of AI
Decision Support
 Intelligent work environment that will help you capture the “why” as well as the
“what” of engineered design and decision making.
 Intelligent human–computer interface (HCI) systems that can understand
spoken language and gestures, and facilitate problem solving by supporting
organization wide collaborations to solve particular problems.

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 Situation assessment and resource allocation software for uses that range
from airlines and airports to logistics centers.
Information Retrieval
 AI-based Intranet and Internet systems that distill tidal waves of information
into simple presentations.
 Natural language technology to retrieve any sort of online information, from
text to pictures, videos, maps, and audio clips, in response to English
questions.
 Database mining for marketing trend analysis, financial forecasting, and
maintenance cost reduction, and more.
Virtual Reality
 X-ray–like vision enabled by enhanced-reality visualization that allows brain
surgeons to “see through” intervening tissue to operate, monitor, and evaluate
disease progression.
 Automated animation interfaces that allow users to interact with virtual objects
via touch (e.g., medical students can “feel” what it‟s like to stitch severed
aortas).
Robotics
 Machine-vision inspections systems for gauging, guiding, identifying, and
inspecting products and providing competitive advantage in manufacturing.
 Cutting-edge robotics systems, from micro-robots and hands and legs.
6. (a) Manual Information Processing Cycle: These are the systems where the level of
manual intervention is very high. Say for example, valuation of exam papers,
teaching, operations in operation theatres, ticket checking by railway staff in trains,
buying of grocery, billing done by small medical shops, people maintaining books
manually, etc. Components of manual information processing cycle include:
 Input: Put details in register.
 Process: Summarize the information.
 Output: Present information to management in the form of reports.
As the level of human intervention is very high the quality of information generated
from these systems is prone to flaws such as delayed information, inaccurate
information, incomplete information and low levels of detail.
Computerized Information Processing Cycle: These are systems where
computers are used at every stage of transaction processing. The components of a
computerized information processing cycle include:

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 Input: Entering data into the computer;
 Processing: Performing operations on the data;
 Storage: Saving data, programs, or output for future use; and
 Output: Presenting the results.
As the processing is computerized the quality of information generated from these
systems is timely, accurate, fast and reliable.
(b) Benefits of Grid Computing are as follows:
 Making use of Underutilized Resources: In most organizations, there are
large amounts of underutilized computing resources. In some organizations,
even the server machines can often be relatively idle. Grid computing provides
a framework for exploiting these underutilized resources and thus has the
possibility of substantially increasing the efficiency of resource usage.
 Resource Balancing: For applications that are grid-enabled, the grid can offer
a resource balancing effect by scheduling grid jobs on machines with low
utilization. This feature of grid computing handles occasional peak loads of
activity in parts of a larger organization.
 Parallel CPU Capacity: The potential for usage of massive parallel CPU
capacity is one of the most common visions and attractive features of a grid. A
CPU-intensive grid application can be thought of as many smaller sub-jobs,
each executing on a different machine in the grid.
 Virtual resources and virtual organizations for collaboration: Another
capability enabled by grid computing is to provide an environment for
collaboration among a wider audience. The users of the grid can be organized
dynamically into a number of virtual organizations, each with different policy
requirements. These virtual organizations can share their resources such as
data, specialized devices, software, services, licenses, and so on, collectively
as a larger grid.
 Access to additional resources: In addition to CPU and storage resources, a
grid can provide access to other resources as well. For example, if a user
needs to increase their total bandwidth to the Internet to implement a data
mining search engine, the work can be split among grid machines that have
independent connections to the Internet. In this way, total searching capability
is multiplied, since each machine has a separate connection to the Internet.
 Reliability: High-end conventional computing systems use expensive
hardware to increase reliability. The machines also use duplicate processors in
such a way that when they fail, one can be replaced without turning the other
off. Power supplies and cooling systems are duplicated. The systems are
operated on special power sources that can start generators if utility power is

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interrupted. All of this builds a reliable system, but at a great cost, due to the
duplication of expensive components.
 Management: The goal to virtualize the resources on the grid and more
uniformly handle heterogeneous systems create new opportunities to better
manage a larger, more distributed IT infrastructure. The grid offers
management of priorities among different projects.
7. (a) Total Quality Management: Total Quality Management (TQM) is a comprehensive
and structured approach to organizational management that seeks to improve the
quality of products and services through ongoing refinements in response to
continuous feedback. TQM requirements may be defined separately for a particular
organization or may be in adherence to established standards, such as the
International Organization for Standardization's ISO 9000 series. TQM can be
applied to any type of organization; it originated in the manufacturing sector and has
since been adapted for use in almost every type of organization imaginable,
including schools, highway maintenance, hotel management, and churches. As a
current focus of e-business, TQM is based on quality management from the
customer's point of view. TQM processes are divided into four sequential
categories: Plan, Do, Check, and Act (the PDCA cycle).
(b) Communication as a Service (CaaS): CaaS has evolved in the same lines as
SaaS. CaaS is an outsourced enterprise communication solution that can be l eased
from a single vender. The CaaS vendor is responsible for all hardware and software
management and offers guaranteed Quality of Service (QoS). It allows businesses
to selectively deploy communication devices and modes on a pay -as-you-go, as-
needed basis. This approach eliminates the large capital investments. Examples
are: Voice over IP (VoIP), Instant Messaging (IM), Collaboration and
Videoconferencing application using fixed and mobile devices.
(c) Parallel Transmission: In Parallel transmission, there are separate parallel paths
corresponding to each bit of the byte so that all character bits are transmitted
simultaneously. Centronic port is the example of parallel port used for printer.

Parallel Transmission

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(d) General-purpose planning languages allow users to perform many routine tasks,
for example; retrieving various data from a database or performing statistical
analyses. The languages in most electronic spreadsheets are good examples of
general-purpose planning languages. These languages enable user to tackle
abroad range of budgeting, forecasting, and other worksheet-oriented problems.
(e) Travel Management Systems: Many business processes specific to this industry
have been automated, including ticket booking for air, bus, train, hotel, etc. It has
features such as streamlined foreign travel approval process, configurable to match
enterprise's foreign travel program, build-in and manage travel policy compliance,
„safe return‟ process for people tracking, traveler portal for up to da te information,
secure traveler profile information, online retrieval of e-tickets, reservations, visas &
inoculation records, management of entry visas & medical requirements, front, mid
and back office tools on a single, and web based platform.

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Test Series: September, 2016
MOCK TEST PAPER – II
INTERMEDIATE (IPC): GROUP – II
PAPER –7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – B: STRATEGIC MANAGEMENT
SUGGESTED ANSWERS/HINTS
1. (a) A strategy is formed on the basis of certain assumptions or premises about the complex
and turbulent organizational environment. Over a period of time these premises may not
remain valid. Premise control is a tool for systematic and continuous monitoring of the
environment to verify the validity and accuracy of the premises on which the strategy
has been built. It primarily involves monitoring two types of factors:
(i) Environmental factors such as economic (inflation, liquidity, interest rates),
technology, social and regulatory.
(ii) Industry factors such as competitors, suppliers, substitutes.
It is neither feasible nor desirable to control all types of premises in the same
manner. Different premises may require different amount of control. Thus,
managers are required to select those premises that are likely to change and
would severely impact the functioning of the organization and its strategy.
(b) Integrating cost leadership and differentiation is possible by providing the
product/service at low cost through technologies that enable differentia tion through
focus on niche segments. Developments in process technology have made it possible to
offer a wider variety of products and yet keep the cost low. An organisation that
produces through mass production, but can use technological means to create variety in
the product/service can sometimes combine the benefits of low-cost and differentiation.
For e.g. the use of CAD and CAM and robot technology, results in manufacturing of
small batch of products at low cost.
(c) Globalization refers to the process of integration of the world into one huge market.
Such unification calls for removal of all trade barriers among countries. Globalization is
an opportunity for organizations to expand their markets and reach out to different
customers. Globalization can also have other meanings. For some it is a new paradigm
- a set of fresh beliefs, working methods, and economic, political and socio-cultural
realities in which the previous assumptions are no longer valid. For developing
countries, it means integration with the world economy.

© The Institute of Chartered Accountants of India
(d) Identifying an organisation's existing vision, mission, objectives are the starting point for
any strategic management process. Determining vision and mission provides long -term
direction, delineate what kind of enterprise the company is trying to become and infuse
the organisation with a sense of purposeful action.
(e) The BCG growth share matrix represents businesses on a two-dimensional scale. The
vertical axis represents market growth rate and provides a measure of market
attractiveness. The horizontal axis represents relative market share and serves as a
measure of company strength in the market. On the basis of different positions of the
businesses on the matrix they are classified as stars, cash cows, question marks and
dogs.
2. (a) (i) Incorrect: Efficiency pertains to designing and achieving suitable input output
ratios of funds, resources, facilities and efforts whereas effectiveness is concerned
with the organization‟s attainment of goals including that of desired competitive
position. While efficiency is essentially introspective, effectiveness highlights the
links between the organization and its environment. In general terms, to be
effective is to do the right things while to be efficient is to do things rightly.
(ii) Correct: Publicity is also a non-personal form of promotion similar to advertising.
However, no payments are made to the media as in case of advertising.
Organizations skillfully seek to promote themselves and their product without
payment. Publicity is communication of a product, brand or business by placi ng
information about it in the media without paying for the time or media space
directly. Thus it is way of reaching customers with negligible cost. Basic tools for
publicity are press releases, press conferences, reports, stories, and internet
releases. These releases must be of interest to the public.
(b) (i) A joint venture is a business agreement in which parties agree to develop, for a
finite time, a new entity and new assets by contributing equity. They exercise
control over the enterprise and consequently share revenues, expenses and
assets.
(ii) The changes in the environmental forces often require businesses to make
modifications in their existing strategies and bring out new strategies. Strategic
change is a complex process and it involves a corporate strategy focused on new
markets, products, services and new ways of doing business.
(iii) Customers and suppliers must work together in the product development process.
Right from the start the partners will have knowledge of all Involving all partners
will help in shortening the life cycles. Products are developed and launched in
shorter time and help organizations to remain competitive.

© The Institute of Chartered Accountants of India
3. (a) The term demographics denote characteristics of population in an area, district, country
or in world. Some of the demographic factors have great impact on the business.
Factors such as general age profile, sex ratio, income, education, growth rate affect the
business with different magnitude.
(b) Corporate culture refers to a company‟s values, beliefs, business principles, traditions,
ways of operating and internal work environment. Every corporation has a culture that
exerts powerful influences on the behaviour of managers.
(c) Marketing mix is a systematic way of classifying the key decision areas of marketing
management. It is the set of controllable marketing variables that the firm blends to
produce the response it wants in the target market. The original framework of marketing
mix comprises of 4Ps- product, price, place and promotion. These are subsequently
expanded to highlight certain other key decision areas like people, processes, and
physical evidence. The elements of original framework are:
 Product: It stands for the “goods-and-service” combination the company offers to
the target market.
 Price: It stands for the amount of money customers have to pay to obtain the
product.
 Place: It stands for company activities that make the product available to target
consumers and include marketing channel, distribution policies and geographical
availablity.
 Promotion: It stands for activities that communicate the merits of the product and
persuade target consumers to buy it.
4. An important component of strategic thinking requires the generation of a series of strategic
alternatives, or choices of future strategies to pursue, given the company's internal strengths
and weaknesses and its external opportunities and threats. The comparison of strengths,
weaknesses, opportunities, and threats is normally referred to as SWOT analysis.
 Strength: Strength is an inherent capability of the organization which it can use to gain
strategic advantage over its competitors.
 Weakness: A weakness is an inherent limitation or constraint of the organization which
creates strategic disadvantage to it.
 Opportunity: An opportunity is a favourable condition in the organisation‟s environment
which enables it to strengthen its position.
 Threat: A threat is an unfavourable condition in the organisation‟s environment which
causes a risk for, or damage to, the organisation‟s position.

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SWOT analysis helps managers to craft a business model (or models) that will allow a
company to gain a competitive advantage in its industry (or industries). Competitive
advantage leads to increased profitability, and this maximizes a company 's chances of
surviving in the fast-changing, competitive environment. Key reasons for SWOT
analyses are:
 It provides a logical framework.
 It presents a comparative account.
 It guides the strategist in strategy identification.
5. Businesses have to respond to a dynamic and often hostile environment for pursuit of their
mission. Strategies provide an integral framework for management and negotiate their way
through a complex and turbulent external environment. Strategy seeks to relate the goals of
the organisation to the means of achieving them.
A company‟s strategy is the game plan management is using to stake out market position
and conduct its operations. A company‟s strategy consists of the combination of competitive
moves and business approaches that managers employ to please customers, compete
successfully and achieve organisational objectives.
Strategy may be defined as a long range blueprint of an organisation's desired image,
direction and destination what it wants to be, what it wants to do and where it wants to go.
Strategy is meant to fill in the need of organisations for a sense of dynamic direction, focus
and cohesiveness.
The Generic Strategies
According to Glueck and Jauch there are four generic ways in which strategic alternatives
can be considered. These are stability, expansion, retrenchment and combinations.
(i) Stability strategies: One of the important goals of a business enterprise is stability to
safeguard its existing interests and strengths, to pursue well established and tested
objectives, to continue in the chosen business path, to maintain operational efficiency
on a sustained basis, to consolidate the commanding position already reached, and to
optimise returns on the resources committed in the business.
(ii) Expansion Strategy: Expansion strategy is implemented by redefining the business by
adding the scope of business substantially increasing the efforts of the current
business. Expansion is a promising and popular strategy that tends to be equated with
dynamism, vigor, promise and success. It is often characterised by significant
reformulation of goals and directions, major initiatives and moves involving investments,
exploration and onslaught into new products, new technology and new markets,

© The Institute of Chartered Accountants of India
innovative decisions and action programmes and so on. Expansion includes
diversifying, acquiring and merging businesses.
(iii) Retrenchment Strategy: A business organisation can redefine its business by
divesting a major product line or market. Retrenchment or retreat becomes necessary or
expedient for coping with particularly hostile and adverse situations in the environment
and when any other strategy is likely to be suicidal. In business parlance also, retreat is
not always a bad proposition to save the enterprise's vital interests, to minimise the
adverse environmental effects, or even to regroup and recoup the resources before a
fresh assault and ascent on the growth ladder is launched.
(iv) Combination Strategies: Stability, expansion or retrenchment strategies are not
mutually exclusive. It is possible to adopt a mix to suit particular situations. An
enterprise may seek stability in some areas of activity, expansion in some and
retrenchment in the others. Retrenchment of ailing products followed by stability and
capped by expansion in some situations may be thought of. For some organisations, a
strategy by diversification and/or acquisition may call for a retrenchment in some
obsolete product lines, production facilities and plant locations.
6. Business Process Reengineering (BPR) is an approach to unusual improvement in operating
effectiveness through the redesigning of critical business processes and supporting business
systems. It is revolutionary redesign of key business processes that involves examination of
the basic process itself. It looks at the minute details of the process, such as why the work is
done, who does it, where is it done and when it is done. BPR refers to the analysis and
redesign of workflows and processes both within the organization and between the
organization and the external entities like suppliers, distributors, and service providers.
The orientation of redesigning efforts is basically radical. In other words, it is a total
deconstruction and rethinking of business process in its entirety, unconstrained by its existing
structure and pattern. Its objective is to obtain quantum jump in process performance in
terms of time, cost, output, quality, and responsiveness to customers. BPR is a revolutionary
redesigning of key business processes.BPR involves the following steps:
1. Determining objectives and framework: Objectives are the desired end results of the
redesign process which the management and organization attempts to achieve. This will
provide the required focus, direction, and motivation for the redesign process. It helps in
building a comprehensive foundation for the reengineering process.
2. Identify customers and determine their needs: The designers have to understand
customers – their profile, their steps in acquiring, using and disposing a product. The
purpose is to redesign business process that clearly provides added value to the
customer.

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3. Study the existing process: The existing processes will provide an important base for
the redesigners. The purpose is to gain an understanding of the „what‟, and „why‟ of the
targeted process. However, some companies go through the reengineering process with
clean perspective without laying emphasis on the past processes.
4. Formulate a redesign process plan: The information gained through the earlier steps
is translated into an ideal redesign process. Formulation of redesign plan is the real
crux of the reengineering efforts. Customer focused redesign concepts are id entified
and formulated. In this step alternative processes are considered and the best is
selected.
5. Implement the redesign: It is easier to formulate new process than to implement them.
Implementation of the redesigned process and application of other knowledge gained
from the previous steps is key to achieve dramatic improvements. It is the joint
responsibility of the designers and management to operationalise the new process.
7. Two basic approaches to leadership can be transformational leadership style and
transactional leadership style.
Transformational leadership style use charisma and enthusiasm to inspire people to exert
them for the good of the organization. They offer excitement, vision, intellectual stimulation
and personal satisfaction. It inspires involvement in a mission, giving followers a „dream‟ or
„vision‟ of a higher calling so as to elicit more dramatic changes in organizational
performance. Such a leadership motivates followers to do more than originally affected to do
by stretching their abilities and increasing their self-confidence, and also promote innovation
throughout the organization.
Transformational leadership style may be appropriate in turbulent environments, in industries
at the very start or end of their life-cycles, in poorly performing organizations when there is a
need to inspire a company to embrace major changes. The use of charismatic behaviours to
make people feel important and cherished is arguably important during periods of uncertainty
when people are generally feeling quite distressed. Transformational leaders will challenge
established paradigms and ways of working.
However, some researchers believe that leaders who rely too heavily upon charisma are not
always effective in the long term. This is because few individuals may be talented and
energetic are able to handle all types of business problems alone. They require people
around them who are able to support them, and who are prepared to tell them when things
are going wrong.
Whereas, transactional leadership style focus more on designing systems and controlling the
organization‟s activities and are more likely to be associated with improving the current
situation. It tries to build on the existing culture and enhance current practices. Transactional

© The Institute of Chartered Accountants of India
leadership style uses the authority of its office to exchange rewards, such as pay and status.
They prefer a more formalized approach to motivation, setting clear goals with explicit
rewards or penalties for achievement or non-achievement. For employees‟ work efforts and
generally seek to enhance an organisation‟s performance steadily, but not dramatically.
Transactional leadership style may be appropriate in settled environment, in growing or
mature industries, and in organizations that are performing well. The style is better suited in
persuading people to work efficiently and run operations smoothly.
In conclusion, neither style of leadership is suitable for all circumstances. Effective
executives use a leadership style that is appropriate to the needs of the organization and its
business situation.

