CA IPCC RTP May 2019 PDF

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PAPER – 1: ACCOUNTING
PART – I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY
FOR MAY 2019 EXAMINATION
A. Applicable for May, 2019 examination

I. Amendments in Schedule III (Division I) to the Companies Act, 2013
In exercise of the powers conferred by sub-section (1) of section 467 of the
Companies Act, 2013), the Central Government made the following amendments in
Division I of the Schedule III with effect from the date of publication of this notification
in the Official Gazette:
(A) under the heading “II Assets”, under sub-heading “Non-current assets”, for the
words “Fixed assets”, the words “Property, Plant and Equipment” shall be
substituted;
(B) in the “Notes”, under the heading “General Instructions for preparation of
Balance Sheet”, in paragraph 6,-
(I) under the heading “B. Reserves and Surplus”, in item (i), in sub- item (c),
the word “Reserve” shall be omitted;
(II) in clause W., for the words “fixed assets”, the words “Property, Plant and
Equipment” shall be substituted.
II. Amendments in Schedule V to the Companies Act, 2013
In exercise of the powers conferred by sub-sections (1) and (2) of section 467 of the
Companies Act, 2013, the Central Government hereby makes the following
amendments to amend Schedule V.
In PART II, under heading “REMUNERATION”, in Section II - ,
(a) in the heading, the words “without Central Government approval” shall be
omitted;
(b) in the first para, the words “without Central Government approval” shall be
omitted;
(c) in item (A), in the proviso, for the words “Provided that the above limits shall be
doubled” the words “Provided that the remuneration in excess of above limits
may be paid” shall be substituted;
(d) in item (B), for the words “no approval of Central Government is required” the
words “remuneration as per item (A) may be paid” shall be substituted;
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2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019
(e) in Item (B), in second proviso, for clause (ii), the following shall be substituted,
namely:-
“(ii) the company has not committed any default in payment of dues to any bank
or public financial institution or non-convertible debenture holders or any other
secured creditor, and in case of default, the prior approval of the bank or public
financial institution concerned or the non-convertible debenture holders or other
secured creditor, as the case may be, shall be obtained by the company before
obtaining the approval in the general meeting.";
(f) in item (B), in second proviso, in clause (iii), the words “the limits laid down in”
shall be omitted;
In PART II, under the heading “REMUNERATION”, in Section III, –
(a) in the heading, the words “without Central Government approval” shall be
omitted;
(b) in first para, the words “without the Central Government approval” shall be
omitted;
(c) in clause (b), in the long line, for the words “remuneration up to two times the
amount permissible under Section II” the words “any remuneration to its
managerial persons”, shall be substituted;
III. Notification dated 13th June, 2017 to exempt startup private companies from
preparation of Cash Flow Statement as per Section 462 of the Companies Act 2013
As per the Amendment, under Chapter I, clause (40) of section 2, an exemption has
been provided to a startup private company besides one person company, small
company and dormant company. Accordingly, a startup private company is not
required to include the cash flow statement in the financial statements.
Thus the financial statements, with respect to one person company, small company,
dormant company and private company (if such a private company is a start-up), may
not include the cash flow statement.
IV. Amendments made by MCA in the Companies (Accounting Standards) Rules, 2006
MCA has issued Companies (Accounting Standards) Amendment Rules, 2016 to
amend Companies (Accounting Standards) Rules, 2006 by incorporating the
references of the Companies Act, 2013, wherever applicable. Also, the Accounting
Standard (AS) 2, AS 4, AS 10, AS 13, AS 14, AS 21 and AS 29 as specified in these
Rules will substitute the corresponding Accounting Standards with the same number
as specified in Companies (Accounting Standards) Rules, 2006.
PAPER – 1 : ACCOUNTING 3
Following table summarises the changes made by the Companies (Accounting

Standards) Amendment Rules, 2016 vis a vis the Companies (Accounting Standards)
Rules, 2006 in the Accounting Standards relevant for Paper 1:
Name of Para As per the As per the Implication
the no. Companies Companies
standard (Accounting (Accounting
Standards) Standards)
Rules, 2006 Amendment Rules,
2016
AS 2 4 (an Inventories do Inventories do not Now,
extract) not include include spare parts, inventories also
machinery servicing equipment do not include
spares which and standby servicing
can be used equipment which equipment and
only in meet the definition of standby
connection with property, plant and equipment
an item of fixed equipment as per AS other than
asset and 10, Property, Plant spare parts if
whose use is and Equipment. they meet the
expected to be Such items are definition of
irregular; such accounted for in property, plant
machinery accordance with and equipment
spares are Accounting Standard as per AS 10,
accounted for (AS) 10, Property, Property, Plant
in accordance Plant and and Equipment.
with Accounting Equipment.
Standard (AS)
10, Accounting
for Fixed
Assets.
27 Common Common Para 27 of AS 2
classifications classifications of requires
of inventories inventories are: disclosure of
are raw (a) Raw materials inventories
materials and and components under different
components, (b) Work-in- classifications.
work in progress One residual
progress, category has
(c) Finished goods
finished goods, been added to
stores and (d) Stock-in-trade the said
(in respect of goods
acquired for trading)
spares, and (e) Stores and paragraph i.e.