© The Institute of Chartered Accountants of India
Test Series: August, 2016
MOCK TEST PAPER – 1
INTERMEDIATE (IPC) : GROUP – II
PAPER – 5: ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
Wherever necessary suitable assumptions may be made and disclosed by way of a note.
Working Notes should form part of the answer.
(Time allowed: Three hours) (Maximum marks: 100)
1. (a) On 1.4.2013, ABC Ltd. received Government grant of Rs. 300 lakhs for acquisition
of machinery costing Rs. 1,500 lakhs. The grant was credited to the cost of the
asset. The life of the machinery is 5 years. The machinery is depreciated at 20% on
WDV basis. The Company had to refund the grant in May 2016 due to non-
fulfillment of certain conditions.
How you would deal with the refund of grant in the books of ABC Ltd.?
(b) Shyam Ltd. (a Public Sector Company) provides consultancy and engineering
services to its clients. In the year 2014-15, the Government has set up a
commission to decide about the pay revision. The pay will be revised with effect
from 1-1-2006 based on the recommendations of the commission. The company
makes the provision of Rs. 680 lakhs for pay revision in the financial year 2014-
2015 on the estimated basis as the report of the commission is yet to come. As per
the contracts with the client on cost plus job, the billing is done on the actual
payment made to the employees and allocated to jobs based on hours booked by
these employees on each job.
The company gives the following disclosures in its notes to accounts:
"Salaries and benefits include the provision of Rs. 680 lakhs in respect of pay
revision. The amount chargeable from reimbursable jobs will be billed as per the
contract when the actual payment is made”.
The accountant feels that the company should also recognise the income by
Rs. 680 lakhs in Profit and Loss Account as per the terms of the contract.
Otherwise, it will be the violation of matching concept and it will lead to
understatement of profit.
You are required to comment on the treatment done by the company in line with
provisions of Accounting Standards.

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(c) From the following information relating to Y Ltd. Calculate Earnings Per Share
(EPS):
Rs. in crores
Profit before V.R.S. payments but after depreciation 75.00
Depreciation 10.00
VRS payments 32.10
Provision for taxation 10.00
Fringe benefit tax 5.00
Paid up share capital (shares of Rs. 10 each fully paid) 93.00

(d) Beta Ltd. has its share capital divided into shares of Rs. 10 each. On 1st April, 2014,
it granted 25,000 employees stock options at Rs. 50 when the market price was Rs.
140 per share. The options were to be exercised between 1 st January, 2015 and
28th February, 2015. The employees exercised options for 24,000 shares only; the
remaining options lapsed. The company closes its books of account on 31 st March
every year. You are required to show necessary journal entries reflecting these
transactions. (4 x 5 =20 Marks)
2. XYZ & Co. is a partnership firm consisting of Mr. X, Mr. Y and Mr. Z who share profits
and losses in the ratio of 2:2:1 and ABC Ltd. is a company doing similar business.
Following is the summarized Balance Sheet of the firm and that of the company as at
31.3.2015:
Liabilities XYZ & Co. ABC Ltd. XYZ & Co. ABC Ltd.
Rs. Rs. Rs. Rs.
Equity share Plant & machinery 5,00,000 16,00,000
capital:
Equity shares of 20,00,000 Furniture & fixture 50,000 2,25,000
Rs. 10 each
Partners capital: Inventories 2,00,000 8,50,000
X 2,00,000 Trade receivables 2,00,000 8,25,000
Y 3,00,000 Cash at bank 10,000 4,00,000
Z 1,00,000 Cash in hand 40,000 1,00,000
General reserve 1,00,000 7,00,000
Trade payables 3,00,000 13,00,000
10,00,000 40,00,000 10,00,000 40,00,000

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It was decided that the firm XYZ & Co. be dissolved and all the assets (except cash in hand
and cash at bank) and all the liabilities of the firm be taken over by ABC Ltd. by issuing
50,000 shares of Rs. 10 each at a premium of Rs. 2 per share.
Partners of XYZ & Co. agreed to divide the shares issued by ABC Ltd. in the profit sharing
ratio and bring necessary cash for settlement of their capital.
The trade payables of XYZ & Co. includes Rs. 1,00,000 payable to ABC Ltd. An unrecorded
liability of Rs. 25,000 of XYZ & Co. must also be taken over by ABC Ltd.
Prepare:
(i) Realisation account, Partners’ capital accounts and Cash in hand/Bank account in
the books of XYZ & Co.
(ii) Pass journal entries in the books of ABC Ltd. for acquisition of XYZ & Co. and draw
the Balance Sheet after the takeover. (16 Marks)
3. The summarised Balance Sheet of M/s. Ice Ltd. as on 31-03-2016 is given below:
Liabilities Rs. Assets Rs.
1,00,000 Equity shares of 10,00,000 Freehold property 5,50,000
Rs. 10 each fully paid up Plant and machinery 2,00,000
4,000, 8% Preference shares of 4,00,000 Trade investment (at 2,00,000
Rs. 100 each fully paid cost)
Trade receivables 4,50,000
6% Debentures 4,00,000 Inventories-in trade 3,00,000
(secured by freehold Profit and loss account 5,25,000
property)
Arrear interest 24,000 4,24,000
Trade payables 1,01,000
Director’s loan 3,00,000
22,25,000 22,25,000
The Board of Directors of the company decided upon the following scheme of
reconstruction with the consent of respective stakeholders:
(i) Preference shares are to be written down to Rs. 80 each and equity shares to Rs. 2
each.
(ii) Preference dividend in arrear for 3 years to be waived by 2/3 rd and for balance 1/3 rd,
equity shares of Rs. 2 each to be allotted.
(iii) Debentureholders agreed to take one freehold property at its book value of
Rs. 3,00,000 in part payment of their holding. Balance debentures to remain as
liability of the company.

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© The Institute of Chartered Accountants of India
(iv) Arrear debenture interest to be paid in cash.
(v) Remaining freehold property to be valued at Rs. 4,00,000.
(vi) Investment sold out for Rs. 2,50,000.
(vii) 75% of Director’s loan to be waived and for the balance, equity shares of Rs. 2 each
to be allotted.
(viii) 40% of Trade receivables, 80% of Inventories and 100% of debit balance of profit
and loss account to be written off.
(ix) Company’s contractual commitments amounting to Rs. 6,00,000 have been settled
by paying 5% penalty of contract value.
Show the Journal Entries for giving effect to the internal re-construction and draw the
Balance Sheet of the company after effecting the scheme. (16 Marks)
4. (a) The following is the summarized Balance Sheet of Shah Ltd. Co. which is in the
hands of the liquidator:
Balance Sheet as at 31.3.2015
Liabilities Rs. Assets Rs.
Share Capital: Fixed assets 2,00,000
1,000, 6% Preference Shares of Inventory 1,20,000
Rs. 100 each, fully paid 1,00,000 Book debts 2,40,000
2,000 Equity shares of Rs. 100 Cash in hand 40,000
each, fully paid 2,00,000 Profit and loss A/c 3,00,000
2,000 Equity shares of Rs. 100
each Rs. 75 paid up 1,50,000
Loan from bank (on security of 1,00,000
stock)
Trade Payables 3,50,000
9,00,000 9,00,000
The assets realized the following amounts (after all costs of realization and
liquidator’s commission amounting to Rs. 5,000 paid out of cash in hand).
Rs.
Fixed assets 1,68,000
Inventory 1,10,000
Trade Receivables 2,30,000
Calls on partly paid shares were made but the amounts due on 200 shares were
found to be irrecoverable.

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You are required to prepare Liquidator’s Final Statement of Receipts and Payments.
(b) Show adjustment Journal entry in the books of Head Office at the end of April, 201 6
for incorporation of inter-branch transactions assuming that only Head Office
maintains different branch accounts in its books.
A. A.P. Branch:
(1) Received goods from M.P. – Rs. 30,000 and Rs. 25,000 from U.P.
(2) Sent goods to W.B. – Rs. 20,000, U.P. – Rs. 30,000.
(3) Bill Receivable received – Rs. 10,000 from W.B.
(4) Acceptances sent to M.P. – Rs. 10,000, U.P. – Rs. 20,000.
B. M.P. Branch (apart from the above) :
(5) Received goods from U.P. – Rs. 20,000, A.P – Rs. 10,000.
(6) Cash sent to A.P – Rs. 20,000, U.P. – Rs. 10,000.
C. W.B. Branch (apart from the above) :
(7) Received goods from U.P. – Rs. 40,000.
(8) Acceptances and Cash sent to U.P. – Rs. 10,000 and Rs. 15,000
respectively.
D. U.P. Branch (apart from the above) :
(9) Paid cash to W.B. – Rs. 20,000 and M.P. – Rs. 10,000 (8 + 8 = 16 Marks)
5. The following are the figures extracted from the books of TOP Bank Limited as on
31.3.2016.
Rs.
Interest and discount received 59,29,180
Interest paid on deposits 32,59,920
Issued and subscribed capital 16,00,000
Salaries and allowances 3,20,000
Directors fee and allowances 48,000
Rent and taxes paid 1,44,000
Postage and telegrams 96,460
Statutory reserve fund 12,80,000
Commission, exchange and brokerage 3,04,000
Rent received 1,04,000

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Profit on sale of investments 3,20,000
Depreciation on bank’s properties 48,000
Statutory expenses 44,000
Preliminary expenses 40,000
Auditor’s fee 28,000

The following further information is given:
(i) A customer to whom a sum of Rs. 16 lakhs has been advanced has become
insolvent and it is expected only 40% can be recovered from his estate.
(ii) There were also other debts for which a provision of Rs. 2,10,000 was found
necessary by the auditors.
(iii) Rebate on bills discounted on 31.3.2015 was Rs. 19,000 and on 31.3.2016 was Rs.
25,000.
(iv) Preliminary expenses are to be fully written off during the year.
(v) Provide Rs. 9,00,000 for Income-tax.
(vi) Profit and Loss account opening balance was Nil as on 31.3. 2015.
Prepare the Profit and Loss account of TOP Bank Limited for the year ended 31.3. 2016.
(16 Marks)
6. (a) From the following information of XYZ Marine Insurance Ltd. for the year ending
31st March, 2016, find out the
(i) Net Premium earned
(ii) Net Claims Incurred
Particulars Direct Business Re-insurance
(Rs.) (Rs.)
Premium Received 92,00,000 7,86,000
Premium Receivable as on 01.04.2015 4,59,000 37,000
Premium Receivable as on 31.03.2016 3,94,000 33,000
Premium Paid 6,36,000
Premium Payable as on 01.04.2015 28,000
Premium payable as on 31.03.2016 20,000
Claims Paid 73,00,000 5,80,000
Claims payable as on 01.04.2015 94,000 16,000

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© The Institute of Chartered Accountants of India
Claims payable as on 31.03.2016 1,01,000 12,000
Claims received 2,10,000
Claims receivable as on 01.04.2015 42,000
Claims receivable as on 31.03.2016 39,000
(b) The following balances were extracted from the books of M/s Division. You are
required to prepare Departmental Trading Account and Profit and Loss account for
the year ended 31 st December, 2015 after adjusting the unrealized department
profits if any.
Deptt. A Deptt. B
Rs. Rs.
Opening Stock 50,000 40,000
Purchases 6,50,000 9,10,000
Sales 10,00,000 15,00,000
General expenses incurred for both the departments were Rs. 1,25,000 and you are
also supplied with the following information: (a) Closing stock of Department A
Rs. 1,00,000 including goods from Department B for Rs. 20,000 at cost of
Department A. (b) Closing stock of Department B Rs. 2,00,000 including goods from
Department A for Rs. 30,000 at cost to Department B. (c) Opening stock of
Department A and Department B include goods of the value of Rs. 10,000 and
Rs. 15,000 taken from Department B and Department A respectively at cost to
transferee departments. (d) The rate of gross profit is uniform from year to year.
(10 + 6 = 16 Marks)
7. (a) Explain whether the following will constitute a change in accounting policy or not as
per AS 5?
(i) Introduction of a formal retirement gratuity scheme by an employer in place of
ad hoc ex-gratia payments to employees on retirement.
(ii) Management decided to pay pension to those employees who have retired
after completing 5 years of service in the organistaion. Such employees will
get pension of Rs. 20,000 per month. Earlier there was no such scheme of
pension in the organization.
(b) AB Ltd. launched a project for producing product X in October, 2013. The Company
incurred Rs. 20 lakhs towards Research and Development expenses upto 31 st
March, 2015. Due to prevailing market conditions, the Management came to
conclusion that the product cannot be manufactured and sold in the market for the
next 10 years. The Management hence wants to defer the expenditure write off to
future years. Advise the Company as per the applicable Accounting Standard.

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(c) An earthquake destroyed a major warehouse of PQR Ltd. on 30.4.201 6. The
accounting year of the company ended on 31.3.2016. The accounts were approved
on 30.6.2016. The loss from earthquake is estimated at Rs. 25 lakhs. State with
reasons, whether the loss due to earthquake is an adjusting or non-adjusting event
and how the fact of loss is to be disclosed by the company.
(d) A commercial bank has the following capital funds. Segregate the capital funds into
Tier I and Tier II capitals.
Particulars Amount
(Rs. in crores)
Equity Share Capital 400.00
Statutory Reserve 250.00
Capital Reserve (of which Statutory Reserve Rs. 18 crores 86.00
were due to revaluation of assets and the balance due to sale
of capital assets)
(c) Mohan started a business on 1 st April 2014 with Rs. 12,00,000 represented by
60,000 units of Rs. 20 each. During the financial year ending on 31 st March, 2015,
he sold the entire stock for Rs. 30 each. In order to maintain the capital intact,
calculate the maximum amount, which can be withdrawn by Mohan in the year
2014-15 if Financial Capital is maintained at historical cost. (4 x 4 = 16 Marks)

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© The Institute of Chartered Accountants of India
Test Series: August, 2016
MOCK TEST PAPER - 1
INTERMEDIATE (IPC): GROUP – I
PAPER – 5: ADVANCED ACCOUNTING
SUGGESTED ANSWERS/HINTS

1. (a) According to para 21 of AS 12 on Accounting for Government Grants, the amount
refundable in respect of a grant related to a specific fixed asset should be recorded
by increasing the book value of the asset or by reducing deferred income balance,
as appropriate, by the amount refundable. Where the book value is increased,
depreciation on the revised book value should be provided prospectively over the
residual useful life of the asset.
Rs. (in lakhs)
1st April, 2013 Acquisition cost of machinery 1,200.00
(Rs. 1,500 – Rs. 300)
31st March, 2014 Less: Depreciation @ 20% (240.00)
Book value 960.00
31st March, 2015 Less: Depreciation @ 20% (192.00)
Book value 768.00
31st March, 2016 Less: Depreciation @ 20% (153.60)
1st April, 2016 Book value 614.40
May, 2016 Add: Refund of grant 300.00
Revised book value 914.40
Depreciation @ 20% on the revised book value amounting Rs. 914.40 lakhs is to be
provided prospectively over the remaining useful life of the asset i.e. years ended
31st March, 2017 and 31st March, 2018.
(b) As per AS 29, „Provisions, Contingent Liabilities and Contingent Assets‟, when
some or all of the expenditure required to settle a provision is expected to be
reimbursed by another party, the reimbursement should be recognised when, and
only when, it is virtually certain that reimbursement will be received if the enterprise
settles the obligation. The reimbursement should be treated as a separate asset.
The amount recognised for the reimbursement should not exceed the amount of t he
provision.

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© The Institute of Chartered Accountants of India
Accordingly, potential loss to an enterprise may be reduced or avoided because a
contingent liability is matched by a related counter-claim or claim against a third
party. In such cases, the amount of the provision is determined after tak ing into
account the probable recovery under the claim if no significant uncertainty as to its
measurability or collectability exists.
(c)
Rs. in crores
Profit after depreciation but before VRS Payment 75.00
Less: Depreciation – No adjustment required -
VRS payments 32.10
Provision for taxation 10.00
Fringe benefit tax 5.00 (47.10)
Net Profit 27.90
No. of shares 9.30 crores
Net profit 27.90
EPS = = = Rs. 3 per share.
No.of shares 9.30

(d) Journal Entries
Rs. Rs.
1.1.15 Bank A/c Dr. 12,00,000
to Employees compensation expense A/c Dr. 21,60,000
28.2.15
To Equity Share Capital A/c 2,40,000
To Securities Premium A/c 31,20,000
(Allotment of 24,000 equity shares of
Rs.10 each at a premium of Rs.130
per share to the employees)
31.3.15 Profit and Loss A/c Dr. 21,60,000
To Employees Compensation
Expense A/c 21,60,000
(For transfer of employees
compensation expense to profit and
loss account)

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© The Institute of Chartered Accountants of India
2. (i) In the books of XYZ & Co.
Realisation Account
Rs. Rs.
To Plant & Machinery 5,00,000 By Trade payables 3,00,000
To Furniture & Fixture 50,000 By ABC Ltd. (Refer W.N.) 6,00,000
To Stock in trade 2,00,000 By Partners‟ Capital Accounts
(loss):
To Trade receivables 2,00,000 X‟s Capital A/c 20,000
Y‟s Capital A/c 20,000
Z‟s Capital A/c 10,000
9,50,000 9,50,000
Partners’ Capital Accounts
X Y Z X Y Z
Rs. Rs. Rs. Rs. Rs. Rs.
To Realisation 20,000 20,000 10,000 By Balance b/d 2,00,000 3,00,000 1,00,000
A/c
To Shares in 2,40,000 2,40,000 1,20,000 By General 40,000 40,000 20,000
ABC Ltd. Reserve
To Cash A/c - 80,000 - By Cash A/c 20,000 - 10,000
2,60,000 3,40,000 1,30,000 2,60,000 3,40,000 1,30,000

Cash and Bank Account
Cash Bank Cash Bank
Rs. Rs. Rs. Rs.
To Balance b/d 40,000 10,000 By Cash A/c 10,000
(Contra)
To Bank A/c 10,000 By Y 80,000
(Contra)*
To X 20,000
To Z 10,000
80,000 10,000 80,000 10,000


It is assumed that cash at bank has been withdrawn to pay Rs. 80,000 to partner Y. However,
payment to Y of Rs. 80,000 can also be made by cash Rs. 70,000 & by cheque Rs. 10,000.

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© The Institute of Chartered Accountants of India
(ii) In the Books of ABC Ltd.
Journal Entries
Dr. (Rs.) Cr. (Rs.)
1. Business Purchase Account Dr. 6,00,000
To XYZ & Co. 6,00,000
(Being business of XYZ & Co. purchased
and payment due)
2. Plant and Machinery Account Dr. 5,00,000
Furniture and Fixture Account Dr. 50,000
Inventories Account Dr. 2,00,000
Trade Receivables Account Dr. 2,00,000
To Trade Payables Account 3,00,000
To Unrecorded Liability Account 25,000
To Business Purchase Account 6,00,000
To Capital Reserve Account (Bal. Fig.) 25,000
(Being take over of all assets and liabilities)
3. XYZ & Co. Dr. 6,00,000
To Equity Share Capital Account 5,00,000
To Securities Premium Account 1,00,000
(Being purchase consideration discharged in
the form of shares of Rs. 10 each issued at
a premium of Rs. 2 each)
4. Trade Payables Account Dr. 1,00,000
To Trade Receivables Account 1,00,000
(Being mutual owings eliminated)
Balance Sheet of ABC Ltd. (After take over of XYZ & Co.)
as at 31.3.2015
Note No. Rs.
Equity and Liabilities
Shareholders funds
Share capital 1 25,00,000
Reserve and Surplus 2 8,25,000

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Current liabilities
Trade Payables (3,00,000 + 13,00,000 – 1,00,000) 15,00,000
Others (Unrecorded Liability) 25,000
Total 48,50,000
Assets
Non-current assets
Fixed assets
Tangible assets 3 23,75,000
Current assets
Inventories(2,00,000 + 8,50,000) 10,50,000
Trade Receivables (2,00,000 + 8,25,000 – 1,00,000) 9,25,000
Cash and cash equivalent 4 5,00,000
Total 48,50,000

Notes to Accounts
Rs.
1. Share Capital
2,50,000, Equity shares of Rs. 10 each fully paid up 25,00,000
(out of which 50,000 shares has been issued for
consideration other than cash)
2 Reserve and Surplus
Securities Premium 1,00,000
Capital Reserve 25,000
General Reserve 7,00,000 8,25,000
3. Tangible assets
Plant and Machinery (5,00,000 + 16,00,000) 21,00,000
Furniture and fixture (50,000 + 2,25,000) 2,75,000 23,75,000
4. Cash and cash equivalent
Cash at Bank 4,00,000
Cash in hand 1,00,000 5,00,000

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© The Institute of Chartered Accountants of India
Working Note:
Computation of purchase consideration:
50,000, Equity shares of Rs. 12 (10+2) each = Rs. 6,00,000
Equity shares distributed among partners:
Partner X = 20,000 shares @ Rs. 12 = Rs. 2,40,000
Partner Y = 20,000 shares @ Rs. 12 = Rs. 2,40,000
Partner Z = 10,000 shares @ Rs. 12 = Rs. 1,20,000
Rs. 6,00,000
3. In the books of Ice Ltd.
Journal Entries
Particulars Debit Credit
Rs. Rs.
i 8% Preference share capital A/c (Rs. 100 each) Dr. 4,00,000
To 8% Preference share capital A/c (Rs. 80 each) 3,20,000
To Capital reduction A/c 80,000
(Being the preference shares of Rs. 100 each
reduced to Rs. 80 each as per the approved
scheme)
ii Equity share capital A/c (Rs. 10 each) Dr. 10,00,000
To Equity share capital A/c (Rs. 2 each) 2,00,000
To Capital reduction A/c 8,00,000
(Being the equity shares of Rs. 10 each reduced to Rs. 2
each)
iii Capital reduction A/c Dr. 32,000
To Equity share capital A/c (Rs. 2 each) 32,000
(Being arrears of preference share dividend of one year
to be satisfied by issue of 16,000 equity shares of Rs. 2
each)
iv 6% Debentures A/c Dr. 3,00,000
To Freehold property A/c 3,00,000
(Being claim settled in part by transfer of freehold
property)
v Accrued debenture interest A/c Dr. 24,000
To Bank A/c 24,000

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© The Institute of Chartered Accountants of India
(Being accrued debenture interest paid)
vi Freehold property A/c Dr. 1,50,000
To Capital reduction A/c 1,50,000
(Being appreciation in the value of freehold property)
vii Bank A/c Dr. 2,50,000
To Trade investment A/c 2,00,000
To Capital reduction A/c 50,000
(Being trade investment sold on profit)
viii Director‟s loan A/c Dr. 3,00,000
To Equity share capital A/c (Rs. 2 each) 75,000
To Capital reduction A/c 2,25,000
(Being director‟s loan waived by 75% and balance
being discharged by issue of 37,500 equity shares of
Rs. 2 each)
ix Capital Reduction A/c Dr. 9,75,000
To Profit and loss A/c 5,25,000
To Trade receivables A/c 1,80,000
To Inventories-in-trade A/c 2,40,000
To Bank A/c 30,000
(Being various assets, penalty on cancellation of
contract, profit and loss account debit balance
written off through capital reduction account)
x Capital Reduction A/c Dr. 2,98,000
To Capital reserve A/c 2,98,000
(Being balance transferred to capital reserve account
as per the scheme)

Balance Sheet of Ice Ltd. (As reduced)
Particulars Notes No. Rs.
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 6,27,000
b Reserves and Surplus 2 2,98,000
2 Non-current liabilities

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© The Institute of Chartered Accountants of India
Long-term borrowings 3 1,00,000
3 Current liabilities
a Trade Payables 1,01,000
Total 11,26,000
Assets
1 Non-current assets
a Fixed assets
Tangible assets 4 6,00,000
2 Current assets
a Inventories 60,000
b Trade receivables 2,70,000
c Cash and cash equivalents 5 1,96,000
Total 11,26,000
Note to Accounts Rs.
1. Share Capital
1,53,500 Equity shares of Rs. 2 each 3,07,000
(out of which 53,500 shares have been issued for consideration other
than cash)
4,000, 8% Preference shares of Rs. 80 each fully paid up 3,20,000
Total 6,27,000
2. Reserves and Surplus
Capital Reserve 2,98,000
3. Long-term borrowings
Secured
6% Debentures 1,00,000
4. Tangible assets
Freehold property 4,00,000
Plant and machinery 2,00,000
Total 6,00,000
5. Cash and cash equivalents
Cash at bank (2,50,000 – 24,000 –30,000) 1,96,000
4. (a) Liquidator’s Final Statement of Receipts and Payments A/c
Rs. Rs. Rs.
To Cash in hand 40,000 By Liquidator‟s remuneration 5,000

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© The Institute of Chartered Accountants of India
To Assets realised: and expenses
Fixed assets 1,68,000 By Trade Payables 3,50,000
Inventory By Preference shareholders 1,00,000
(1,10,000 – 1,00,000) 10,000 By Equity shareholders @
Book debts 2,30,000 4,08,000 Rs. 10 on 2,000 shares 20,000
To Cash - proceeds of call on
1,800 equity shares @
Rs. 15 27,000
4,75,000 4,75,000

Working Note:
Return per equity share
Rs.
Cash available before paying preference shareholders
(Rs. 4,48,000 – Rs. 3,55,000) 93,000
Add: Notional calls 1,800 shares (2,000-200) × Rs. 25 45,000
1,38,000
Less: Preference share capital (1,00,000)
Available for equity shareholders 38,000
Rs. 38,000
Return per share=  Rs. 10
3,800 (4,000  200)
and Loss per Equity Share Rs. (100-10) = Rs. 90
Calls to be made @ Rs. 15 per share (Rs. 90-75) on 1,800 shares.
(b) Journal entry in the books of Head Office
Date Particulars Dr. Cr.
Rs. Rs.
30.4.2016 W.B. Branch Account Dr. 45,000
To A.P. Branch Account 5,000
To M.P. Branch Account 10,000
To U.P. Branch Account 30,000
(Being adjustment entry passed by head office in
respect of inter-branch transactions for the month of
April, 2014)

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© The Institute of Chartered Accountants of India
Working Note:
Inter – Branch transactions
A.P M.P. W.B. U.P.
Rs. Rs. Rs. Rs.
A. A.P Branch
(1) Received goods 55,000 (Dr.) 30,000 (Cr.) 25,000 (Cr.)
(2) Sent goods 50,000 (Cr.) 20,000 (Dr.) 30,000 (Dr.)
(3) Received Bills 10,000 (Dr.) 10,000 (Cr.)
receivable
(4) Sent acceptance 30,000 (Cr.) 10,000 (Dr.) 20,000 (Dr.)
B. M.P. Branch
(5) Received goods 10,000 (Cr.) 30,000 (Dr.) 20,000 (Cr.)
(6) Sent cash 20,000 (Dr.) 30,000 (Cr.) 10,000 (Dr.)
C. W.B. Branch
(7) Received goods 40,000 (Dr.) 40,000 (Cr.)
(8) Sent cash and 25,000 (Cr.) 25,000 (Dr.)
acceptances
D. U.P. Branch
(9) Sent cash 10,000( Dr.) 20,000 (Dr.) 30,000 (Cr.)
5,000 (Cr.) 10,000 (Cr.) 45,000 (Dr.) 30,000 (Cr.)
5. TOP Bank Limited
Profit and Loss Account for the year ended 31 st March, 2016
Schedule Year ended
31.03. 2016
(` in ‘000s)
I. Income:
Interest earned 13 5923.18
Other income 14 728.00
Total 6,651.18
II. Expenditure
Interest expended 15 3259.92
Operating expenses 16 768.46

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© The Institute of Chartered Accountants of India
Provisions and contingencies (960+210+900) 2,070.00
Total 6,098.38
IIII. Profits/Losses
Net profit for the year 552.80
Profit brought forward nil
552.80
IV. Appropriations
Transfer to statutory reserve (25%) 138.20
Balance carried over to balance sheet 414.60
552.80

Year ended
31.3. 2016
(` in ‘000s)
Schedule 13 – Interest Earned
I. Interest/discount on advances/bills (Refer W.N.) 5923.18
5923.18
Schedule 14 – Other Income
I. Commission, exchange and brokerage 304
II. Profit on sale of investments 320
III. Rent received 104
728
Schedule 15 – Interest Expended
I. Interests paid on deposits 3259.92

Schedule 16 – Operating Expenses
I. Payment to and provisions for employees 320
II. Rent, taxes and lighting 144
III. Depreciation on bank‟s properties 48
IV. Director‟s fee, allowances and expenses 48
V. Auditors‟ fee 28
VI. Law (statutory) charges 44
VII. Postage and telegrams 96.46

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VIII. Preliminary expenses 40
768.46
Working Note:
(` in ‘000s)
Interest/discount 5,929.18
Add: Rebate on bills discounted on 31.3. 2015 19.00
Less: Rebate on bills discounted on 31.3. 2016 25.00
5,923.18
6. (a) In the books of XYZ Marine Insurance Ltd.
Amount (Rs.)
(i) Net Premium earned
Premium from Direct Business received 92,00,000
Add: Receivable as on 31.03.2016 3,94,000
Less: Receivable as on 01.04.2015 (4,59,000)
Sub Total (A) 91,35,000
Premium on reinsurance accepted 7,86,000
Add: Receivable as on 31.03.2016 33,000
Less: Receivable as on 01.04.2015 (37,000)
Sub Total (B) 7,82,000
Premium on reinsurance Ceded 6,36,000
Add: Payable as on 31.03.2016 20,000
Less: Payable as on 01.04.2015 (28,000)
Sub Total (C) 6,28,000
Premium Earned (A+B-C) 92,89,000
(ii) Net Claims Incurred
Claims paid on direct business 73,00,000
Add: Outstanding as on 31.03.2016 1,01,000
Less: Outstanding as on 01.04.2015 (94,000)
Sub Total (A) 73,07,000
Reinsurance claims 5,80,000
Add: Outstanding as on 31.03.2016 12,000
Less: Outstanding as on 01.04.2015 (16,000)

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Sub Total (B) 5,76,000
Claims received from reinsurance 2,10,000
Add: Outstanding as on 31.03.2016 39,000
Less: Outstanding as on 01.04.2015 (42,000)
Sub Total (C) 2,07,000
Net Claim Incurred (A+B-C) 76,76,000
(b) Departmental Trading and Profit and Loss Account of M/s Division
For the year ended 31 st December, 2015
Deptt. A Deptt. B Deptt. A Deptt. B
Rs. Rs. Rs. Rs.
To Opening stock 50,000 40,000 By Sales 10,00,000 15,00,000
To Purchases 6,50,000 9,10,000 By Closing
To Gross profit 4,00,000 7,50,000 stock 1,00,000 2,00,000
11,00,000 17,00,000 11,00,000 17,00,000
To General By Gross profit 4,00,000 7,50,000
Expenses
(in ratio of
sales) 50,000 75,000
To Profit ts/f to general 3,50,000 6,75,000
profit and loss
account
4,00,000 7,50,000 4,00,000 7,50,000

General Profit and Loss Account
Rs. Rs.
To Stock reserve required (additional: By Profit from:
Stock in Deptt. A Deptt. A 3,50,000
50% of (Rs. 20,000 - Rs. 10,000) 5,000 Deptt. B 6,75,000
(W.N.1)
Stock in Deptt. B
40% of (Rs. 30,000 - Rs. 15,000) 6,000
(W.N.2)
To Net Profit 10,14,000
10,25,000 10,25,000
Working Notes:
1. Stock of department A will be adjusted according to the rate applicable to
department B = [(7,50,000 † 15,00,000) х 100] = 50%

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2. Stock of department B will be adjusted according to the rate applicable to
department A = [(4,00,000 † 10,00,000) х 100] = 40%
7. (a) As per AS 5 „Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies‟, the adoption of an accounting policy for events or transactions
that differ in substance from previously occurring events or transactions, will not be
considered as a change in accounting policy.
(i) Accordingly, introduction of a formal retirement gratuity scheme by an
employer in place of ad hoc ex-gratia payments to employees on retirement is
not a change in an accounting policy.
(ii) Similarly, the adoption of a new accounting policy for events or transactions
which did not occur previously or that were immaterial will not be treated as a
change in an accounting policy
(b) As per Para 41 of AS 26 “Intangible Assets”, expenditure on research should be
recognized as an expense when it is incurred. An intangible asset arising from
development (or from the development phase of an internal project) should be
recognized if, and only if, an enterprise can demonstrate all of the conditions
specified in para 44 of the standard. An intangible asset (arising from development)
should be derecognised when no future economic benefits are expected from its
use according to para 87 of the standard. Therefore, the manager cannot defer the
expenditure write off to future years.
Hence, the expenses amounting Rs. 20 lakhs incurred on the research and
development project has to be written off in the current year ending 31 st March, 2015.
(c) AS 4 “Contingencies and Events Occurring after the Balance Sheet Date”, states
that adjustments to assets and liabilities are not appropriate for events occurring
after the balance sheet date, if such events do not relate to conditions existing at
the balance sheet date. The destruction of warehouse due to earthquake did not
exist on the balance sheet date i.e. 31.3.2016. Therefore, loss occurred due to
earthquake is not to be recognised in the financial year 2015-2016.
However, according to para 8.6 of the standard, unusual changes affecting the
existence or substratum of the enterprise after the balance sheet date may indicate
a need to consider the use of fundamental accounting assumption of going concern
in the preparation of the financial statements. As per the information given in the
question, the earthquake has caused major destruction; therefore fundamental
accounting assumption of going concern is called upon.
Hence, the fact of earthquake together with an estimated loss of Rs. 25 lakhs
should be disclosed in the Report of the Directors for the financial year 201 5-2016.

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(d) Computation of Tier I and Tier II Capital Fund
Particulars Amount
(Rs. in crores)
(i) Capital Funds – Tier I
Equity Share Capital 400.00
Statutory Reserve 250.00
Capital Reserve (arising out of sale of assets i.e.
Rs. 86 cr – Rs.18 cr) 68.00
718.00
(ii) Capital Fund – Tier-II
Capital Reserve (arising out of revaluation of assets) 18.00
Less: Discount to the extent of 55% (9.90) 8.10
726.10
(e)
Particulars Financial Capital Maintenance at
Historical Cost (Rs.)

Closing equity
18,00,000 represented by cash
(Rs. 30 x 60,000 units)
Opening equity 60,000 units x Rs. 20 = 12,00,000
Permissible drawings to keep Capital intact 6,00,000 (18,00,000 – 12,00,000)

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Test Series: August, 2016
MOCK TEST PAPER – 1
INTERMEDIATE (IPC): GROUP – II
PAPER – 6: AUDITING AND ASSURANCE
Question No.1 is compulsory.
Attempt any five questions from the remaining six questions.