loose tools. spares ‘Others’.
(f) Loose tools
(g) Others (specify
nature)”.
AS 10 All Fixed Assets Property, Plant and Entire standard
Equipment has been
revised with the
title AS 10:
‘Property, Plant
and Equipment’
by replacing the
existing AS 6
and AS 10. The
students are
advised to refer
the explanation
of AS 10
Property, Plant
and equipment
(2016) given in
the Annexure.
The Annexure
is given at the
end of
Accounting
Part II
Suggested
Answers.
AS 13 20 The cost of any An investment Accounting of
shares in a co- property is investment
operative accounted for in property was
society or a accordance with cost not stated in
company, the model as prescribed this para but
holding of in Accounting now
which is directly Standard (AS) 10, incorporated
related to the Property, Plant and i.e. at cost
right to hold the Equipment. The cost model.
investment of any shares in a co-
property, is operative society or a
added to the company, the
carrying holding of which is
amount of the directly related to the

investment right to hold the
property. investment property,
is added to the
carrying amount of
the investment
property.
30 An enterprise An enterprise holding Accounting of
holding investment investment
investment properties should property shall
properties account for them in now be in
should account accordance with cost accordance
for them as model as prescribed with AS 10 i.e.
long term in AS 10, Property, at cost model
investments. Plant and
Equipment.
AS 14 3(a) Amalgamation Amalgamation Definition of
means an means an Amalgamation
amalgamation amalgamation has been made
pursuant to the pursuant to the broader by
provisions of provisions of the specifically
the Companies Companies Act, including
Act, 1956 or 2013 or any other ‘merger’.
any other statute which may be
statute which applicable to
may be companies and
applicable to includes ‘merger’.
companies.
18 and In such cases In such cases the Corresponding
39 the statutory statutory reserves debit on
reserves are are recorded in the account of
recorded in the financial statements statutory
financial of the transferee reserve in case
statements of company by a of
the transferee corresponding debit amalgamation
company by a to a suitable account in the nature of
corresponding head (e.g., purchase is
debit to a ‘Amalgamation termed as
suitable Adjustment ‘Amalgamation
account head Reserve’) which is Adjustment
(e.g., presented as a Reserve’ and is
‘Amalgamation separate line item. now to be
Adjustment When the identity of presented as a

Account’) which the statutory separate line
is disclosed as reserves is no longer item since there
a part of required to be is not sub-
‘miscellaneous maintained, both the heading like
expenditure’ or reserves and the ‘Miscellaneous
other similar aforesaid account expenditure’ in
category in the are reversed. Schedule III to
balance sheet. the Companies
When the Act, 2013
identity of the
statutory
reserves is no
longer required
to be
maintained,
both the
reserves and
the aforesaid
account are
reversed.
B. Not applicable for May, 2019 examination
Non-Applicability of Ind ASs for May, 2019 Examination
The Ministry of Corporate Affairs has notified Companies (Indian Accounting Standards)
Rules, 2015 on 16th February, 2015, for compliance by certain class of companies. T hese
Ind AS are not applicable for May, 2019 Examination.
PART – II: QUESTIONS AND ANSWERS
QUESTIONS
Financial Statements of Companies

1. (a) Shweta Ltd. has the Authorised Capital of ` 15,00,000 consisting of 6,000 6%
Preference shares of ` 100 each and 90,000 equity Shares of `10 each. The following
was the Trial Balance of the Company as on 31 st March, 2018
Particulars Dr. Cr.
Investment in Shares at cost 1,50,000
Purchases 14,71,500
Selling Expenses 2,37,300

Inventory as at the beginning of the year 4,35,600
Salaries and Wages 1,56,000
Cash on Hand 36,000
Interim Preference dividend for the half year to 30th
18,000
September
Bills Receivable 1,24,500
Interest on Bank overdraft 29,400
Interest on Debentures upto 30th Sep (1st half year) 11,250
Debtors 1,50,300
Trade payables 2,63,550
Freehold property at cost 10,50,000
Furniture at cost less depreciation of ` 45,000 1,05,000
6% Preference share capital 6,00,000
Equity share capital fully paid up 6,00,000
5% mortgage debentures secured on Freehold
4,50,000
properties
Income tax paid in advance for the current year 30,000
Dividends 12,750
Profit and Loss A/c (opening balance) 85,500
Sales (Net) 20,11,050
Bank overdraft secured by hypothecation of stocks
4,50,000
and receivables
Technical knowhow fees at cost paid during the year 4,50,000
Audit fees 18,000
Total 44,72,850 44,72,850
You are required to prepare the Profit and Loss Statement for the year ended
31st March, 2018 and the Balance Sheet as on 31st March, 2018 as per Schedule III
of the Companies Act, 2013 after taking into account the following –
1. Closing Stock was valued at ` 4,27,500.
2. Purchases include ` 15,000 worth of goods and articles distributed among
valued customers.
3. Salaries and Wages include ` 6,000 being Wages incurred for installation of
Electrical Fittings which were recorded under "Furniture".
4. Bills Receivable include ` 4,500 being dishonoured bills. 50% of which had been
considered irrecoverable.
5. Bills Receivable of ` 6,000 maturing after 31st March were discounted.
6. Depreciation on Furniture to be charged at 10% on Written Down Value.
7. Investment in shares is to be treated as non-current investments.
8. Interest on Debentures for the half year ending on 31 st March was due on that
date.
9. Provide Provision for taxation `12,000.
10. Technical Knowhow Fees is to be written off over a period of 10 years.
11. Salaries and Wages include ` 30,000 being Director's Remuneration.
12. Trade receivables include ` 18,000 due for more than six months.
Managerial Remuneration – Effective Capital
(b) The following extract of Balance Sheet of Gaurav Ltd. was obtained:
Balance Sheet (Extract) as on 31 st March, 2018
Liabilities `
Authorised capital:
90,000, 14% preference shares of ` 100 90,00,000
9,00,000 Equity shares of `100 each 9,00,00,000
9,90,00,000
Issued and subscribed capital:
67,500, 14% preference shares of ` 100 each fully paid 67,50,000
5,40,000 Equity shares of ` 100 each, ` 80 paid-up 4,32,00,000
Share suspense account 90,00,000
Reserves and surplus
Capital reserves (` 6,75,000 is revaluation reserve) 8,77,500
Securities premium 2,25,000
Secured loans:
15% Debentures 2,92,50,000
Unsecured loans:
Public deposits 16,65,000
Cash credit loan from SBI (short term) 5,92,500
Current Liabilities:
Trade Payables 15,52,500