Time Allowed – 3 Hours Maximum Marks – 100

1. (a) “The purpose of an audit is to enhance the degree of confidence of intended users
in the financial statements.” Explain. (5 Marks)
(b) With reference of SA 250 give some examples or matters indicating to the auditor
about non compliance of laws & regulations by management. (5 Marks)
(c) State the generalisations about the reliability of audit evidence (5 Marks)
(d) “Fraud in the form of misappropriation of goods is still more difficult to detect.”
Explain. (5 Marks)
2. State with reason (in short) whether the following statements are correct or incorrect
(Answer any eight):
(i) The basic objective of audit does not change with reference to nature, size or form
of an entity.
(ii) The auditor cannot modify the opinion in the auditor's report.
(iii) While preparing the Balance sheet of a company- a receivable shall be classified as
a „trade receivable‟ if it is in respect of the amount due on account of goods
purchased or services rendered in the normal course of business.
(iv) In case of Companies, only Central Government has the power to prescribe
accounting standards.
(v) Teeming and lading is one of the techniques of inflating cash payments.
(vi) The fact that an audit is carried out acts as a deterrent and consequently the auditor
can be held responsible for the prevention of fraud and error.
(vii) Sufficiency and appropriateness of audit evidence are interrelated.
(viii) Director's relative can act as an auditor of the company.
(ix) Internal control can provide absolute assurance.
(x) Substantive procedure may be defined as an audit procedure designed to evaluate
the operating effectiveness of controls in preventing, or detecting and correcting,
material misstatements at the assertion level. (2 x 8 = 16 Marks)

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3. (a) “Apart from the knowledge acquired by the auditor in the formal manner, the auditor
should also possess certain personal qualities.” Explain stating briefly the qualities
of Auditors. (6 Marks)
(b) “The risk of not detecting a material misstatement resulting from fraud is higher than
the risk of not detecting one resulting from error.” Explain. (6 Marks)
(c) The Partner of Ashish Surjeet and Company, Chartered Accountants, asked the
management to provide statements from the creditors as part of audit evidence and
also required written representation from the management but the management did
not provide the requested written representations. Discuss how the auditor would
proceed. (4 Marks)
4. How will you vouch and verify the following?
(a) Refund of General Insurance Premium paid.
(b) Profit or Loss Arising on Sale of Plots Held by Real Estate Dealer.
(c) Goods sent out on Sale or Return Basis.
(d) Borrowing from Banks. (4 x 4 = 16 Marks)
5. (a) An audit of Expenditure is one of the major components of Government Audit. In
the context of „Government Expenditure Audit‟, write in brief, what do you
understand by:
(i) Audit against Rules and Orders
(ii) Audit of Sanctions
(iii) Audit against Provision of Funds
(iv) Propriety Audit
(v) Performance Audit (8 Marks)
(b) Mention any eight special audit points to be considered by the auditor during the
audit of a Hospital? (8 Marks)
6. (a) RGS & Co. a firm of Chartered Accountants has three partners, namely, R, G & S.
The firm is allotted the audit of BY Ltd. R, partner in the firm subsequently holds 100
shares in BY Ltd. Comment. (4 Marks)
(b) Discuss the provisions relating to appointment of subsequent Auditors of Suruchi
Yarns Pvt. Ltd. (4 Marks)
(c) The auditor CA Z appointed under section 139 was removed from his office before the
expiry of his term by an ordinary resolution of the company. Comment explaining
clearly the procedure of removal of auditor before expiry of term. (4 Marks)
(d) Discuss the reporting requirements regarding Fixed Assets under CARO, 2016.
(4 Marks)

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7. Write short notes on any four of the following:
(a) Examination in Depth.
(b) Audit Trail.
(c) Intangible Assets.
(d) Sweat Equity Shares.
(e) Audit of Capital Reserve. (4 x 4 = 16 Marks)

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© The Institute of Chartered Accountants of India
Test Series: August, 2016
MOCK TEST PAPER – 1
INTERMEDIATE (IPC): GROUP – II
PAPER – 6: AUDITING AND ASSURANCE
SUGGESTED ANSWERS/HINTS
1. (a) Purpose of Audit: As per SA 200 on “Overall objectives of the Independent
Auditor”, the purpose of an audit is to enhance the degree of confidence of intended
users in the financial statements. This is achieved by the expression of an opinion
by the auditor on whether the financial statements are prepared, in all material
respects, in accordance with an applicable financial reporting framework. In the
case of most general purpose frameworks, that opinion is on whether the financial
statements are presented fairly, in all material respects, or give a true and fair view
in accordance with the framework. An audit conducted in accordance with SAs and
relevant ethical requirements enables the auditor to form that opinion.
(b) Examples or Matters Indicating about Non-Compliance with Laws and
Regulations: As per SA 250 on “Consideration of Laws and Regulation in an Audit
of Financial Statements”, the following are examples or matters indicating to the
auditor about non-compliance with laws and regulations by management :
 Investigations by regulatory organisations and government departments or
payment of fines or penalties.
 Payments for unspecified services or loans to consultants, related parties,
employees or government employees.
 Sales commissions or agent‟s fees that appear excessive in relation to those
ordinarily paid by the entity or in its industry or to the services actually
received.
 Purchasing at prices significantly above or below market price.
 Unusual payments in cash, purchases in the form of cashiers‟ cheques
payable to bearer or transfers to numbered bank accounts.
 Unusual payments towards legal and retainership fees.
 Unusual transactions with companies registered in tax havens.
 Payments for goods or services made other than to the country from which the
goods or services originated.
 Payments without proper exchange control documentation.
 Existence of an information system which fails, whether by design or by
accident, to provide an adequate audit trail or sufficient evidence.

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 Unauthorised transactions or improperly recorded transactions.
 Adverse media comment.
(c) Generalisations about the Reliability of Audit Evidence: The reliability of
information to be used as audit evidence, and therefore of the audit evidence itself,
is influenced by its source and its nature, and the circumstances under which it is
obtained, including the controls over its preparation and maintenance where
relevant. Therefore, generalisations about the reliability of various kinds of audit
evidence are subject to important exceptions. Even when information to be used as
audit evidence is obtained from sources external to the entity, circums tances may
exist that could affect its reliability. For example, information obtained from an
independent external source may not be reliable if the source is not knowledgeable,
or a management‟s expert may lack objectivity. While recognising that exceptio ns
may exist, the following generalisations about the reliability of audit evidence may
be useful:
 The reliability of audit evidence is increased when it is obtained from
independent sources outside the entity.
 The reliability of audit evidence that is generated internally is increased when
the related controls, including those over its preparation and maintenance,
imposed by the entity are effective.
 Audit evidence obtained directly by the auditor (for example, observation of the
application of a control) is more reliable than audit evidence obtained indirectly
or by inference (for example, inquiry about the application of a control).
 Audit evidence in documentary form, whether paper, electronic, or other
medium, is more reliable than evidence obtained orally (for example, a
contemporaneously written record of a meeting is more reliable than a
subsequent oral representation of the matters discussed).
 Audit evidence provided by original documents is more reliable than audit
evidence provided by photocopies or facsimiles, or documents that have been
filmed, digitised or otherwise transformed into electronic form, the reliability of
which may depend on the controls over their preparation and maintenance.
(d) Misappropriation of Goods: Fraud in the form of misappropriation of goods is still
more difficult to detect; for this management has to rely on various measures. Apart
from the various requirements of record keeping about the physical quantities and
their periodic checks, there must be rules and procedures for allowing persons
inside the area where goods are kept. In addition there should be external secu rity
arrangements to see that no goods are taken out without proper authority. Goods
can be anything in the premises; it may be machinery. It may even be the daily
necessities of the office like stationery. The goods may be removed by subordinate
employees or even by persons quite higher up in the management. Auditors can

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detect this by undertaking a thorough and strenuous checking of records followed
by physical verification process. Also, by resorting to intelligent ratio analysis,
auditors may be able to form an idea whether such fraud exists. For example, the
gross profit ratio adjusted for any recorded change during the year, reveals whether
the value of inventory is reasonable with reference to the amount of the sale.
Similarly, the input-output ratio of production in terms of physical quantity may
reveal whether output is normal with reference to the quantity consumed for
production.
2. (i) Correct: An audit is an independent examination of financial information of any
entity, whether profit oriented or not, and irrespective of its size or legal form, when
such an examination is conducted with a view to expressing an opinion thereon. It is
clear that the basic objective of auditing, i.e., expression of opinion on financial
statements does not change with reference to nature, size or form of an entity.
(ii) Incorrect: The auditor shall modify the opinion in the auditor‟s report when the
auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement or the auditor is
unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.
(iii) Correct: As explained in General Instructions for Preparation of Balance Sheet as
per Schedule III, a receivable shall be classified as a „trade receivable‟ if it is in
respect of the amount due on account of goods purchased or services rendered in
the normal course of business.
(iv) Correct: Section 133 of the Companies Act, 2013 provides that the Central
Government may prescribe accounting standards as recommended by the Institute
of Chartered Accountants of India (ICAI) in consultation with and after examination
of the recommendations made by the National Financial Reporting Authority .
(v) Incorrect: Teeming and Lading is one of the techniques of suppressing cash
receipts and not of inflating cash payments. Money received from one customer is
misappropriated and the account is adjusted with the subsequent receipt from
another customer and so on.
(vi) Incorrect: An audit conducted in accordance with the auditing standards generally
accepted in India is designed to provide reasonable assurance that the financial
statements taken as a whole are free from material misstatement, whether caused
by fraud or error. The fact that an audit is carried out may act as a deterrent, but
the auditor is not and cannot be held responsible for the prevention of fraud and
error.
(vii) Correct: SA 500 on „Audit Evidence‟ expounds this concept. According to it, the
sufficiency and appropriateness of audit evidence are interrelated. Sufficiency is the
measure of the quantity of audit evidence. Appropriateness is the measure of the

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quality of audit evidence. SA 330 requires the auditor to conclude whether sufficient
appropriate audit evidence has been obtained. Whether sufficient appropriate audit
evidence has been obtained to reduce audit risk to an acceptably low level.
(viii) Incorrect: As per section 141(3) of the Companies Act, 2013, a person shall not be
eligible for appointment as an auditor of a company whose relative is a Director or is
in the employment of the Company as a director or key Managerial Personnel.
(ix) Incorrect: Internal control can provide only reasonable but not absolute assurance
that its objective relating to prevention and detection of errors/frauds, safeguarding
of assets etc., are achieved. This is because it suffers from some inherent
limitations.
(x) Incorrect: Test of controls may be defined as an audit procedure designed to
evaluate the operating effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level.
Whereas substantive procedure may be defined as an audit procedure designed to
detect material misstatements at the assertion level.
3. (a) Qualities of Auditors: The auditor should possess specific knowledge of
accountancy, auditing, taxation, etc. which are acquired by him during the course of
his theoretical education.
The auditor should also have sufficient knowledge of general principles of law of
contracts, partnership; specific statutes and provisions applicable, e.g. Companies
Act, 2013, Co-operative Societies Act, etc.; client‟s nature of business and its
peculiar features. Apart from the knowledge acquired by the auditor in the formal
manner, the auditor should also possess certain personal qualities such as, tact;
caution; firmness; good temper; judgement; patience; clear headedness and
commonsense; reliability and trust, etc.
In short, all those personal qualities required to make a good person contribute to
the making of a good auditor. In addition, the auditor must have the shine of culture
for attaining a great height. He must have the highest degree of integrity backed by
adequate independence. In fact, SA 200 mentions integrity, objectivity and
independence as one of the basic principles.
Auditing is a profession, calling for wide variety of knowledge to which no one has
yet set a limit, the most useful part of the knowledge is probably that which cannot
be learnt from books because its acquisition depends on the alertness of the mind
in applying to ever varying circumstances, the fruits of his own observation and
reflection; only he who is endowed with common sense in adequate measure can
achieve it.
(b) Risk of Not Detecting a Material Misstatement Resulting from Fraud: As
described in SA 200, the potential effects of inherent limitations are particularly
significant in the case of misstatement resulting from fraud. The risk of not detecting

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a material misstatement resulting from fraud is higher than the risk of not detecting
one resulting from error. This is because fraud may involve sophisticated and
carefully organized schemes designed to conceal it, such as forgery, deliberate
failure to record transactions, or intentional misrepresentations being made to the
auditor. Such attempts at concealment may be even more difficult to detect when
accompanied by collusion. Collusion may cause the auditor to believe that audit
evidence is persuasive when it is, in fact, false. The auditor‟s ability to detect a
fraud depends on factors such as the skillfulness of the perpetrator, the frequency
and extent of manipulation, the degree of collusion involved, the relative size of
individual amounts manipulated, and the seniority of those individuals involved.
While the auditor may be able to identify potential opportunities for fraud to be
perpetrated, it is difficult for the auditor to determine whether misstatements in
judgment areas such as accounting estimates are caused by fraud or error
(c) Management not providing Written Representation: If management does not
provide one or more of the requested written representations, the auditor shall:
(a) Discuss the matter with management;
(b) Re-evaluate the integrity of management and evaluate the effect that this may
have on the reliability of representations (oral or written) and audit evidence in
general; and
(c) Take appropriate actions, including determining the possible effect on the
opinion in the auditor‟s report in accordance with SA 705.
4. (a) Refund of General Insurance Premium paid: The refund of insurance premium
may be because of earlier provisional payment of premium or may be a policy might
have been cancelled at a later date. The auditor should take following steps while
vouching such refunds-
(i) Ascertain the reasons for refund of insurance premium.
(ii) Examine insurance policy or cover note to find out the amount of premium.
(iii) Verify advice of refund received from the insurance company. When refund is
admitted, the insurance company sends the advice. This will be evidence as a
covering letter to the cheque for the refund. Sometimes, a cheque is issued after a
receipt is sent in advance to the insurance company.
(iv) Scrutinise correspondence between the insurance company and the client.
(v) Check entries in the bank book or the bank statement. If necessary, the counterfoil
of the pay-in-slips can also be verified.
(b) Profit or Loss Arising on Sale of Plots Held by Real Estate Dealer: The land
holding in the case of real estate dealer will be a current asset and not a fixed

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asset. The same should, therefore, be valued at cost or market value, whichever is
less.
Profit or loss arising on sale of plots of land by Real Estate Dealer should be
verified as follows-
(i) Each property account should be examined from the beginning of the
development with special reference to the nature of charges so as to find out
that only the appropriate cost and charges have been debited to the account
and the total cost of the property has been set off against the price realised for
it.
(ii) This basis of distribution of the common charges between different plots of
land developed during the period, and basis for allocation of cost to individual
properties comprised in a particular piece of land should be scrutinised.
(iii) If land price lists are available, these should be compared with actual selling
prices obtained. And it should be verified that contracts entered into in respect
of sale have been duly sanctioned by appropriate authorities.
(iv) Where part of the sale price is intended to reimburse taxes or expenses,
suitable provisions should be maintained for the purpose.
(v) The prices obtained for various plots of land sold should be checked with the
plan map of the entire tract and any discrepancy or unreasonable price
variations should be inquired into. The sale price of different plots of land
should be verified on a reference to certified copies of sale deeds executed.
(vi) Out of the sale proceeds, provision should be made for the expenditure
incurred on improvement of land, which so far has been accounted for.
(c) Goods sent out on sale or return basis
(i) Check whether a separate memoranda record of goods sent out on sale or
return basis is maintained. The party accounts are debited only after the goods
have been sold and the sales account is credited.
(ii) See that price of such goods is unloaded from the sales account and the trade
receivable‟s record. Refer to the memoranda record to confirm that on the
receipt of acceptance from each party, his account has been debited and the
sales account correspondingly credited.
(iii) Ensure that the goods in respect of which the period of approval has expired at
the close of the year either have been received back subsequently or
customers‟ accounts have been debited.
(iv) Confirm that the inventory of goods sent out on approval, the period of
approval in respect of which had not expired till the close of the year lying with
the party, has been included in the closing inventory.

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(d) Borrowing from Banks: Borrowing from banks may be either in the form of
overdraft limits or term loans. In each case, the borrowings should be verified as
follows:
(i) Reconcile the balances in the overdraft or loan account with that shown in the
pass book(s) and confirm the last mentioned balance by obtaining a certificate
from the bank showing the balance in the accounts as at the end of the year.
(ii) Obtain a certificate from the bank showing particulars of securities deposited
with the bank as security for the loans or of the charge created on an asset or
assets of the concern and confirm that the same has been correctly d isclosed
and duly registered with Registrar of Companies and recorded in the Register
of charges.
(iii) Verify the authority under which the loan or draft has been raised. In the case of a
company, only the Board of Directors is authorised to raise a loan or borrow from a
bank.
(iv) Confirm, in the case of a company, that the restraint contained in Section 180
of the Companies Act, 2013 as regards the maximum amount of loan that the
company can raise has not been contravened.
Ascertain the purpose for which loan has been raised and the manner in which it
has been utilized and that this has not prejudicially affected the entity.
5. (a) Government Expenditure Audit: Audit of government expenditure is one of the
major components of government audit conducted by the office of C & AG. The
basic standards set for audit of expenditure are to ensure that there is provision of
funds authorised by competent authority fixing the limits within which expenditure
can be incurred. Briefly, these standards are explained below:
(i) Audit against Rules & Orders: The auditor has to see that the expenditure
incurred conforms to the relevant provisions of the statutory enactment and is
in accordance with the financial rules and regulations framed by the competent
authority.
(ii) Audit of Sanctions: The auditor has to ensure that each item of expenditure is
covered by a sanction, either general or special, accorded by the competent
authority, authorising such expenditure.
(iii) Audit against Provision of Funds: It contemplates that there is a provision of
funds out of which expenditure can be incurred and the amount of such
expenditure does not exceed the appropriations made.
(iv) Propriety Audit: It is required to be seen that the expenditure is incurred with
due regard to broad and general principles of financial propriety. The auditor
aims to bring out cases of improper, avoidable, or in fructuous expenditure
even though the expenditure has been incurred in conformity with the existing

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rules and regulations. Audit aims to secure a reasonably high standard of
public financial morality by looking into the wisdom, faithfulness and economy
of transactions.
(v) Performance Audit: This involves that the various programmes, schemes and
projects where large financial expenditure has been incurred are being run
economically and are yielding results expected of them. Efficiency-cum-
performance audit, wherever used, is an objective examination of the financial
and operational performance of an organisation, programme, authority or
function and is oriented towards identifying opportunities for greater economy,
and effectiveness.
(b) Audit of Hospital: The audit points to be considered by the auditor during the audit
of a Hospital are stated below:-
(i) Vouch the Register of patients with copies of bills issued to them. Verify bills
for a selected period with the patients‟ attendance record to see that the bills
have been correctly prepared. Also see that bills have been issued to all
patients from whom an amount was recoverable according to the rules of the
hospital.
(ii) Check cash collections as entered in the Cash Book with the receipts,
counterfoils and other evidence for example, copies of patients bills,
counterfoils of dividend and other interest warrants, copies of rent bills, etc.
(iii) See by reference to the property and Investment Register that all income that
should have been received by way of rent on properties, dividends, and
interest on securities settled on the hospital, has been collected.
(iv) Ascertain that legacies and donations received for a specific purpose have
been applied in the manner agreed upon.
(v) Trace all collections of subscription and donations from the Cash Book to the
respective Registers. Reconcile the total subscriptions due (as shown by the
Subscription Register and the amount collected and that still outstanding).
(vi) Vouch all purchases and expenses and verify that the capital expenditure was
incurred only with the prior sanction of the Trustees or the Managing
Committee and that appointments and increments to staff have been duly
authorised.
(vii) Verify that grants, if any, received from Government or local authority has been
duly accounted for. Also, that refund in respect of taxes deducted at source
has been claimed.
(viii) Compare the totals of various items of expenditure and income with the
amount budgeted for them and report to the Trustees or the Managing
Committee significant variations which have taken place.

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(ix) Examine the internal check as regards the receipt and issue of stores;
medicines, linen, apparatus, clothing, instruments, etc. so as to ensure that
purchases have been properly recorded in the Inventory Register and that
issues have been made only against proper authorisation.
(x) See that depreciation has been written off against all the assets at the
appropriate rates.
(xi) Inspect the bonds, share scrips, title deeds of properties and compare their
particulars with those entered in the property and Investment Registers.
(xii) Obtain inventories, especially of inventories and stores as at the end of the
year and check a percentage of the items physically; also compare their total
values with respective ledger balances.
6. (a) Holding of Shares by Partner of Audit Firm: Under sub-section (3) of section 141
along with the Companies (Audit and Auditors) Rule, 2014, a person who, or his
relative or partner is holding any security of or interest in the company or its
subsidiary, or of its holding or associate company or a subsidiary of such holding
company, shall not be eligible for appointment as an auditor of a company.
It may be noted that the relative may hold security or interest in the company of face
value not exceeding rupees one lakh.
Where a person appointed as an auditor of a company incurs any of the
disqualifications mentioned in sub-section (3) after his appointment, he shall vacate
his office as such auditor and such vacation shall be deemed to be a casual
vacancy in the office of the auditor.
Applying the above provisions to the given problem, it may be concluded that Fi rm
of RGS, Chartered Accountants is not eligible to continue as auditors. Firm shall
vacate its office as auditor and such vacation shall be treated as casual vacancy.
(b) Appointment of Subsequent Auditors in case of Non Government Companies:
Section 139(1) of the Companies Act, 2013 provides that every company shall, at
the first annual general meeting appoint an individual or a firm as an auditor who
shall hold office from the conclusion of that meeting till the conclusion of its sixth
annual general meeting and thereafter till the conclusion of every sixth meeting.
The following points need to be noted in this regard-
(i) The company shall place the matter relating to such appointment of ratification
by member at every Annual General Meeting.
(ii) Before such appointment is made, the written consent of the auditor to such
appointment, and a certificate from him or it that the appointment, if made,
shall be in accordance with the conditions as may be prescribed, shall be
obtained from the auditor.

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(iii) The certificate shall also indicate whether the auditor satisfies the criteria
provided in section 141.
(iv) The company shall inform the auditor concerned of his or its appointment, and
also file a notice of such appointment with the Registrar within 15 days of the
meeting in which the auditor is appointed.
(c) Removal of Auditor before Expiry of Term: According to Section 140 (1) the
auditor appointed under section 139 may be removed from his office before the
expiry of his term only by a special resolution of the company, after obtaining the
previous approval of the Central Government.
(1) The application to the Central Government for removal of auditor shall
be made in Form ADT-2 and shall be accompanied with fees as provided for
this purpose under the Companies (Registration Offices and Fees) Rules,
2014.
(2) The application shall be made to the Central Government within thirty days of
the resolution passed by the Board.
(3) The company shall hold the general meeting within sixty days of receipt of
approval of the Central Government for passing the special resolution.
It may be noted that before taking any action for removal before expiry of terms, the
auditor concerned shall be given a reasonable opportunity of being heard.
By applying the above provisions, it may be concluded that the action of the
company for removal of the auditor CA Z before expiry of term is not justified and
auditor may be removed from his office only by following the above mentioned
procedure.
(d) Reporting requirements regarding Fixed Assets under CARO, 2016 are :
(i) Whether the company is maintaining proper records showing full particulars,
including quantitative details and situation of fixed assets;
(ii) Whether these fixed assets have been physically verified by the management
at reasonable intervals; whether any material discrepancies were noticed on
such verification and if so, whether the same have been properly dealt with in
the books of account;
(iii) Whether the title deeds of immovable properties are held in the name of the
company. If not, provide the details thereof.
7. (a) Examination in Depth: It implies examination of a few selected transactions from
the beginning to the end through the entire flow of the transaction, i.e., from
initiation to the completion of the transaction by receipt or payment of cash and
delivery or receipt of the goods. This examination consists of studying the recording
of transactions at the various stages through which they have passed. At each

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stage, relevant records and authorities are examined; it is also judged whether the
person who has exercised the authority in relation to the transactions is fit to do so
in terms of the prescribed procedure. For example, a purchase of goods may
commence when a predetermined re-order level has been reached. The ensuing
stages may be summarised thus:
(i) Requisitions are pre-printed, pre-numbered and authorised;
(ii) official company order, also sequentially pre-numbered, authorised and placed
with approved suppliers only;
(iii) receipt of supplier‟s invoice;
(iv) receipt of supplier‟s statement;
(v) entries in purchases day book;
(vi) postings to purchase ledger and purchase ledger control account;
(vii) cheque in settlement;
(viii) entry on bank statement and returned “paid” cheque (if requested);
(ix) cash book entry;
(x) posting from cash book to ledger and control account, taking into account any
discounts.
(xi) receipt of goods, together with delivery/advice note;
(xii) admission of goods to stores;
(xiii) indication, by initials or rubber stamp on internal goods inwards note, of
compliance with order regarding specification, quantity and quality;
(xiv) entries in stores records.
It should be noted that the above list is not necessarily comprehensive, nor does its
constituent stages inevitably take place in the sequence suggested. The important
point to note is that from the moment it was realised that once a re -order level had
reached, a chain of events was put in motion, together leaving what may be termed
as “audit trail”. Each item selected for testing must be traced meticulously, and
although sample sizes need not be large, they must, of course, be representative.
It is an acceptable practice to check a slightly smaller number of transactions at
each successive stage within a depth test, on the statistical grounds (based on
probability theory) that the optimum sample size decreases as the auditor‟s “level of
confidence” concerning the functioning of the system increases. Examination in
depth has been found indispensable in modern auditing practice and, if intelligently
conducted, its reconstruction of the audit trail reveals more about the functioning (or
malfunctioning) of the client‟s system in practice than the haphazard and
mechanical approach to testing.

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(b) Audit Trail: An audit trail refers to a situation where it is possible to relate „one-to-
one‟ basis, the original input along with the final output. The work of an auditor
would be hardly affected if “Audit Trail” is maintained i.e. if it were still possible to
relate, on a „one-to-one‟ basis, the original input with the final output. A simplified
representation of the documentation in a manually created audit trail.
For example, the particular credit notes may be located by the auditor at any time
he may wish to examine them, even months after the balance sheet date. He also
has the means, should he so wish, of directly verifying the accuracy of the totals
and sub-totals that feature in the control listing, by reference to individual credit
notes. He can, of course, check all detailed calculations, casts and postings in the
accounting records, at any time.
In first and early second-generation computer systems, such a complete and trail
was generally available, no doubt , to management‟s own healthy scepticism of
what the new machine could be relied upon to achieve – an attitude obviously
shared by the auditor.
It is once iterated that there is an abundance of documentation upon which the
auditor can use his traditional symbols of scrutiny, in the form of colored ticks and
rubber stamps. Specifically:
(i) The output itself is as complete and as detailed as in any manual system.
(ii) The trail, from beginning to end, is complete, so that all documents may be
identified by located for purposes of vouching, totalling and cross -referencing.
Any form of audit checking is possible, including depth testing in either direction.
(c) Intangible Assets: An intangible asset is that asset which does not have a physical
identity but which is used by the enterprise for production or supply of goods or for
retails to other or for administrative purpose. Such asset does not have any physical
existence but their presence in the business is indicated with a value placed
thereon. These assets include rights and benefit to owners subject to their being
useful. For example: goodwill, patents, copyright etc. AS 26, “Intangible Assets”,
applies to, among other things, expenditure on advertising, training, start -up,
research and development activities. Research and development activities are
directed to the development of knowledge. Therefore, although these activities may
result in an asset with physical substance (for example, a prototype), the physical
element of the asset is secondary to its intangible component, that is the knowledge
embodied in it. This standard also applies to rights under licensing agreements for
items such as motion picture films, video recordings, plays, manuscripts, patents
and copyrights. An intangible asset should measured at cost. After initial recognition
an intangible asset should be carried at its cost less any accumulated amortisation
and any impairment losses.

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Auditor should also ensure that proper disclosure is made in the financial
statements about the carrying amount, amortisation methods, useful lives, etc.
(d) Sweat Equity Shares: As per section 54 of the Companies Act, 2013, the
employees may be compensated in the form of „Sweat Equity Shares”.
“Sweat Equity Shares” means equity shares issued by the company to employees or
directors at a discount or for consideration other than cash for providing know-how
or making available right in the nature of intellectual property rights or value
additions, by whatever name called.
The auditor may see that the Sweat Equity Shares issued by the company are of a
class of shares already issued and following conditions are fulfilled:
(i) the issue is authorised by a special resolution passed by the company;
(ii) the resolution specifies the number of shares, the current market price,
consideration, if any, and the class or classes of directors or employees to whom such
equity shares are to be issued;
(iii) not less than one year has, at the date of such issue, elapsed since the date
on which the company had commenced business; and
(iv) where the equity shares of the company are listed on a recognised stock
exchange, the sweat equity shares are issued in accordance with the regulations
made by the Securities and Exchange Board in this behalf and if they are not so
listed, the sweat equity shares are issued in accordance with such rules as may be
prescribed.
The rights, limitations, restrictions and provisions as are for the time being
applicable to equity shares shall be applicable to the sweat equity shares issued
under this section and the holders of such shares shall rank pari passu with other
equity shareholders.
(e) Audit of Capital Reserve: A capital reserve is a reserve which is not available for
distinction as dividend. The auditor should examine that the head 'capital reserves'
does not include any amounts as are regarded as free for distribution as dividend.
In the case of a company, if there is a capital profit on reissue of forfeited shares, it
is to be shown under capital reserves.
The following are the duties for the Auditor in connection with the capital profit,
which are not normally available for distribution to the shareholders unless:
(i) The Articles of the company permit such a distribution,
(ii) It has been realised in cash.
(iii) The assets value remaining after distribution of the profit will be not les s than
the book value so that share capital and reserves remaining after the
distribution will be fully represented by the remaining assets.

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Revaluation reserve is also not available for dividends. Further, the bonus share
cannot be issued by capitalisation of revaluation reserve. If any company does so,
the auditor should qualify his report.
It may however, be noted that revalued capital profits are distributable in the same
way as other profits and that it is not necessary to comply condition ( i) and (ii)
above. This is because AS 10 requires that any profit on sale of fixed asset has to
be routed through the profit and loss account. A clear distinction should be made
between capital profits and capital receipts. The latter cannot be distributed by way
of dividend at all.
Auditor should also ensure that the presentation and disclosure requirements of
Schedule III to the Companies Act, 2013 have been complied with.

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Test Series: August, 2016
MOCK TEST PAPER – 1
INTERMEDIATE (IPC): GROUP – II
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – A: INFORMATION TECHNOLOGY
Question No. 1 is compulsory.
Attempt any five questions from the rest.
Time Allowed – 1½ Hours Maximum Marks – 50

1. Answer all the following questions in brief.
(i) What are the advantages of using E-R Diagram?
(ii) Differentiate between Connection Oriented and Connectionless networks.
(iii) What do you understand by the term “Telecommunications Control Software”?
(iv) Define “Principle of Least Privilege” in Information Security.
(v) Discuss some of the advantages of Cloud Computing. (2 x 5 = 10 Marks)
2. (a) Discuss the benefits and risks of Business Process Automation (BPA). (4 Marks)
(b) Discuss various advantages of using Flowchart. (4 Marks)
3. (a) What are the important benefits of a computer network? (4 Marks)
(b) Discuss major activities that come under the „Conversion process‟ in „System
Implementation‟. (4 Marks)
4. (a) Discuss the various risk factors that are involved in an e-Commerce transaction.
(4 Marks)
(b) Discuss in detail the term “Protocol”? (4 Marks)
5. (a) Discuss Information System and its components, in brief. (4 Marks)
(b) Differentiate between Explicit Knowledge and Tacit Knowledge. (4 Marks)
6. (a) Differentiate between Online Processing and Batch Processing. (4 Marks)
(b) Differentiate between Hardware Virtualization and Storage Virtualization. (4 Marks)
7. Write short notes on any four of the following.
(a) Six Sigma (b) Network as a Service (Naas)
(c) Asynchronous Transmission (d) Specialized Systems
(e) Communication Controls under Application Controls (4 × 2 = 8 Marks)

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Test Series: August, 2016
MOCK TEST PAPER – 1
INTERMEDIATE (IPC) GROUP – II
PAPER –7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – B: STRATEGIC MANAGEMENT
Question No.1 is compulsory.
Attempt any five questions from the rest.
Time Allowed – 1½ Hours Maximum Marks – 50
1. (a) Being a strategic professional, analyze and redesign the work flows in the context of
business process reengineering. (3 Marks)
(b) An established firm introduces a new product which has no affinity with its present
product line and is meant for new customers. Identify and explain the diversification
followed by the firm. (3 Marks)
(c) Explain how technological factors present an opportunity as well as threat to a
particular business organization. (3 Marks)
(d) How would you argue that Research and Development Personnel are important for
effective strategy implementation? (3 Marks)
(e) Mission statement of a company focuses on the question: „who we are‟ and „what
we do‟. Explain briefly. (3 Marks)
2. (a) State with reasons which of the following statements is correct/incorrect:
(i) Control systems run parallel with strategic levels.
(ii) Human resource management aids in strategic management. (2  2 = 4 Marks)
(b) Explain the meaning of the following concepts:
(i) Corporate Strategy
(ii) Cost leadership strategies
(iii) Synchro Marketing (3  1 = 3 Marks)
3. Write short notes on the following:
(a) Logistics Strategy. (2 Marks)
(b) Dealing with strategic uncertainty. (2 Marks)
(c) Objectives of SWOT analysis. (3 Marks)

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4. “The role played by middle management is diminishing as the tasks performed by them
are increasingly being replaced by the technological tools. “Elucidate the statement in
terms of Hourglass organization structure”. (7 Marks)
5. An organization wants to start a new business and would like to understand the structure
of competition in the industry. Identify the factors that an organization should analyze.
(7 Marks)
6. It is difficult to determine exactly what business should do in response to a p articular
situation in the environment. Explain the various strategic approaches for it. (7 Marks)
7. For implementing six sigma, there are two separate key methodologies for existing and
new processes. Explain these methodologies. (7 Marks)

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Test Series: August, 2016
MOCK TEST PAPER – 1
INTERMEDIATE (IPC): GROUP – II
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – A: INFORMATION TECHNOLOGY
SUGGESTED ANSWERS/HINTS

1. (i) Advantages of using E-R Diagram are as follows:
 ER Modeling is simple and easily understandable. It is represented in business
users‘ language and it can be understood by non-technical specialist.
 Intuitive and helps in Physical Database creation.
 Can be generalized and specialized based on needs.
 Can help in database design.
 Gives a higher level description of the system.
(ii) Connection Oriented networks: There are the networks wherein a connection is
first established and then data is exchanged like it happens in case of telephone
networks.
Connectionless Networks: These are the networks where no prior connection is
made before data exchanges. Data which is being exchanged in fact has a
complete contact information of recipient and at each intermediate destination, it is
decided how to proceed further like it happens in case of postal networks.
(iii) Telecommunications Control Software: This consists of programs that control
telecommunications activities and manage the functions of telecommunications
networks. They include Telecommunication Monitors (mainframe host computers),
Network Operating Systems (microcomputer network servers) for network servers,
Network Management Components and Communication Packages (Microcomputer
Web browsers). This software can reside on almost any component of the network
and can provide such features as performance monitoring, activity monitoring,
priority assigning, transmission error correction and network problem mitigation.
(iv) Principle of Least Privilege: This is a fundamental principle of information
security, which refers to give only those privileges to a user account, which are
essential to that user's work. For example, a backup user does not need to install
software; hence, the backup user has rights only to run backup and backup-related
applications. Any other privileges, such as installing new software, should be
blocked. The principle applies also to a personal computer user, who usually does

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work in a normal user account, and opens a privileged, password protected account
(that is, a super user) only when the situation absolutely demands it.
When applied to users, the terms refers to the concept that all user accounts at all
times should run with as few privileges as possible, and also launch applications
with as few privileges as possible.
(v) Advantages of Cloud Computing are as follows:
 Cost Efficient: Cloud computing is probably the most cost efficient method to
use, maintain and upgrade.
 Almost Unlimited Storage: Storing information in the cloud gives us almost
unlimited storage capacity.
 Backup and Recovery: Since all the data is stored in the cloud, backing it up
and restoring the same is relatively much easier than storing the same on a
physical device. Furthermore, most cloud service providers are usually
competent enough to handle recovery of information.
 Automatic Software Integration: In the cloud, software integration is usually
something that occurs automatically. Not only that, cloud computing allows us
to customize the options with great ease. Hence, we can handpick just those
services and software applications that we think will best suit the particular
enterprise.
 Easy Access to Information: Once we register ourselves in the cloud, we can
access the information from anywhere, where there is an Internet connection.
 Quick Deployment: Once we opt for this method of functioning, the entire
system can be fully functional in a matter of a few minutes. Of course, the
amount of time taken here will depend on the exact kind of technology that we
need for our business.
2. (a) Benefits of using Business Process Automation (BPA) are as follows:
 Saving on costs: Automation leads to saving in time and labor costs.
 Staying ahead in competition: Today, in order to survive, businesses need to
adopt automation.
 Fast service to customers: This was not the initial reason for adoption of
BPA but gradually business managers realized that automation could help
them to serve their customers faster and better.
Risks of using Business Process Automation (BPA) are as follows:
 Risk to jobs: Jobs that were earlier performed manually by several employees
would post-automation would be mechanized, thereby posing a threat to jobs.