Assets:
Investment in shares, debentures, etc. 3,37,50,000
Profit and Loss account (Dr. balance) 68,62,500
Share suspense account represents application money received on shares, the
allotment of which is not yet made. You are required to compute effective capital as
per the provisions of Schedule V. Would your answer differ if Gaurav Ltd.is an
investment company?
(c) State under which head these accounts should be classified in Balance Sheet, as per
Schedule III of the Companies Act, 2013:
(i) Share application money received in excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest accrued thereon.
(iv) Uncalled liability on shares and other partly paid investments.
(v) Calls unpaid.
Cash flow statement
2. Preet Ltd. presents you the following information for the year ended 31 st March, 2019:
(` in lacs)
(i) Net profit before tax provision 72,000
(ii) Dividend paid 20,404
(iii) Income-tax paid 10,200
(iv) Book value of assets sold 444
Loss on sale of asset 96
(v) Depreciation debited to P & L account 48,000
(vi) Capital grant received - amortized to P & L A/c 20
(vii) Book value of investment sold 66,636
Profit on sale of investment 240
(viii) Interest income from investment credited to P & L A/c 6,000
(ix) Interest expenditure debited to P & L A/c 24,000
(x) Interest actually paid (Financing activity) 26,084
(xi) Increase in working capital 1,34,580
[Excluding cash and bank balance]
(xii) Purchase of fixed assets 44,184
(xiii) Expenditure on construction work 83,376

(xiv) Grant received for capital projects 36
(xv) Long term borrowings from banks 1,11,732
(xvi) Provision for Income-tax debited to P & L A/c 12,000
Cash and bank balance on 1.4.2018 12,000
Cash and bank balance on 31.3.2019 16,000
You are required to prepare a cash flow statement as per AS-3 (Revised).
Profit/Loss prior to Incorporation
3. Lotus Ltd. was incorporated on 1 st July, 2017 to acquire a running business of Feel goods
with effect from 1st April, 2017. During the year 2017-18, the total sales were ` 48,00,000
of which ` 9,60,000 were for the first six months. The Gross profit of the company
` 7,81,600. The expenses debited to the Profit & Loss Account included:
(i) Director's fees ` 60,000
(ii) Bad debts ` 14,400
(iii) Advertising ` 48,000 (under a contract amounting to ` 4,000 per month)
(iv) Salaries and General Expenses ` 2,56,000
(v) Preliminary Expenses written off ` 20,000
(vi) Donation to a political party given by the company ` 20,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year
ended 31st March, 2018.
Accounting for Bonus Issue
4. Following is the extract of the Balance Sheet of Xeta Ltd. as at 31 st March, 2017
`
Authorised capital:
50,000 12% Preference shares of ` 10 each 5,00,000
4,00,000 Equity shares of ` 10 each 40,00,000
45,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of ` 10 each fully paid 2,40,000
2,70,000 Equity shares of ` 10 each, ` 8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Securities premium 1,00,000

Profit and Loss Account 6,00,000
On 1st April, 2017, the Company has made final call @ ` 2 each on 2,70,000 equity shares.
The call money was received by 20 th April, 2017. Thereafter, the company decided to
capitalize its reserves by way of bonus at the rate of one share for every four shares held.
Show necessary journal entries in the books of the company and prepare the extract of the
balance sheet as on 30 th April, 2017 after bonus issue.
Internal Reconstruction of a Company
5. Kishor Limited decided to reconstruct its business as it has accumulated huge losses. The
following is the Balance Sheet of the company as on 31.03.2018 before reconstruction:
Balance Sheet as on 31.03.2018
Particulars ` Particulars `
6,00,000 Equity shares of ` 10 Patents 3,00,000
each fully paid up 60,00,000 Land & building 34,00,000
3,20,000, 6% Preference shares Plant & machinery 4,00,000
of ` 10 each fully paid up 32,00,000 Investments (at cost) 4,40,000
6% Debentures (secured Trade receivables 34,80,000
against
land & building) 30,00,000 Inventory 34,00,000
Bank overdraft 11,60,000 Profit & loss A/c 47,40,000
Trade payables 24,00,000
Provision for income tax 4,00,000
1,61,60,000 1,61,60,000
Following scheme of reconstruction is approved by all interested parties and the Court:
(1) All equity shares are reduced to ` 3 each and preference shares to ` 7 each.
(2) Debentureholders agreed to take over a part of land and building, book value of which
is ` 14,00,000, towards their 50% claim. Rate of interest of balance 50% debentures
will be increased to 9%.
(3) Patent will be written off.
(4) 10% of Trade receivables to be provided for bad debts.
(5) Inventory to be written off by ` 5,20,000.
(6) 50% of balance Land & Building sold for ` 12,00,000 and remaining Land & Building
valued at ` 12,00,000.
(7) Investments to be sold for ` 4,00,000.