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 False sense of security: Automating poor processes will not gain better
business practices.
(b) Advantages of using Flowchart are as follows:
(i) Quicker grasp of relationships – Before any application can be solved, it
must be understood, the relationship between various elements of the
application must be identified. The programmer can chart a lengthy procedure
more easily with the help of a flowchart than by describing it by means of
written notes.
(ii) Effective Analysis – The flowchart becomes a blue print of a system that can
be broken down into detailed parts for study. Problems may be identified and
new approaches may be suggested by flowcharts.
(iii) Communication – Flowcharts aid in communicating the facts of a business
problem to those whose skills are needed for arriving at the solution.
(iv) Documentation – Flowcharts serve as a good documentation which aid
greatly in future program conversions. In the event of staff changes, they serve
as training function by helping new employees in understanding the existing
programs.
(v) Efficient coding – Flowcharts act as a guide during the system analysis and
program preparation phase. Instructions coded in a programming language
may be checked against the flowchart to ensure that no steps are omitted.
(vi) Orderly check out of problem – Flowcharts serve as an important tool during
program debugging. They help in detecting, locating and removing mistakes.
(vii) Efficient program maintenance – The maintenance of operating programs is
facilitated by flowcharts. The charts help the programmer to concentrate
attention on that part of the information flow which is to be modified.
3. (a) The important benefits of a computer network are as follows:
 Distributed nature of information: There would be many situations where
information has to be distributed geographically. E.g. in the case of Banking
Company, accounting information of various customers could be distributed
across various branches but to make Consolidated Balance Sheet at the year -
end, it would need networking to access information from all its branches.
 Resource Sharing: Data could be stored at a central location and can be
shared across different systems. Even resource sharing could be in terms of
sharing peripherals like printers, which are normally shared by many systems.
E.g. In the case of a CBS, Bank data is stored at a Central Data Centre and
could be accessed by all branches as well as ATMs.

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 Computational Power: The computational power of most of the applications
would increase drastically if the processing is distributed amongst computer
systems. For example: processing in an ATM machine in a bank is distributed
between ATM machine and the central Computer System in a Bank, thus
reducing load on both.
 Reliability: Many critical applications should be available 24x7, if such
applications are run across different systems which are distributed across
network then the reliability of the application would be high. For example - In a
city, there could be multiple ATM machines so that if one ATM fails, one could
withdraw money from another ATM.
 User communication: Networks allow users to communicate using e-mail,
newsgroups, video conferencing, etc.
(b) In ‗Conversion process‘ in ‗System implementation‘, following are the major
activities:
 Direct Changeover: The user stops using the old system one particular day
and starts using the new system from thereon, usually over a weekend or
during a slack period.
 Parallel Conversion: The old system continues alongside the new system for
a few weeks or months.
 Phased Conversion: Used with larger systems that can be broken down into
individual modules which can be implemented separately at different times.
 Pilot Conversion: New system will first be used by only a portion of the
enterprise, for example at one branch or factory.
4. (a) The risks associated with e-Commerce are multi-faceted. Some of them are as
follows:
 Problem of anonymity: There is need to identify and authenticate users in the
virtual global market where anyone can sell to or buy from anyone, anything
from anywhere.
 Repudiation of contract: There is possibility that the electronic transaction in
the form of contract, sale order or purchase by the trading partner or customer
may be denied.
 Lack of authenticity of transactions: The electronic documents that are
produced in the course of an e-Commerce transaction may not be authentic
and reliable.
 Data Loss or theft or duplication: The data transmitted over the Internet may
be lost, duplicated, tampered with or replayed.
 Attack from hackers: Web servers used for e-Commerce may be vulnerable
to hackers.

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 Denial of Service: Service to customers may be denied due to non-availability
of system as it may be affected by viruses, e-mail bombs and floods.
 Non-recognition of electronic transactions: e-Commerce transactions, as
electronic records and digital signatures may not be recognized as evidence in
courts of law.
 Lack of audit trails: Audit trails in e-Commerce system may be lacking and
the logs may be incomplete, too voluminous or easily tampered with.
 Problem of piracy: Intellectual property may not be adequately protected
when such property is transacted through e-Commerce.
(b) Protocol: Communication protocols are rules established to govern the way the
data are transmitted in a computer network. These rules are embedded or built into
the software which resides either in – Computer‘s memory or Memory of
transmission device. A protocol defines the following three aspects of digital
communication.
 Syntax: The format of data being exchanged, character set used, type of error
correction used, type of encoding scheme (e.g., signal levels) being used.
 Semantics: Type and order of messages used to ensure reliable and error
free information transfer.
 Timing: Defines data rate selection and correct timing for various events
during data transfer.
At the sending computer, protocols break data down into packets; add destination
address to the packet; and prepares data for transmission through Network
Interface Card (NIC). At the receiving computer, protocols take data packets off the
cable; bring packets into computer through Network Interface Card (NIC); strip the
packets off any transmitting information; copy data from packet to a buffer for
reassembly; and pass the reassembled data to the application.
5. (a) Information System: Information System (IS) is a combination of people,
hardware, software, communication devices, network and data resources that
processes data and information for a specific purpose. The system needs inputs
from user which will then be processed using technology devices such as
computers, and produce output that will be sent to another user or other system via
a network and a feedback method that controls the operation.
In general, any specific Information System aims to support operations,
management and decision-making. The main aim and purpose of each Information
System is to convert the data into information which is useful and meaningful. The
components of an Information System are as follows:
 People, Hardware, Software, Data and Networks are the five basic
resources of information systems;

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 People Resources consist of end users and IT specialists; Hardware
resources involve machines and media; Software resources include
programs and procedures; Data resources include data and knowledge
bases; and Network resources include communications media and networks;
 Data Resources are transformed by information processing activities into a
variety of information products for end users; and
 Information processing consists of the system activities of input, processing,
output, storage, and control.
(b) Explicit knowledge: Explicit knowledge is that which can be formalized easily and
as a consequence is easily available across the organization. Explicit knowledge is
articulated, and represented as spoken words, written material and compiled data.
This type of knowledge is codified, easy to document, transfer and reproduce. For
example – Online tutorials, Policy and procedural manuals.
Tacit knowledge: Tacit knowledge, on the other hand, resides in a few often-in just
one person and hasn‘t been captured by the organization or made available to
others. Tacit knowledge is unarticulated and represented as intuition, perspective,
beliefs, and values that individuals form based on their experiences. It is personal,
experimental and context-specific. It is difficult to document and communicate the
tacit knowledge. For example – hand-on skills, special know-how, employee
experiences.
6. (a) Batch Processing: It is defined as a processing of large set of data in a specific
way, automatically, without needing any user intervention. The data is first
collected, during a work day, for example, and then batch-processed, so all the
collected data is processed in one go. This could happen at the end of the work
day, for example, when computing capacities are not needed for other tasks. It is
possible to perform repetitive tasks on a large number of pieces of data rapidly
without needing the user to monitor it. Batched jobs can take a long time to process.
Batch processing is used in producing bills, stock control, producing monthly credit
card statements, etc.
Online Processing: Data is processed immediately while it is entered, the user
usually only has to wait a short time for a response. (Example: games, word
processing, booking systems). Interactive or online processing requires a user to
supply an input. Interactive or online processing enables the user to input data and
get the results of the processing of that data immediately.
(b) Hardware Virtualization: Hardware Virtualization refers to the creation of a virtual
machine that acts like a real computer with an operating system. Software executed
on these virtual machines is separated from the underlying hardware resources. For
example, a computer that is running Microsoft Windows may host a virtual machine
that looks like a computer with the Linux operating system; based software that can

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be run on the virtual machine. The basic idea of Hardware virtualization is t o
consolidate many small physical servers into one large physical server so that the
processor can be used more effectively.
Storage Virtualization: Storage virtualization is the apparent pooling of data from
multiple storage devices, even different types of storage devices, into what appears
to be a single device that is managed from a central console. Storage virtualization
helps the storage administrator perform the tasks of backup, archiving, and recovery
more easily - and in less time - by disguising the actual complexity of a Storage
Area Network (SAN). Administrators can implement virtualization with software
applications or by using hardware and software hybrid appliances. The servers
connected to the storage system aren‘t aware of where the data really is. Storage
virtualization is sometimes described as ―abstracting the logical storage from the
physical storage.
7. (a) Six Sigma: Six Sigma is a set of strategies, techniques, and tools for process
improvement. It seeks to improve the quality of process outputs by identifying and
removing the causes of defects and minimizing variability in manufacturing and
business processes. It follows a life-cycle having phases:
 Define: Customers are identified and their requirements are gathered.
 Measure: Data on current process are gathered and current baseline
performance for process output measures are established.
 Analyze: Using statistical methods and graphical displays, possible causes of
process output variations are identified.
 Improve: Solution alternatives are generated to fix the root cause. The most
appropriate solution is identified using solution prioritization matrix and
validated using pilot testing.
 Control: Before and after analysis is performed on the new process to validate
expected results, monitoring system is implemented to ensure process is
performing as designed.
(b) Network as a Service (NaaS): It is a category of cloud services where the
capability provided to the cloud service user is to use network/transport connecting
services. NaaS involves optimization of resource allocation by considering network
and computing resources as a whole. Some of the examples are: Virtual Private
Network, Mobile Network Virtualization etc.
(c) Asynchronous Transmission: In this, each character is sent at irregular intervals
in time as in the case of characters entered at the keyboard in real time. So, the
sender provides a synchronization signal to the receiver before starting the transfer
of each message. For example, imagine that a single byte is transmitted during a
long period of silence the receiver will not be able to know if this is 00010000,
10000000 or 00000100. To correct this problem, each character is preceded by

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some information indicating the start of character transmission by start-of-
transmission information (called a START bit usually 0) and ends by sending end-
of-transmission information (called STOP bit usually 1).

(d) Specialized Systems: Specialized Systems provide comprehensive end to end IT
solutions and services including systems integration, implementation, engineering
services, software application customization and maintenance to various
corporations in India and other part of a world. Specialized Systems also offer
comprehensive solutions to various sectors to confront challenges, and convert
every challenge into an opportunity. There are various specialized systems like
Enterprise Resource Planning (ERP), Core Banking System (CBS), Human
Resource Management Systems (HRMS), and Supply Chain Management (SCM)
etc.
(e) Communication Controls: Components in the communication subsystem are
responsible for transporting data among all the other subsystems within a system
and for transporting data to or receiving data from another system. Three types of
exposure arise in the communication subsystem.
 As data is transported across a communication subsystem, it can be impaired
through attenuation, delay distortion, and noise.
 The hardware and software components in a communication subsystem can
fail.
 The communication subsystem can be subjected to passive or active
subversive attacks.
The communication controls can be Physical Component Controls, Line Error
Controls, Flow Controls, Link Controls, Topological Controls, Channel Access
Controls and Internetworking Controls.

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Test Series: August, 2016
MOCK TEST PAPER – 1
INTERMEDIATE (IPC): GROUP – II
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – B: STRATEGIC MANAGEMENT
SUGGESTED ANSWERS/HINTS
1. (a) Business Process Reengineering (BPR) refers to the analysis and redesign of
workflows and processes both within and between the organizations. The
orientation of the redesign effort is radical. It involves total deconstruction and
rethinking of a business process in its entirety.
The workflows are studied, appraised and improved in terms of time, cost, output,
quality, and responsiveness to customers. The redesign effort aims to simplify and
streamline a process by eliminating all extra avoidable steps, activities, and
transactions. With the help of redesigning workflows, organizations can drastically
reduce the number of stages of work, and improve their performance.
(b) When an established firm introduces a new product which has little or no affinity
with its present product line and which is meant for a new class of customers
different from the firm's existing customer groups, the process is known as
conglomerate diversification. In conglomerate diversification, the new businesses/
products are disjointed from the existing businesses/products in every way; it is a
totally unrelated diversification. In process/technology/function, there is no
connection between the new products and the existing ones. Conglomerate
diversification has no common thread at all with the firm's present position.
(c) Technology is the most dynamic of all the environmental factors. Changes in
technology vitally affect the enterprise‘s costs, profitability, plant location decisions,
product lines, growth and development.
Technology can act as both opportunity and threat to a business. I t can act as
opportunity as business can take advantage of adopting technological innovations
to their strategic advantage. However, at the same time technology can act as
threat if organisations are not able to adopt it to their advantage. For example, an
innovative and modern production system can act as weakness if the business is
not able to change their production system. New entrants or existing competitors
can always use availability of technological improvements in products or production
methods that can be a threat to a business.
Technological opportunities and threats are not limited to the product or production.
Technology permeates whole gambit of business. It can transform how a business
acts and functions.

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(d) Research and Development (R&D) personnel can play an integral part in strategy
implementation. These individuals are generally charged with developing new
products and improving old products in a way that will allow effective strategy
implementation. R&D employees and managers perform tasks that include
transferring complex technology, adjusting processes to local raw materials,
adapting processes to local markets, and altering products to particular tastes and
specifications.
Strategies such as product development, market penetration, and concentric
diversification require that new products be successfully developed and that old
products be significantly improved. But the level of management support for R&D is
often constrained by resource availability.
(e) A company‘s mission statement is typically focused on its present business scope—
―who we are and what we do‖; mission statements broadly describe an
organizations present capabilities, customer focus activities and business makeup.
An organisation‘s mission states what customers it serves, what need it satisfies,
and what type of product it offers. It is an expression of the growth ambition of the
organisation. It helps organisation to set its own special identity, business emphasis
and path for development. Mission amplifies what brings the organisation to this
business or why it is there, what existence it seeks and what purpose it seeks to
achieve as a business organisation.
In other words, the mission serves as a justification for the firm's very presence and
existence; it legitimizes the firm's presence.
2. (a) (i) Correct: There are three strategic levels – corporate, business and functional.
Control systems are required at all the three levels. At the top level, strategic
controls are built to check whether the strategy is being implemented as
planned and the results produced by the strategy are those intended. Down
the hierarchy management controls and operational controls are built in the
systems. Operational controls are required for day-to-day management of
business.
(ii) Correct: The human resource management helps the organization to
effectively deal with the external environmental challenges. The function has
been accepted as a partner in the formulation of organization‘s strategies and
in the implementation of such strategies through human resource planning,
employment, training, appraisal and rewarding of personnel.
(b) (i) Corporate strategy is basically the growth design of the firm; it spells out the
growth objective - the direction, extent, pace and timing of the firm's growth. It
also spells out the strategy for achieving the growth. It serves as the design for
filling the strategic planning gap. It also helps build the relevant competitive
advantages.

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(ii) A number of cost elements affect the relative attractiveness of generic
strategies. A successful cost leadership strategy usually permeates the entire
firm, as evidenced by high efficiency, low overhead cost, and waste reduction.
The low cost leadership should be such that no competitors are able to imitate
so that it can result in sustainable competitive advantage to the cost leader
firm.
(iii) Synchro-marketing: When the demand for the product is irregular causing idle
capacity or over-worked capacities, synchro-marketing can be used to find
ways to alter the pattern of demand so that it equates more suitably with the
pattern of supply. It can be done through flexible pricing, promotion, and other
incentives.
3. (a) Management of logistics is a process which integrates the flow of materials into,
through and out of an organization to achieve a level of service that the right
materials are available at the right place at the right time, of right quality and at the
right cost. For a business organization effective logistics strategy will involve raising
and finding solutions to the questions relating to raw material, manufacturing
locations, products, transportation and deployment of inventory. Improvement in
logistics can result in saving in cost of doing business.
When a company creates a logistics strategy, it is defining the service levels at
which its logistics systems are highly effective. A company may develop a number
of logistics strategies for specific product lines, specific countries or specific
customers to address different categorical requirements.
(b) A typical external analysis will emerge with dozens of strategic uncertainties. To be
manageable, they need to be grouped into logical clusters or themes. It is then
useful to assess the importance of each cluster in order to set priorities with respe ct
to Information gathering and analysis.
Sometimes the strategic uncertainty is represented by a future trend or event that
has inherent unpredictability. Information gathering and additional analysis will not
be able to reduce the uncertainty. In that case, scenario analysis can be employed.
Scenario analysis basically accepts the uncertainty as given and uses it to drive a
description of two or more future scenarios. Strategies are then developed for each.
One outcome could be a decision to create organizational and strategic flexibility so
that as the business context changes the strategy will adapt.
(c) In SWOT analysis ‗strengths‘ and ‗opportunities‘ are positive considerations and
‗weaknesses‘ and ‗threats‘ are negative considerations. The basic objectives of
conducting SWOT analysis are:
 To exploit the strengths of the company to achieve its objectives.
 To identify the shortcomings in the company‘s present skills and resources and to
take necessary corrective steps so that the overall interest of the organisation is

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protected.
 To focus on profit making opportunities in the business environment and for
identifying threats.
 To highlight areas within the company, which are strong and might be exploited
more and weaknesses, where some defensive planning might be required to
prevent the company from downfall.
4. In the recent years information technology and communications have significantly altered
the functioning of organizations. The role played by middle management is diminishing
as the tasks performed by them are increasingly being replaced by the technological
tools. Hourglass organization structure consists of three layers with constricted middle
layer. The structure has a short and narrow middle-management level. Information
technology links the top and bottom levels in the organization taking away many tasks
that are performed by the middle level managers. A shrunken middle layer coordinates
diverse lower level activities. Contrary to traditional middle level managers who are often
specialist, the managers in the hourglass structure are generalists and perform wide
variety of tasks. They would be handling cross-functional issues emanating such as
those from marketing, finance or production.

Figure: Hourglass Organisation Structure
Hourglass structure has obvious benefit of reduced costs. It also helps in enhancing
responsiveness by simplifying decision making. Decision making authority is shifted close
to the source of information so that it is faster. However, with the reduced size of middle
management the promotion opportunities for the lower levels diminish significantly.
Continuity at same level may bring monotony and lack of interest and it becomes difficult
to keep the motivation levels high. Organisations try to overcome these problems by
assigning challenging tasks, transferring laterally and having a system of proper rewards
for performance.
5. Industry and competitive analysis can be done using a set of concepts and techniques to
get a clear understanding of key industry traits, the intensity of competition, the drivers of

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industry change, the market positions and strategies of rival companies, the keys to
competitive success, and the industry's profit outlook. The factors that can be analysed are:
Dominant economic features of the industry
Industries differ significantly in their basic character and structure. Industry and
competitive analysis begins with an overview of the industry's dominant economic
features. The factors to consider in profiling an industry's economic features are market
size, scope of competitive rivalry (local, regional, national, international, or global) ,
market growth rate and position in the business life, number of rivals and their relative
sizes, number of buyers and their relative sizes and so on.
Nature and strength of competition
An important component of industry and competitive analysis is to identify what the main
sources of competitive pressure are and how strong each competitive force is. This
analytical step is essential because managers cannot devise a successful strategy
without in-depth understanding of the industry's competitive character. Even though
competitive pressures in various industries are never precisely the same, the competitive
process works in a similar fashion to use a common analytical framework in gauging the
nature and intensity of competitive forces.
Triggers of change
An industry's economic features and competitive structure say a lot about its fundamental
character but little about the ways in which its environment may be changing. A ll
industries are characterized by trends and new developments that gradually produce
changes important enough to require a strategic response.
Identifying the companies that are in the strongest/weakest positions
The next step in examining the industry's competitive structure is to study the market
positions of rival companies. One technique for revealing the competitive positions of
industry participants is strategic group mapping, which is useful analytical tool for
comparing the market positions of each firm separately or for grouping them into like
positions when an industry has so many competitors that it is not practical to examine
each one in depth.
Likely strategic moves of rivals
Unless a company pays attention to what competitors are doing, it ends up flying blind
into competitive battle. A company can't expect to outmanoeuvre its rivals without
monitoring their actions, understanding their strategies, and anticipating what moves they
are likely to make next. Competitive intelligence about the strategies rivals are deploying,
their latest moves, their resource strengths and weaknesses, and the plans they have
announced is essential to anticipating the actions they are likely to take next and what
bearing their moves might have on a company's own best strategic moves.