(8) The income tax liability of the company is settled at ` 4,50,000. Provision for income
tax will be raised accordingly.
(9) 1/3 of trade payables decided to forgo their claim.
(10) After making all the above adjustments, balance amount available through scheme,
will be utilized to write off the value of plant & machinery to that extent.
You are required to pass the necessary Journal Entries.
Amalgamation of Companies
6. Super Express Ltd. and Fast Express Ltd. were in competing business. They decided to
form a new company named Super Fast Express Ltd. The summarized balance sheets of
both the companies were as under:
Super Express Ltd.
Balance Sheet as at 31st December, 20X1
` `
20,000 Equity shares of `100 each 20,00,000 Buildings 10,00,000
Provident fund 1,00,000 Machinery 4,00,000
Trade Payables 60,000 Inventory 3,00,000
Insurance reserve 1,00,000 Trade receivables 2,40,000
Cash at bank 2,20,000
Cash in hand 1,00,000
22,60,000 22,60,000
Fast Express Ltd.
Balance Sheet as at 31st December, 20X1
` `
10,000 Equity shares of `100 each 10,00,000 Buildings 7,00,000
Trade Payables 40,000 Machinery 5,00,000
Reserve 1,00,000 Inventory 40,000
Surplus 1,60,000 Trade receivables 40,000
Cash at bank 10,000
Cash in hand 10,000
13,00,000 13,00,000
The assets and liabilities of both the companies were taken over by the new company at
their book values. The companies were allotted equity shares of ` 100 each in lieu of
purchase consideration amounting to ` 30,000 (20,000 for Super Fast Express Ltd and
10,000 for Fast Express Ltd.).
Prepare opening balance sheet of Super Fast Express Ltd considering pooling method.
Average Due Date
7. Harish has the following bills due on different dates. It was agreed to settle the total amount
due by a single cheque payment. Find the date of the cheque.
(i) ` 5,000 due on 5.3.2017
(ii) ` 7,500 due on 7.4.2017
(iii) ` 6,000 due on 17.7.2017
(iv) ` 8,000 due on 14.9.2017
Account Current
8. The following transactions took place between A and B for the three months ending
31st March 2017:
Books of A
Date Particulars `
1.1.2017 B 's Opening balance 1,00,000
10.1.2017 Sold goods to B 2,00,000
15.1.2017 Cash received from B 2,00,000
15.2.2017 Sold goods to B 2,00,000
1.3.2017 Cash received from B 1,00,000
You are required to calculate the amount of interest to be paid by one party to the other at
10% per annum using Epoque Method. Also prepare Account current of Mr. B with Mr. A.
(1 year =365 days)
Self – Balancing Ledgers
9. The following particulars are obtained from books of Prime Ltd. for the year ended
31st March, 2018:
` `
Cash Sales 50,000 Bills Receivable dishonoured 5,000
Credit Purchases 5,60,000 Return Inward 17,000
Collection from Debtors 8,50,000 Payment to creditors 3,24,000
Bills Receivable drawn 40,000 Discount allowed 6,000
Discount Received 5,000 Debtor’s cheque returned 15,000

dishonoured
Cash Purchases 24,000 Credit Sales 9,80,000
Bills Payable Paid 13,000 Bills Receivable Collected 20,000
Recovery of Bad Debts 3,000 Return Outward 7,400
Bills receivable discounted 16,000 Bills Receivable endorsed to 15,800
with Bank Creditors
Interest charged on overdue 2,400 Overpayment refunded by 1,200
customer’s A/c Suppliers
Endorsed Bills Receivable 11,000 Bad debts 2,000
dishonoured (noting Opening Balances:
charges ` 150) Sundry Debtors 1,56,000
Bills payable accepted 32,000 Sundry Creditors 1,70,000
You are required to prepare the Total Debtors Account and Total Creditors Account.
Financial Statements of Not-For-Profit Organizations
10. The Accountant of ‘Retreat & Refresh’ Club furnishes you the following Receipts and
Payment Account for the year ending 31 st March, 2018:
Receipts ` Payments `
Opening Balance: Honoraria to Secretary 19,200
Cash & Bank 33,520 Misc. expenses 6,120
Subscription 42,840 Rates & Taxes 5,040
Sale of Old Magazines 9,600 Ground man’s wages 3,360
Entertainment Fees 17,080 Printing & Stationary 1,880
Bank Interest 920 Payment for bar purchases 23,080
Bar Receipts 29,800 Repairs 1,280
Telephone expenses 9,560
New car (less sale proceeds of old car 50,400
` 12,000) (Old car was sold on
1.4.2017)
Closing Balance:
Cash & Bank 13,840
1,33,760 1,33,760
Additional Information
1.4.2017 (`) 31.3.2018 (`)
Subscription due (not received) 4,800 3,920
Cheque issued, but not presented (payment of printing 360 120
expenses)
Club premises at cost 1,16,000 -
Depreciation on club premises provided so far 75,200 -
Car at cost 48,760 -
Depreciation on car provided so far 41,160 -
Value of Bar stock 2,840 3,480
Amount unpaid for bar purchases 2,360 1,720
Depreciation is to be provided @ 5% p.a. on written down value of the club premises and
@ 15% p.a. on car for the whole year.
You are required to prepare an Income & Expenditure Account of Retreat & Refresh Club
for the year ending 31 st March, 2018 and Balance Sheet as on that date.
Accounts from Incomplete Records
11. From the following information in respect of Mr. Preet, prepare Trading and Profit and Loss
Account for the year ended 31 st March, 2018 and a Balance Sheet as at that date:
31-03-2017 31-03-2018
(1) Liabilities and Assets ` `
Stock in trade 1,60,000 1,40,000
Debtors for sales 3,20,000 ?
Bills receivable - ?
Creditors for purchases 2,20,000 3,00,000
Furniture at written down value 1,20,000 1,27,000
Expenses outstanding 40,000 36,000
Prepaid expenses 12,000 14,000
Cash on hand 4,000 3,000
Bank Balance 20,000 1,500
(2) Receipts and Payments during 2017-2018:
Collections from Debtors
(after allowing 2-1/2% discount) 11,70,000
Payments to Creditors
(after receiving 2% discount) 7,84,000
Proceeds of Bills receivable discounted at 2%) 1,22,500

Proprietor’s drawings 1,40,000
Purchase of furniture on 30.09.2017 20,000
12% Government securities purchased on 2,00,000
1-10-2017
Expenses 3,50,000
Miscellaneous Income 10,000
(3) Sales are effected so as to realize a gross profit of 50% on the cost.
(4) Capital introduced during the year by the proprietor by cheques was omitted to
be recorded in the Cash Book, though the bank balance on 31 st March, 2018
(as shown above), is after taking the same into account.
(5) Purchases and Sales are made only on credit.
(6) During the year, Bills Receivable of ` 2,00,000 were drawn on debtors. out of
these, Bills amount to ` 40,000 were endorsed in favour of creditors. Out of
this latter amount, a Bill for ` 8,000 was dishonoured by the debtor.
Hire Purchase Transactions
12. The following particulars relate to hire purchase transactions:
(a) X purchased three cars from Y on hire purchase basis, the cash price of each car
being ` 2,00,000.
(b) The hire purchaser charged depreciation @ 20% on diminishing balance method.
(c) Two cars were seized by on hire vendor when second installment was not paid at the
end of the second year. The hire vendor valued the two cars at cash price less 30%
depreciation charged under it diminishing balance method.
(d) The hire vendor spent ` 10,000 on repairs of the cars and then sold them for a total
amount of ` 1,70,000.
You are required to compute:
(i) Agreed value of two cars taken back by the hire vendor.
(ii) Book value of car left with the hire purchaser.
(iii) Profit or loss to hire purchaser on two cars taken back by their hire vendor.
(iv) Profit or loss of cars repossessed, when sold by the hire vendor.
Investment Accounts
13. A Ltd. purchased on 1 st April, 2018 8% convertible debenture in C Ltd. of face value of
` 2,00,000 @ ` 108. On 1st July, 2018 A Ltd. purchased another ` 1,00,000 debenture
@ ` 112 cum interest.
On 1st October, 2018 ` 80,000 debenture was sold @ ` 108. On 1st December, 2018, C
Ltd. give option for conversion of 8% convertible debentures into equity share of ` 10 each.
A Ltd. receive 5,000 equity share in C Ltd. in conversion of 25% debenture held on that
date. The market price of debenture and equity share in C Ltd. at the end of year 2018 is
` 110 and ` 15 respectively.
Interest on debenture is payable each year on 31 st March, and 30th September.
The accounting year of A Ltd. is calendar year.
Prepare investment account in the books of A Ltd. on average cost basis.
Insurance Claim for loss of stock or profit
14. A fire engulfed the premises of a business of M/s Preet on the morning of 1 st July 2018.
The building, equipment and stock were destroyed and the salvage recorded the following:
Building – ` 4,000; Equipment – ` 2,500; Stock – ` 20,000. The following other information
was obtained from the records saved for the period from 1 st January to 30th June 2018:
`
Sales 11,50,000
Sales Returns 40,000
Purchases 9,50,000
Purchases Returns 12,500
Cartage inward 17,500
Wages 7,500
Stock in hand on 31st December, 2017 1,50,000
Building (value on 31 st December, 2017) 3,75,000
Equipment (value on 31 st December, 2017) 75,000
Depreciation provision till 31 st December, 2017 on:
Building 1,25,000
Equipment 22,500
No depreciation has been provided since December 31 st 2017. The latest rate of
depreciation is 5% p.a. on building and 15% p.a. on equipment by straight line method.
Normally business makes a profit of 25% on net sales. You are required to prepare the
statement of claim for submission to the Insurance Company.
Issues in Partnership Accounts
15. Ajay, Vijay and Sanjay are partners sharing Profit & Loss in the ratio of 2:3:1. The Balance
Sheet of the firm as on 31.03.2018 is as follows:
Liabilities ` Assets `
Capital A/c: Furniture & Fixture 30,000
Vijay’s Capital 85,000 Office equipment 20,000
Sanjay’s Capital 68,000 Motor Car 60,000
General Reserve A/c 30,000 Stock 40,000
Sundry Creditors 25,000 Sundry Debtors 20,000
Cash at Bank 18,000
Ajay’s Capital 20,000
2,08,000 2,08,000
Kamal is admitted as· a new. partner with effect from 1 st April, 2018 by receiving 1/4 share
in the profit & loss of the firm. The· profit or loss sharing ratios between other partners
remain same as before. It was agreed that Kamal would bring. some private furniture worth
` 3,000 and private stock worth ` 5,000 and balance in cash towards his capital.
The following adjustments are to be made prior to Kamal admission:
1. Goodwill of the firm is to be valued at 2 years purchase of the average profit of last 3
years. The profits for the last 3 years were ` 35,900, ` 38,200 and ` 31,500. However
on checking of the past records it was noticed that on 01.04.14 a new furniture
costing, ` 8,000 was purchased but wrongly debited to revenue and also in year
2015-16, a purchase invoice for ` 4,000 has been omitted in the book. The firm
charged depreciation on furniture @ 10% on original cost. Your calculation of
goodwill is to be made on the basis of correct profits. It is agreed among existing
partners that Sanjay’s interest in the goodwill of the firm is only up to value of
` 42,000.
2. Motor Car is taken over by Vijay at ` 70,000.
3. Office equipment is revalued at ` 25,000.
4. Expenses incurred but not paid of ` 6,500 are provided for. ·
5. Value of the stock is to be reduced by 5%.
6. Kamal is to bring proportionate capital. Capital of Vijay, Ajay and Sanjay are also to
be adjusted in profit sharing ratio.
Assuming the above mentioned adjustments are duly carried out, show the revaluation
account, partner's capital accounts and the Balance Sheet of the firm after Kamal’s
admission.
Accounting in Computerized Environment