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Key factors for competitive success
Key Success Factors (KSFs) are those things that most affect industry members' ability
to prosper in the marketplace - the particular strategy elements, product attributes,
resources, competencies, competitive capabilities, and business outcomes that spell the
difference between profit and loss and, ultimately, between competitive success or
failure. KSFs by their very nature are so important that all firms in the industry must pay
close attention to them.
Prospects and financial attractiveness of industry
The final step of industry and competitive analysis is to use the results of analysis of
previous six issues to draw conclusions about the relative attractiveness or
unattractiveness of the industry, both near-term and long-term. Strategists are obligated
to assess the industry outlook carefully, deciding whether industry and competitive
conditions present an attractive business opportunity for the company or whether the
company's growth and profit prospects are gloomy.
6. The business organization and its many environments have innumerous interrelationship
that at times it becomes difficult to determine exactly where the organization ends and
where its environment begins. It is also difficult to determine exactly what business
should do in response to a particular situation in the environment. Strategically, the
businesses should make efforts to exploit the opportunity and avoid the threats.
In this context following are the approaches:
(i) Least resistance: Some businesses just manage to survive by way of coping with
their changing external environments. They are simple goal-maintaining units. They
are very passive in their behaviour and are solely guided by the signals of the
external environment. They are not ambitious but are content with taking simple
paths of least resistance in their goal-seeking and resource transforming behaviour.
(ii) Proceed with caution: At the next level, are the businesses that take an intelligent
interest to adapt with the changing external environment. They seek to monitor the
changes in that environment, analyse their impact on their own goals and activities
and translate their assessment in terms of specific strategies for survival, stability
and strength. This is a sophisticated strategy than to wait for changes to occur and
then take corrective-adaptive action.
(iii) Dynamic response: At a still higher sophisticated level, are those businesses that
regard the external environmental forces as partially manageable and controllable
by their actions. Their feedback systems are highly dynamic and powerful. They not
merely recognise and ward off threats; they convert threats into opportunities. They
are highly conscious and confident of their own strengths and the weaknesses of
their external environmental ‗adversaries‘. They generate a contingent set of
alternative courses of action to be picked up in tune with the changing environment.

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7. For implementing six sigma, there are two separate key methodologies for existing and
new processes. They are known as DMAIC and DMADV.
DMAIC is an acronym for five different steps used in six sigma - Define, Measure,
Analyze Improve, and Control. DMAIC methodology is directed towards improvement of
existing product, process or service.
 Define: To begin with six sigma experts define the process improvement goals that
are consistent with the strategy of the organization and customer demands. They
discuss different issues with the senior managers so as to define what needs to
done.
 Measure: The existing processes are measured to facilitate future comparison. Six
sigma experts collect process data by mapping and measuring relevant processes.
 Analyze: Verify cause-and-effect relationship between the factors in the processes.
Experts need to identify the relationship between the factors. They have to make a
comprehensive analysis to identify hidden or not so obvious factor.
 Improve: On the basis of the analysis experts make a detailed plan to improve.
 Control: Initial trial or pilots are run to establish process capability and transition to
production. Afterwards continuously measure the process to ensure that variances
are identified and corrected before they result in defects.
DMADV is an acronym for Define, Measure, Analyze, Design, and Verify. DMADV is a
strategy for designing new products, processes and services.
 Define: As in case of DMAIC six sigma experts have to formally define goals of the
design activity that are consistent with strategy of the organization and the demands
of the customer.
 Measure: Next identify the factors that are critical to quality (CTQs). Measure
factors such as product capabilities and production process capability. Also assess
the risks involved.
 Analyze: Develop and design alternatives. Create high-level design and evaluate to
select the best design.
 Design: Develop details of design and optimise it. Verify designs may require using
techniques such as simulations.
 Verify: Verify designs through simulations or pilot runs. Verified and implemented
processes are handed over to the process owners.
However, in spite of different orientation in two methodologies, conceptually there is
overlapping between the DMAIC and DMADV as both are essentially having similar
objectives.

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Test Series: March, 2016
MOCK TEST PAPER – 2
INTERMEDIATE (IPC) : GROUP – II
PAPER – 5: ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
Wherever necessary suitable assumptions may be made and disclosed by way of a note.
Working Notes should form part of the answer.
(Time allowed: Three hours) (Maximum marks: 100)
1. (a) A Company follows April to March as its financial year. The Company recognizes
cheques dated 31st March or before, received from customers after balance sheet
date, but before approval of financial statement by debiting ‘Cheques in hand
account’ and crediting ‘Debtors account’. The ‘cheques in hand’ is shown in the
Balance Sheet as an item of cash and cash equivalents. All cheques in hand are
presented to bank in the month of April and are also realised in the same month in
normal course after deposit in the bank. State with reasons, whether the collection
of cheques bearing date 31st March or before, but received after Balance Sheet date
is an adjusting event and how this fact is to be disclosed by the company?
(b) Santosh Ltd. has received a grant of Rs. 8 crores from the Government for setting up
a factory in a backward area. Out of this grant, the company distributed Rs. 2 crores
as dividend. Also, Santosh Ltd. received land free of cost from the State Government
but it has not recorded it at all in the books as no money has been spent. In the light
of AS 12 examine, whether the treatment of both the grants is correct.
(c) On 1st April, 2015, Amazing Construction Ltd. obtained a loan of Rs. 32 crores to be
utilized as under:
(i) Construction of sealink across two cities:
(work was held up totally for a month during the year due : Rs. 25 crores
to high water levels)
(ii) Purchase of equipments and machineries : Rs. 3 crores
(iii) Working capital : Rs. 2 crores
(iv) Purchase of vehicles : Rs. 50,00,000
(v) Advance for tools/cranes etc. : Rs. 50,00,000
(vi) Purchase of technical know-how : Rs. 1 crores
(vii) Total interest charged by the bank for the year ending : Rs. 80,00,000
31st March, 2016

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Show the treatment of interest by Amazing Construction Ltd.
(d) An airline is required by law to overhaul its aircraft once in every five years. The
pacific Airlines which operate aircrafts does not provide any provision as required by
law in its final accounts. Discuss with reference to relevant Accounting Standard 29.
(4 x 5 = 20 Marks)
2. The following is the Balance Sheet of M/s. P and Q as on 31st March, 2015:
Liabilities Rs. Assets Rs.
Capital Accounts: Machinery 54,000
P 50,000 Furniture 5,000
Q 30,000 Investment 50,000
Reserves 20,000 Stock 20,000
Loan Account of Q 15,000 Debtors 21,000
Creditors 40,000 Cash 5,000
1,55,000 1,55,000
It was agreed that Mr. R is to be admitted for a fourth share in the future profits from
1st April, 2015. He is required to contribute cash towards goodwill and Rs. 15,000
towards capital.
The following further information is furnished:
(a) P & Q share the profits in the ratio 3 : 2.
(b) P was receiving salary of Rs. 750 p.m. from the very inception of the firm in 2008 in
addition to share of profit.
(c) The future profit ratio between P, Q & R will be 2:1:1. P will not get any salary after
the admission of R.
(d) It was agreed that the value of goodwill of the firm shall appear in the books of the
firm. The goodwill of the firm shall be determined on the basis of 3 years’ purchase
of the average profits from business of the last 5 years. The particulars of the
profits are as under:
Year ended Profit/(Loss)
31st March, 2011 25,000
31st March, 2012 12,500
31st March, 2013 (2,500)
31st March, 2014 35,000
31st March, 2015 30,000

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The above Profits and Losses are after charging the Salary of P. The Profit of the
year ended 31st March, 2011 included an extraneous profit of Rs. 40,000 and the
loss for the year ended 31st March, 2013 was on account of loss by strike to the
extent of Rs. 20,000.
(e) The cash trading profit for the year ended 31st March, 2016 was Rs. 50,000 before
depreciation.
(f) The partners had drawn each Rs. 1,000 p.m. as drawings.
(g) The value of other assets and liabilities as on 31st March, 2016 were as under:
Rs.
Machinery (before depreciation) 60,000
Furniture (before depreciation) 10,000
Investment 50,000
Stock 15,000
Debtors 30,000
Creditors 20,000
(h) Provide depreciation @ 10% on Machinery and @ 5% on Furniture on the Closing
Balance and interest is accumulated @ 6% on Q’s loan. The loan alongwith interest
would be repaid within next 12 months.
(i) Investments are held from inception of the firm and interest is received @ 10% p.a.
(j) The partners applied for conversion of the firm into a Private Limited Company.
Certificate was received on 1st April, 2016. They decided to convert Capital A/cs of
the partners into share capital in the ratio of 2:1:1 on the basis of a total Capital as
on 31st March, 2016. If necessary, partners have to subscribe to fresh capital or
withdraw.
Prepare the Profit and Loss Account of the firm for the year ended 31st March, 2016 and
the Balance Sheet of the Company on 1st April, 2016. (16 Marks)
3. (a) A company had 16,000, 12% debentures of Rs. 100 each outstanding as on
1st April, 2015, redeemable on 31st March, 2016. On that day, sinking fund was
Rs. 14,98,000 represented by 2,000 own debentures purchased at the average
price of Rs. 99 and 9% stocks face value of Rs. 13,20,000. The annual instalment
was Rs. 56,800.
On 31st March, 2016 the investments were realized at Rs. 98 and the debentures
were redeemed. You are required to write up the following accounts for the year
ending 31st March 2016:
(1) 12% Debentures account
(2) Debenture redemption sinking fund account.

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(b) X Co. Ltd. has its share capital divided into equity shares of Rs. 10 each. On
1.1.2015 it granted 20,000 employees’ stock option at Rs. 50 per share, when the
market price was Rs. 120 per share. The options were to be exercised between
15th March, 2016 and 31st March, 2016. The employees exercised their options for
16,000 shares only and the remaining options lapsed. The company closes its
books on 31st March every year. Show Journal entries (with narration) as would
appear in the books of the company up to 31st March, 2016. (8 + 8 = 16 Marks)
4. From the following balances extracted from the books of Perfect General Insurance
Company Limited as on 31.3.2016 you are required to prepare Revenue Accounts in
respect of Fire and marine Insurance business for the year ended 31.3.2016 to and a
Profit and Loss Account for the same period:
Rs. Rs.
Directors’ Fees 80,000 Interest received 19,000
Dividend received 1,00,000 Fixed Assets (1.4.2015) 90,000
Provision for Taxation Income-tax paid during
(as on 1.4. 2015) 85,000 the year 60,000

Fire Marine
Rs. Rs.
Outstanding Claims on 1.4. 2015 28,000 7,000
Claims paid 1,00,000 80,000
Reserve for Unexpired Risk on 2,00,000 1,40,000
1.4.2015
Premiums Received 4,50,000 3,30,000
Agent’s Commission 40,000 20,000
Expenses of Management 60,000 45,000
Re-insurance Premium (Dr.) 25,000 15,000
The following additional points are also to be taken into account :
(a) Depreciation on Fixed Assets to be provided at 10% p.a.
(b) Interest accrued on investments Rs. 10,000.
(c) Closing provision for taxation on 31.3. 2016 to be maintained at Rs. 1,24,138.
(d) Claims outstanding on 31.3.2016 were Fire Insurance Rs. 10,000; Marine Insurance
Rs. 15,000.
(e) Premium outstanding on 31.3.2016 were Fire Insurance Rs. 30,000; Marine
Insurance Rs. 20,000.

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(f) Reserve for unexpired risk to be maintained at 50% and 100% of net premiums in
respect of Fire and Marine Insurance respectively.
(g) Expenses of management due on 31.3.2016 were Rs. 10,000 for Fire Insurance and
Rs. 5,000 in respect of marine Insurance. (16 Marks)
5. (a) Siva Ltd. has two departments X and Y. From the following particulars prepare
departmental trading accounts and general profits and loss account for the year
ending 31st March, 2016:
Department X Department Y
Rs. Rs.
Opening stock (at cost) 80,000 48,000
Purchases 3,68,000 2,72,000
Carriage inward 8,000 8,000
Wages 48,000 32,000
Sales 5,60,000 4,48,000
Purchased goods transferred
By department Y to X 40,000 -
By department X to Y - 32,000
Finished goods transferred
By department Y to X 1,40,000 -
By department X to Y - 1,60,000
Return of finished goods
By department Y to X 40,000 -
By department X to Y - 28,000
Closing stock
Purchased goods 18,000 24,000
Finished goods 96,000 56,000
Purchased goods have been transferred mutually at their respective departmental
purchase cost and finished goods at departmental market price and that 25% of the
closing finished stock with each department represents finished goods received
from the other department.
(b) Beta, having head office at Mumbai has a branch at Nagpur. The head office does
wholesale trade only at cost plus 80%. The goods are sent to branch at the
wholesale price viz., cost plus 80%. The branch at Nagpur is wholly engaged in
retail trade and the goods are sold at cost to H.O. plus 100%.

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Following details are furnished for the year ended 31st March, 2016:
Head Office Branch
(Rs.) (Rs.)
Opening stock (as on 1.4.2015) 2,25,000 -
Purchases 25,50,000 -
Goods sent to branch (Cost to H.O. plus 80%) 9,54,000 -
Sales 27,81,000 9,50,000
Office expenses 90,000 8,500
Selling expenses 72,000 6,300
Staff salary 65,000 12,000
You are required to prepare Trading and Profit and Loss Account of the head office
and branch for the year ended 31st March, 2016. (8 + 8 =16 Marks)
6. The summarized Balance Sheet of X Ltd. as at 31st March, 2014 was as follows:
Particulars Amount Rs.
I Equity and Liabilities
1 Shareholders Fund
Share Capital
40,000 equity shares of Rs. 100 each fully paid 40,00,000
20,000, 10% preference shares of Rs.100 each 20,00,000
fully paid
Reserve & Surplus
(a) Securities Premium Account 1,50,000
(b) Profit & Loss Account (23,00,000)
2. Non Current Liabilities
Long Term Borrowings 4,00,000
7% Debentures of Rs. 100 each
3. Current Liabilities
Other Current Liabilities
(a) Creditors 10,00,000

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(b) Loan from Director 2,00,000
Total Liabilities 54,50,000
II Assets
1 Non Current Assets
Fixed Assets
(a) Land & Building 20,00,000
(b) Plant & Machinery 12,00,000 32,00,000
Intangible Assets
Goodwill 4,00,000
2. Current Assets
(a) Debtors 12,00,000
(b) Stock 5,00,000
(c) Cash at Bank 1,50,000 18,50,000
Total Assets 54,50,000

No Dividend on Preference Shares has been paid for last 5 Years.
The following scheme of reorganisation was duly approved by the Court:
(i) Each equity share to be reduced to Rs. 25.
(ii) Each existing Preference Share to be reduced to Rs. 75 and then exchanged for
one new 13% Preference Share of Rs. 50 each and one Equity Share of Rs. 25
each.
(iii) Preference Shareholders have forgone their right for dividend for four years. One
year's dividend at the old rate is however, payable to them in fully paid equity
shares of Rs. 25.
(iv) The Debenture Holders be given the option to either accept 90% of their claims in
cash or to convert their claims in full into new 13 % Preference Shares of Rs. 50
each issued at par. One-fourth (in value) of the Debenture Holders accepted
Preference Shares for their claims. The rest were paid in cash.
(v) Contingent Liability of Rs. 2,00,000 is payable which has been created by wrong
action of one Director. He has agreed to compensate this loss out of the loan given
by the Director to the Company.