16. Recently a growing trend has developed for outsourcing the accounting function to a third
party. What are the basis on which choice of such third party made?
Applicability of Accounting Standards
17. (a) XYZ Ltd., (a corporate entity) with a turnover of ` 35 lakhs and borrowings of ` 10
lakhs during any time in the previous year, wants to avail the exemptions available in
adoption of Accounting Standards applicable to companies for the year ended
31.3.2017. Advise the management on the exemptions that are available as per the
Companies (AS) Rules, 2006.
If XYZ is a partnership firm is there any other exemptions additionally available.
AS 1 Disclosure of Accounting Policies
(b) Om Ltd. purchases goods on behalf of its customers for execution of work under a
works contract against which it receives full payment and necessary declaration form
under GST to be passed on to the supplier. The company follows the practice of
treating the same as its purchases and accordingly debits to its Profit and Loss
Account. Give your views on the above.
AS 3 Cash flow Statements
18. (a) Explain the meaning of the terms ‘cash’ and ‘cash equivalent’ for the purpose of Cash
Flow Statement as per AS-3.
Ruby Exports had a bank balance of USD 25,000, stated in books at ` 16,76,250
using the rate of exchange ` 67.05 per USD prevailing on the date of receipt of
dollars. However, on the balance sheet date, the closing rate of exchange was
` 67.80 and the bank balance had to be restated at ` 16,95,000.
Comment on the effect of change in bank balance due to exchange rate fluctuation
and also discuss how it will be disclosed in Cash Flow Statement of Ruby Exports
with reference to AS-3.
(b) Money Ltd., a non-financial company has the following entries in its Bank Account. It
has sought your advice on the treatment of the same for preparing Cash Flow
Statement.
(i) Loans and Advances given to the following and interest earned on them:
(1) to suppliers
(2) to employees
(3) to its subsidiaries companies
(ii) Investment made in subsidiary Smart Ltd. and dividend received
(iii) Dividend paid for the year
(iv) TDS on interest income earned on investments made

(v) TDS on interest earned on advance given to suppliers
Discuss in the context of AS 3 Cash Flow Statement.
AS 7 Construction Contracts
19. (a) GTI Ltd. negotiates with Bharat Oil Corporation Ltd. (BOCL), for construction of
“Retail Petrol & Diesel Outlet Stations”. Based on proposals submitted to different
Regional Offices of BOCL, the final approval for one outlet each in Region X, Region
Y, Region Z is awarded to GTI Ltd. A single agreement is entered into between two.
The agreement lays down values for each of the three outlets i.e. ` 102 lacs, ` 150
lacs, ` 130 lacs for Region X, Region Y, Region Z respectively. Agreement also lays
down completion time for each Region.
Comment whether GTI Ltd. will treat it as single contract or three separate contracts
with reference to AS-7?
AS 9 Revenue Recognition
(b) Raj Ltd. entered into an agreement with Heena Ltd. to dispatch goods valuing
` 5,00,000 every month for next 6 months on receipt of entire payment. Heena Ltd.
accordingly made the entire payment of ` 30,00,000 and Raj Ltd. started dispatching
the goods. In fourth month, due to fire in premise of Heena Ltd., Heena Ltd. requested
to Raj Ltd. not to dispatch goods worth ` 15,00,000 ready for dispatch. Raj Ltd.
accounted ` 15,00,000 as sales and transferred the balance to Advance received
against Sales account.
Comment upon the above treatment by Raj Ltd. with reference to the provision of AS-9.
AS 10 Property, Plant and Equipment
20. (a) Preet Ltd. is installing a new plant at its production facility. It has incurred these costs:
1. Cost of the plant (cost per supplier’s invoice plus taxes) ` 50,00,000
2. Initial delivery and handling costs ` 4,00,000
3. Cost of site preparation ` 12,00,000
4. Consultants used for advice on the acquisition of the plant ` 14,00,000
5. Interest charges paid to supplier of plant for deferred credit ` 4,00,000
6. Estimated dismantling costs to be incurred after 7 years ` 6,00,000
7. Operating losses before commercial production ` 8,00,000
Please advise Preet Ltd. on the costs that can be capitalised in accordance with
AS 10 (Revised).
AS 13 Accounting for Investments

(b) Paridhi Electronics Ltd. has current investment (X Ltd.’s shares) purchased for ` 5
lakhs, which the company want to reclassify as long term investment on 31.3.2018.
The market value of these investments as on date of Balance Sheet was ` 2.5 lakhs.
How will you deal with this as on 31.3.18 with reference to AS-13?
SUGGESTED ANSWERS/HINTS
1. (a) Statement of Profit and Loss of Shweta Ltd. for the year ended 31st March, 2018
Particulars Note `
I Revenue from Operations 20,11,050
II Other income (Divided income) 12,750
III Total Revenue (I &+ II) 20,23,800
IV Expenses:
(a) Purchases (14,71,500 – Advertisement
14,56,500
Expenses 15,000)
(b) Changes in Inventories of finished Goods /
8,100
Work in progress (4,35,600 – 4,27,500)
(c) Employee Benefits expense 9 1,20,000
(d) Finance costs 10 51,900
(e) Depreciation & Amortization Expenses [10% of
11,100
(1,05,000 + 6,000)]
(f) Other Expenses 11 3,47,550
Total Expenses 19,95,150
V Profit before exceptional, extraordinary items and
28,650
tax (III-IV)
VI Exceptional items -
VII Profit before extra ordinary items and tax (V-IV) 28,650
VIII Extraordinary items -
IX Profit before tax (VII-VIII) 28,650
X Tax expense:
12,000
Current Tax
XI Profit/Loss for the period (after tax) 16,650
Balance sheet of Shweta Ltd. as on 31 st March, 2018

Particulars as on 31st March Note
I
(1) Shareholders’ funds:
(a) Share capital 1 12,00,000
(b) Reserves and surplus 2 66,150
(2) Non current liabilities:
Long term borrowings 3 4,50,000
(3) Current liabilities:
(a) Short term borrowings 4 4,50,000
(b) Trade payables 2,63,550
(c) Other current liabilities 5 29,250
Total 24,58,950
II ASSETS
(1) (a) Non-current Assets:
Property, Plant & Equipment
(i) Tangible assets 6 11,49,900
(ii) Intangible assets 7 4,05,000
(b) Non current investments (Shares at cost) 1,50,000
Current Assets:
(a) Inventories 4,27,500
(b) Trade receivables 8 2,72,550
(c) Cash and Cash equivalents – Cash on hand 36,000
(d) Short term loans and advances –Income tax
18,000
(paid 30,000-Provision 12,000)
Total 24,58,950
Note: There is a Contingent liability for Bills receivable discounted with Bank ` 6,000.
Notes to accounts
(` )
1. Share Capital
Authorized
90,000 Equity Shares of ` 10 each 9,00,000
6,000 6% Preference shares of ` 100 each 6,00,000 15,00,000
Issued, subscribed & called up
60,000, Equity Shares of ` 10 each 6,00,000
6,000 6% Redeemable Preference Shares of 100