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© The Institute of Chartered Accountants of India
(vi) Goodwill does not have any value in the present. Decrease the value of Plant &
Machinery, Stock and Debtors by Rs. 3,00,000; Rs. 1,00,000 and Rs. 2,00,000
respectively. Increase the value of Land & Building to Rs. 25,00,000.
(vii) 50,000 new Equity Shares of Rs. 25 each are to be issued at par payable in full on
application. The issue was underwritten for a commission of 4%. Shares were fully
taken up.
(viii) Total expenses incurred by the Company in connection with the Scheme excluding
underwriting Commission amounted to Rs. 20,000.
Pass necessary Journal Entries to record the above transactions. (16 Marks)
7. Answer any four of the following:
(a) AB Limited was incorporated on 1st January, 2015 and it issued a prospectus
inviting applications for 40,000 equity shares of Rs. 10 each. The whole issue
was fully underwritten by A, B and C as follows:
A - 20,000 Shares, B - 12,000 Shares, C - 8,000 Shares
Applications were received for 32,000 shares, of which marked applications
were as follows:
A - 16,000 Shares, B - 5,700 Shares, C - 8,300 Shares
You are required to find out the liabilities of individual underwriters.
(b) Calculate the diluted earnings per share from the following information:
Net profit for the current year Rs. 85,50,000
Number of equity shares outstanding 20,00,000
Number of 8% convertible debentures of Rs. 100 each 1,00,000
Each debenture is convertible into 10 equity shares.
Interest expenses for the current year Rs.6,00,000
Tax relating to interest expenses 30%
(c) From the following information find out the amount of provisions to be shown in the
Profit and Loss Account of a Commercial Bank:
Assets (Rs. in lakhs)
Standard 4,000
Sub-standard 2,000
Doubtful upto one year 900
Doubtful upto three years 400
Doubtful more than three years 300

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© The Institute of Chartered Accountants of India
Loss Assets 500
(d) “One of the characteristics of financial statements is neutrality”- Do you agree with
this statement?
(e) “In the following list of shares issued, for the purpose of calculation of weighted
average number of shares, from which date weight is to be considered:
(i) Equity Shares issued in exchange of cash,
(ii) Equity Shares issued as a result of conversion of a debt instrument,
(iii) Equity Shares issued in exchange for the settlement of a liability of the
enterprise,
(iv) Equity Shares issued for rendering of services to the enterprise,
(v) Equity Shares issued in lieu of interest and/or principal of an other financial
instrument,
(vi) Equity Shares issued as consideration for the acquisition of an asset other
than in cash.
Also define Potential Equity Share. (4 x 4 = 16 Marks)

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© The Institute of Chartered Accountants of India
Test Series: March, 2016
MOCK TEST PAPER - 2
INTERMEDIATE (IPC): GROUP – I
PAPER – 5: ADVANCED ACCOUNTING
SUGGESTED ANSWERS/HINTS

1. (a) Even if the cheques bear the date 31st March or before, the cheques received after
31st March do not represent any condition existing on the balance sheet date i.e.
31st March. Thus, the collection of cheques after balance sheet date is not an
adjusting event. Cheques that are received after the balance sheet date should be
accounted for in the period in which they are received even though the same may
be dated 31st March or before as per AS 4 “Contingencies and Events Occurring
after the Balance Sheet Date”. Moreover, the collection of cheques after balance
sheet date does not represent any material change affecting financial position of the
enterprise on the balance sheet date, so no disclosure is necessary.
(b) As per AS 12 ‘Accounting for Government Grants’, when government grant is
received for a specific purpose, it should be utilized for the same. So the grant
received for setting up a factory is not available for distribution of dividend. In the
second case, even if the company has not spent money for the acquisition of land,
land should be recorded in the books of accounts at a nominal value. The treatment
of both the elements in the treatment of the grant is incorrect as per AS 12.
(c) According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily
takes substantial period of time to get ready for its intended use. As per the
standard, borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalised as part of the
cost of that asset. Other borrowing costs should be recognised as an expense in the
period in which they are incurred. The treatment of interest by Amazing
Construction Ltd. can be shown as:
Qualifying Interest to Interest to be
Asset be charged to
capitalized Profit & Loss
A/c
Rs. Rs.
Construction of Yes 62,50,000 [80,00,000*(25/32)]
sea-link
Purchase of
equipments and
machineries No 7,50,000 [80,00,000*(3/32)]

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© The Institute of Chartered Accountants of India
Working capital No 5,00,000 [80,00,000*(2/32)]
Purchase of No 1,25,000 [80,00,000*(.5/32)]
vehicles
Advance for tools,
cranes etc. No. 1,25,000 [80,00,000*(.5/32)]
Purchase of
technical know-how No 2,50,000 [80,00,000*(1/32)]
Total 62,50,000 17,50,000
(d) A provision should be recognized only when an enterprise has a present obligation
arising from a past event or obligation. In the given case, there is no present
obligation but a future one, therefore no provision is recognized as per AS 29.
The cost of overhauling aircraft is not recognized as a provision because it is a
future obligation and the incurring of the expenditure depends on the company’s
decision to continue operating the aircrafts. Even a legal requirement to overhaul
does not require the company to make a provision for the cost of overhaul because
there is no present obligation to overhaul the aircrafts. Further, the enterprise can
avoid the future expenditure by its future action, for example by selling the aircraft.
However, an obligation might arise to pay fines or penalties under the legislation
after completion of five years. Assessment of probability of incurring fines and
penalties depends upon the provisions of the legislation and the stringency of the
enforcement regime. A provision should be recognized for the best estimate of any
fines and penalties if airline continues to operate aircrafts for more than five years.
2. M/s P, Q and R
Profit and Loss Account for the year ending on 31st March, 2016
Rs. Rs.
To Depreciation on Machinery 6,000 By Trading Profit 50,000
To Depreciation on furniture 500 By Interest on 5,000
Investment
To Interest on Q’s loan 900
To Net Profit to :
P’s Capital A/c 23,800
Q’s Capital A/c 11,900
R’s Capital A/c 11,900 47,600
55,000 55,000

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© The Institute of Chartered Accountants of India
Balance Sheet of the PQR Pvt. Ltd. as on 1st April, 2016
Notes No. Rs.
I Equity and Liabilities
Shareholders’ funds
Share capital 1,41,600
Current liabilities
Short term borrowings 1 15,900
Trade payables 20,000
Total 1,77,500
II Assets
Non-current assets
Fixed assets
Tangible assets 2 63,500
Non-current investments 50,000
Current assets
Inventories 15,000
Trade receivables 30,000
Cash and cash equivalents 19,000
Total 1,77,500
Notes to Accounts
Rs.
1. Short term borrowings
Loan from Q 15,900
2. Tangible assets
Machinery 54,000
Furniture 9,500 63,500
Working Notes:
1. Calculation of goodwill
2010-11 2011-12 2012-13 2013-14 2014-15
Rs. Rs. Rs. Rs. Rs.
Profits/(Loss) 25,000 12,500 (2,500) 35,000 30,000
Adjustment for extraneous
profit of 2010-11 and
abnormal loss of 2012-13 (40,000) - 20,000 — —
(15,000) 12,500 17,500 35,000 30,000

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© The Institute of Chartered Accountants of India
Add: Salary of P (750 x12) 9,000 9,000 9,000 9,000 9,000
(6,000) 21,500 26,500 44,000 39,000
Less: Interest on non-
trading investment* (5,000) (5,000) (5,000) (5,000) (5,000)
(11,000) 16,500 21,500 39,000 34,000
Total Profit from 2011-12 1,11,000
to 2014-15
Less: Loss for 2010-11 (11,000)
1,00,000
Average Profit 20,000
Goodwill equal to 3 years’ 60,000
purchase
Contribution from R for ¼ 15,000
share
* Investments are assumed to be non-trading investments.
2. Calculation of sacrificing ratio of Partners P and Q on admission of R
Old share New share Sacrificing share Gaining share
P 3/5 1/2 3 1 6−5 1
− = =
5 2 10 10
Q 2/5 1/4 2 1 8−5 3
− = =
5 4 20 20
R 1/4 1/4

3. Goodwill adjustment entry ∗ through Partners’ capital accounts (in their
sacrificing ratio of 2:3)
Rs. Rs.
R’ s capital A/c Dr. 15,000
To P’s capital A/c 6,000
To Q’ s capital A/c 9,000
(R’s share in goodwill adjusted through P and Q)

*As per AS 26 “Intangible Assets”, only purchased goodwill should appear in the books. Therefore,
goodwill though required to be shown in the books as per the requirement of the question, has been
adjusted through capital accounts of the partners in line with the provisions of AS 26.

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© The Institute of Chartered Accountants of India
4. Partners’ Capital Accounts
P Q R P Q R
Rs. Rs. Rs. Rs. Rs. Rs.
To Drawings 12,000 12,000 12,000 By Balance b/d 50,000 30,000 —
(1,000 x 12)
To P 6,000 By General 12,000 8,000 —
Reserve
To Q 9,000 By R 6,000 9,000 —
To Balance 79,800 46,900 14,900 By Bank (15,000 — — 30,000
c/d + 15,000)
By Profit & Loss 23,800 11,900 11,900
A/c
91,800 58,900 41,900 91,800 58,900 41,900
5. Balance Sheet of the firm as on 31st March, 2016
Liabilities Rs. Assets Rs. Rs.
P’s Capital 79,800 Machinery 60,000
Q’s Capital 46,900 Less : Depreciation (6,000) 54,000
R’s Capital 14,900 1,41,600 Furniture 10,000
Less : Depreciation (500) 9,500
Q’s Loan 15,000 Investments 50,000
Add: Interest due 900 15,900 Stock-in-trade 15,000
Creditors 20,000 Debtors 30,000
Cash (W.N.6) 19,000
1,77,500 1,77,500
6. Cash balance as on 31.3.2016
Rs. Rs.
Cash trading profit 50,000
Add: Investment Interest 5,000
Add: Decrease in Stock Balance 5,000
60,000
Less: Increase in Debtors 9,000
Less: Decrease in Creditors 20,000 (29,000)
31,000
Add: Opening cash balance 5,000
Add: Cash brought in by R 30,000 35,000
66,000

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© The Institute of Chartered Accountants of India
Less: Drawings (12,000 +12,000 +12,000) 36,000
Less: Additions to Machine (60,000 - 54,000) 6,000
Furniture (10,000 - 5,000) 5,000 (47,000)
Closing cash balance 19,000
7. Distribution of shares – Conversion into Company
Rs.
Capital: P 79,800
Q 46,900
R 14,900
Share Capital 1,41,600
Distribution of shares : P (1/2) 70,800
Q (1/4) 35,400
R (1/4) 35,400
P and Q should withdraw capital of Rs. 9,000 (Rs. 79,800 – Rs. 70,800) and Rs.11,500
(Rs. 46,900 – Rs. 35,400) respectively and R should subscribe shares of Rs. 20,500
(Rs.35,400 – Rs. 14,900).
3. (a) 12% Debentures Account
Date Particulars Rs. Date Particulars Rs.
st
31 March, To Own st
2,00,000 1 April, By Balance b/d 16,00,000
2016 debentures 2015
A/c
To Bank A/c 14,00,000
16,00,000 16,00,000
Debenture Redemption Sinking Fund Account
Date Particulars Rs. Date Particulars Rs.
31st March, To 9% 1st April, By Balance
2016 Stock A/c 6,400 2015 b/d 14,98,000
(loss)
(W.N.5)
To General 31st March, By Profit and
reserve 2016 loss A/c
A/c
(Bal.fig.) 16,93,200 56,800
By Interest on
sinking
fund A/c 1,42,800
(W.N.3)

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© The Institute of Chartered Accountants of India
By Own
debentures
A/c
(W.N.4) 2,000
16,99,600 16,99,600
Working Notes:
1. Amount of stock as on 1st April, 2015
Rs.
Sinking fund balance as on 1st April, 2015 14,98,000
Less: Own debentures (1,98,000)
13,00,000
2. Sales value of 9% stock
= Face value / Rs. per stock
= Rs. 13,20,000 / Rs. 100 = 13,200 stock
Sales value = 13,200 stock x Rs. 98 per stock
= Rs. 12,93,600
3. Interest credited to Sinking Fund
(i) Interest on 9% stock (Rs. 13,20,000 x 9%) Rs. 1,18,800
(ii) Interest on own debentures
(2,000 Debentures x Rs. 100 x 12%) Rs. 24,000
Rs. 1,42,800
4. Own Debentures Account
Rs. Rs.
1st
April, To Balance b/d 1,98,000 31st March, By 12% Debentures
2015 2016 A/c 2,00,000
31st March, To Sinking fund
2016 A/c 2,000
2,00,000 2,00,000

5. 9% Stock Account
Rs. Rs.
1st April, To Balance b/d 31st March, By Bank
2015 (Face value Rs. 2016 account
13,20,000) (W.N.1) 13,00,000 (W.N.2) 12,93,600

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© The Institute of Chartered Accountants of India
By Sinking
fund (loss
on sales) 6,400
13,00,000 13,00,000
(b) In the books of X Ltd.
Journal Entries
Rs. Rs.
15.03.16 Bank A/c Dr. 8,00,000
to 31.3.16 Employee compensation expense A/c Dr. 11,20,000
To Equity share capital A/c 1,60,000
To Securities premium A/c 17,60,000
(Being shares issued to the employees
against the options vested to them in
pursuance of Employee Stock Option
Plan)
31.3.16 Profit and Loss A/c Dr. 11,20,000
To Employee compensation 11,20,000
expenses A/c
(Being transfer of employee
compensation transfer to Profit and Loss
Account)
Working Notes:
1. No entry is passed when Stock Options are granted to employees. Hence, no
entry will be passed on 1st April 2015;
2. Market Price = Rs. 120 per share where as stock option price = Rs. 50, Hence,
the difference Rs. 120 – Rs. 50 = Rs. 70 per share is equivalent to employee
cost or employee compensation expense and will be charged to P/L Account
as such for the number of options exercised i.e. 16,000 shares.
4. Form B – RA (Prescribed by IRDA) Perfect General Insurance Co. Ltd
Revenue Account for the year ended 31st March, 2016
Fire and Marine Insurance Businesses
Schedule Fire Marine
Current Year Current Year
Rs. Rs.
Premiums earned (net) 1 4,27,500 1,40,000

8

© The Institute of Chartered Accountants of India
Profit / (Loss) on sale / redemption of
investments — —
Others (to be specified)
Interest, Dividends and Rent – Gross — —

Total (A) 4,27,500 1,40,000
Claims incurred (net) 2 82,000 88,000
Commission 3 40,000 20,000
Operating expenses related to 4 70,000 50,000
Insurance business
Premium Deficiency
Total (B) 1,92,000 1,58,000
Profit from Fire / Marine Insurance
business (A-B) 2,35,500 (18,000)
Schedules forming part of Revenue Account
Schedule –1
Premiums earned (net) Fire Marine
Current Current
Year Year
Rs. Rs.
Premiums from direct business written 4,80,000 3,50,000
Less: Premium on reinsurance ceded (25,000) (15,000)
Total Premium earned 4,55,000 3,35,000
Less: Change in provision for unexpired risk (27,500) (1,95,000)
4,27,500 1,40,000
Schedule – 2
Claims incurred (net) (W.N. 1) 82,000 88,000
Schedule – 3
Agents Commission 40,000 20,000
Schedule – 4
Operating expenses related to insurance
business
Expenses of Management (W.N. 2) 70,000 50,000

9

© The Institute of Chartered Accountants of India
Form B-PL
Perfect General Insurance Co. Ltd.
Profit and Loss Account for the year ended 31st March, 2016
Particulars Schedule Current Year Previous
Year
Rs. Rs.
Operating Profit/(Loss)
(a) Fire Insurance 2,35,500
(b) Marine Insurance (18,000)
(c) Miscellaneous Insurance —
Income From Investments
Interest, Dividend & Rent–Gross 1,29,000 ∗
Other Income (To be specified)
Total (A) 3,46,500
Provisions (Other than taxation) —
Depreciation 9,000
Other Expenses –Director’s Fee 80,000
Total (B) 89,000
Profit Before Tax 2,57,500
Provision for Taxation 99,138
Profit After Tax 1,58,362
Working Notes:
Fire Marine
Rs. Rs.
1. Claims under policies less reinsurance
Claims paid during the year 1,00,000 80,000
Add: Outstanding on 31st March, 2016 10,000 15,000
1,10,000 95,000
Less: Outstanding on 1st April, 2015 (28,000) (7,000)
82,000 88,000


Interest and dividend in this case can’t be bifurcated between fire and marine, thus taken to profit and
loss account.

10

© The Institute of Chartered Accountants of India
2. Expenses of management
Expenses paid during the year 60,000 45,000
Add: Outstanding on 31st March, 2016 10,000 5,000
70,000 50,000
3. Premiums less reinsurance
Premiums received during the year 4,50,000 3,30,000
Add: Outstanding on 31st March, 2016 30,000 20,000
4,80,000 3,50,000
Less : Reinsurance premiums (25,000) (15,000)
4,55,000 3,35,000
4. Reserve for unexpired risks is 50% of net premium for fire insurance and 100% of
net premium for marine insurance. Reserve for unexpired risks for fire insurance =
Rs. 4,55,000 X 50% = Rs. 2,27,500. Opening Balance in reserves for unexpired
risk for fire insurance was Rs. 2,00,000. Hence, additional transfer to reserve for
fire insurance in the year will be Rs. 27,500. On similar basis of calculation, the
additional transfer to reserve for marine insurance will be Rs. 1,95,000
5. Provision for taxation account
Rs. Rs.
31.3.2016 To Bank A/c 1.4.2015 By Balance b/d 85,000
(taxes paid) 60,000 31.3.2016 By P & L A/c 99,138
(Bal Fig)
31.3.2016 To Balance 1,24,138
c/d
1,84,138 1,84,138
5. (a) Departmental Trading Account in the books of Siva Ltd.
for the year ended 31st March 2016
Particulars Department Department Particulars Department Department
X Y X Y
Rs. Rs. Rs. Rs.
To Opening stock 80,000 48,000 By Sales 5,60,000 4,48,000
To Purchases 3,68,000 2,72,000 By Transfers:
To Carriage inward 8,000 8,000 Purchased goods 32,000 40,000

11

© The Institute of Chartered Accountants of India
To Wages 48,000 32,000 Finished goods 1,20,000 ∗ 1,12,000*
To Transfers: By Closing stock:
Purchased 40,000 32,000 Purchased goods 18,000 24,000
goods
Finished goods 1,12,000 1,20,000 Finished goods 96,000 56,000
To Gross profit c/d 1,70,000 1,68,000
8,26,000 6,80,000 8,26,000 6,80,000

Profit and Loss A/c
for the year ended 31st March, 2016
Particulars Rs. Particulars Rs.
To Provision for unrealized profit By Gross profit b/d
included in closing stock
Department X (W.N. 3) 7,200 Department X 1,70,000
Department Y (W.N. 3) 3,500 Department Y 1,68,000
To Net profit 3,27,300
3,38,000 3,38,000
Working Notes:
1. Calculation of rates of gross profit margin on sales
Department X Department Y
Rs. Rs.
Sales 5,60,000 4,48,000
Add: Transfer of finished goods 1,60,000 1,40,000
7,20,000 5,88,000
Less: Return of finished goods (40,000) (28,000)
6,80,000 5,60,000
Gross Profit 1,70,000 1,68,000
Gross profit margin = 1,70,000 1,68,000
× 100 =25% × 100 = 30%
6,80,000 5,60,000


Net transfers of finished goods by
Department X to Y = Rs. 1,60,000 – Rs. 40,000 = Rs. 1,20,000
Department Y to X = Rs. 1,40,000 – Rs. 28,000= Rs. 1,12,000

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© The Institute of Chartered Accountants of India
2. Finished goods from other department included in the closing stock
Department X Department Y
Rs. Rs.
Stock of finished goods 96,000 56,000
Stock related to other department
(25% of finished goods) 24,000 14,000
3. Unrealized profit included in the closing stock
Department X = 30% of Rs. 24,000 = Rs. 7,200
Department Y = 25% of Rs. 14,000 = Rs. 3,500
(b) Trading and P