6,00,000 12,00,000
each
2. Reserves and Surplus
Balance as on 1st April, 2017 85,500
Add: Surplus for current year 16,650 1,02,150
Less: Preference Dividend 36,000
Balance as on 31st March, 2018 66,150
3. Long Term Borrowings
5% Mortgage Debentures (Secured against Freehold
4,50,000
Properties)
4. Short Term Borrowings
Secured Borrowings: Loans Repayable on Demand
Overdraft from Banks (Secured by Hypothecation of 4,50,000
Stocks & Receivables)
5. Other Current liabilities
Interest Accrued and due on Borrowings
11,250
(5% Debentures)
Unpaid Preference Dividends 18,000 29,250
6. Tangible Fixed assets
Furniture
Furniture at Cost Less depreciation ` 45,000 (as given
1,05,000
in Trial Balance)
Add: Depreciation 45,000
Cost of Furniture 1,50,000
Add: Installation charge of Electrical Fittings wrongly
6,000
included under the heading Salaries and Wages
Total Gross block of Furniture A/c 1,56,000
Accumulated Depreciation Account: Opening
Balance-given in Trial Balance 45,000
Depreciation for the year:
On Opening WDV at 10% i.e. (10% x 1,05,000) 10,500
On additional purchase during the year at 10% i.e.
(10% x 6,000) 600
Less: Accumulated Depreciation 56,100 99,900
Freehold property (at cost) 10,50,000
11,49,900
7. Intangible Fixed Assets

Technical knowhow 4,50,000
Less: Written off 45,000 4,05,000
8. Trade Receivables
Sundry Debtors (a) Debt outstanding for more than
18,000
six months
(b) Other Debts (refer Working Note) 1,34,550
Bills Receivable (1,24,500 -4,500) 1,20,000 2,72,550
9. Employee benefit expenses
Amount as per Trial Balance 1,56,000
Less: Wages incurred for installation of electrical
6,000
fittings to be capitalised
Less: Directors’ Remuneration shown separately 30,000
Balance amount 1,20,000
10. Finance Costs
Interest on bank overdraft 29,400
Interest on debentures 22,500 51,900
11. Other Expenses

Payment to the auditors 18,000
Director’s remuneration 30,000
Selling expenses 2,37,300
Technical knowhow written of (4,50,000/10) 45,000
Advertisement (Goods and Articles Distributed) 15,000
Bad Debts (4,500 x50%) 2,250 3,47,550
Working Note:
Calculation of Sundry Debtors-Other Debts
Sundry Debtors as given in Trial Balance 1,50,300
Add Back: Bills Receivables Dishonoured 4,500
1,54,800
Less: Bad Debts written off – 50% ` 4,500 (2,250)
Adjusted Sundry Debtors 1,52,550
Less: Debts due for more than 6 months (as per information given) (18,000)
Total of other Debtors i.e. Debtors outstanding for less than 6 months 1,34,550
(b) Computation of effective capital:

Where Gaurav Ltd.is Where Gaurav Ltd.is
a non-investment is an investment
company company
Paid-up share capital —
67,500, 14% Preference shares 67,50,000 67,50,000
5,40,000 Equity shares 4,32,00,000 4,32,00,000
Capital reserves 2,02,500 2,02,500
Securities premium 2,25,000 2,25,000
15% Debentures 2,92,50,000 2,92,50,000
Public Deposits 16,65,000 16,65,000
(A) 8,12,92,500 8,12,92,500
Investments 3,37,50,000 -
Profit and Loss account (Dr.
68,62,500
balance) 68,62,500
(B) 4,06,12,500 68,62,500
Effective capital (A–B) 4,06,80,000 7,44,30,000
(c) (i) Current Liabilities/ Other Current Liabilities
(ii) Shareholders' Fund / Reserve & Surplus
(iii) Current liabilities/Other Current Liabilities
(iv) Contingent Liabilities and Commitments
(v) Shareholders' Fund / Share Capital
2. Cash Flow Statement as per AS 3
Cash flows from operating activities: ` in lacs
Net profit before tax provision 72,000
Add: Non cash expenditures:
Depreciation 48,000
Loss on sale of assets 96
Interest expenditure (non-operating activity) 24,000 72,096
1,44,096
Less: Non cash income
Amortisation of capital grant received (20)
Profit on sale of investments (non-operating income) (240)

Interest income from investments (non-operating income) (6,000) 6,260
Operating profit 1,37,836
Less: Increase in working capital (1,34,580)
Cash from operations 3,256
Less: Income tax paid (10,200)
Net cash generated from operating activities (6,944)
Cash flows from investing activities:
Sale of assets (444 – 96) 348
Sale of investments (66,636+240) 66,876
Interest income from investments 6,000
Purchase of fixed assets (44,184)
Expenditure on construction work (83,376)
Net cash used in investing activities (54,336)
Cash flows from financing activities:
Grants for capital projects 36
Long term borrowings 1,11,732
Interest paid (26,084)
Dividend paid (20,404)
Net cash from financing activities 65,280
Net increase in cash 4,000
Add: Cash and bank balance as on 1.4.2018 12,000
Cash and bank balance as on 31.3.2019 16,000
3. Statement showing the calculation of Profits for the pre-incorporation and
post-incorporation periods
For the year ended 31 st March, 2018
Particulars Total Basis of Pre- Post-
Amount Allocation incorporation incorporation
Gross Profit 7,81,600 Sales 78,160 7,03,440
Less: Directors’ fee 60,000 Post 60,000
Bad debts 14,400 Sales 1,440 12,960
Advertising 48,000 Time 12,000 36,000
Salaries & general expenses 2,56,000 Time 64,000 1,92,000
Preliminary expenses 20,000 Post 20,000

Donation to Political Party 20,000 Post 20,000
Net Profit 3,63,200 720 3,62,480
Working Notes:
1. Sales ratio
Particulars `
Sales for period up to 30.06.2017 (9,60,000 x 3/6) 4,80,000
Sales for period from 01.07.2017 to 31.03.2018 (48,00,000 – 4,80,000) 43,20,000
Thus, Sales Ratio = 1 : 9
2. Time ratio
1st April, 2017 to 30 June, 2017: 1 st July, 2017 to 31st March, 2018
= 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3
4. Journal Entries in the books of Xeta Ltd.
` `
1-4-2017 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of ` 2 per share on 2,70,000
equity shares due as per Board’s Resolution
dated….)
20-4-2017 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity
shares received)
Securities Premium A/c Dr. 1,00,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c Dr. 2,15,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue of one
share for every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
To Equity share capital A/c 6,75,000
(For issue of bonus shares)
Extract of Balance Sheet as at 30 th April, 2017 (after bonus issue)

`
Authorised Capital
50,000 12% Preference shares of `10 each 5,00,000
4,00,000 Equity shares of `10 each 40,00,000
Issued and subscribed capital
24,000 12% Preference shares of `10 each, fully paid 2,40,000
3,37,500 Equity shares of `10 each, fully paid 33,75,000
(Out of above, 67,500 equity shares @ `10 each were issued by way of bonus)
Reserves and surplus
Profit and Loss Account 3,85,000
5. Journal Entries in the books of Kishor Limited

Dr. (` ) Cr. (` )
1. Equity share capital A/c (` 10) Dr. 60,00,000
To Equity share capital A/c (` 3) 18,00,000
To Capital reduction A/c 42,00,000
(Reduction of equity share of ` 10 each to shares
of ` 3 each as per the reconstruction scheme)
2. 6% Preference share capital A/c (` 10) Dr. 32,00,000
To 6% Preference share capital A/c (` 7) 22,40,000
(Reduction of preference share of ` 10 each to
shares of ` 7 each as per the reconstruction
scheme)
3. 6 % Debentures A/c Dr. 30,00,000
To Land & building A/c 14,00,000
To 9% Debentures A/c 15,00,000
(50% claim of debentureholders discharged by
transfer of a part of land & building having book
value ` 14,00,000 and rate of interest of balance
50% debentures increased to 9% as per the
reconstruction scheme).
4. Bank A/c Dr. 12,00,000
To Land & building A/c 10,00,000

(50% of balance land & building having book value
` 10,00,000 sold as per the reconstruction scheme)
5. Land & building A/c Dr. 2,00,000
To Capital Reduction A/c 2,00,000
(50% of balance land & building having book value
` 10,00,000, valued at ` 12,00,000, as per the
reconstruction scheme)
6. Bank A/c Dr. 4,00,000
Capital reduction A/c Dr. 40,000
To Investment A/c 4,40,000
(All the investment sold as per the reconstruction
scheme)
7. Trade payables A/c Dr. 8,00,000
(1/3 of Trade payables decided to forgo their claim
as per the reconstruction scheme)
8. Capital reduction A/c Dr. 61,58,000
To Patents A/c 3,00,000
To Provision of doubtful debts A/c 3,48,000
To Inventory A/c 5,20,000
To Provision for income tax A/c 50,000
To Profit & loss A/c 47,40,000
To Plant & machinery A/c (Bal. fig.) 2,00,000
(Written off patent, profit & loss, part value of stock,
plant & machinery, and provision made for doubtful
debts, income tax, as per the reconstruction
scheme)
6. Balance Sheet of Super Fast Express Ltd
as at 1st Jan., 20X2
Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 30,00,000
b Reserves and Surplus 2 3,60,000
2 Non-current liabilities
a Long-term provisions 3 1,00,000

3 Current liabilities
a Trade Payables 1,00,000
Total- 35,60,000
Assets
1 Non-current assets
a Property, plant & Equipment
Tangible assets 4 26,00,000
2 Current assets
Inventories 3,40,000
Trade receivables 2,80,000
Cash and cash equivalents 5 3,40,000
Total 35,60,000
Notes to accounts
`
1 Share Capital
Equity share capital
Issued, subscribed and paid up
30,000 Equity shares of ` 100 each 30,00,000
Total 30,00,000
2 Reserves and Surplus
Reserve 1,00,000
Surplus 1,60,000
Insurance reserve 1,00,000
Total 3,60,000
3 Long-term provisions
Provident fund 1,00,000
Total 1,00,000
4 Tangible assets
Buildings 17,00,000
Machinery 9,00,000
Total 26,00,000
5 Cash and cash equivalents

Balances with banks 2,30,000
Cash on hand 1,10,000
Total 3,40,000
7. Calculation of number of days from the base date
Due date Amount (` ) No. of days from 5.3.17 Product
5.3.2017 5,000 0 0
7.4.2017 7,500 33 2,47,500
17.7.2017 6,000 134 8,04,000
14.9.2017 8,000 193 15,44,000
26,500 25,95,500
Sum of Product
Average due date = Base date +
Sum of Amount
25,95,500
= 5.3.2017 + = 98 days (round off)
26,500
The date of the cheque will be 98 days from the base date i.e.11.6.2017. So on
11th June, 2017, all bills will be settled by a single cheque payment.
8. Mr. B in Account Current with Mr. A (Books of A - Interest to 31st March 2017 @ 10% p.a.)
32
Date Particulars Due Amt. ` Days Product Date Particulars Due Amt. ` Days Product `
date ` date
01.01.17 To Balance b/d 1,00,000 15.1.17 By Cash A/c 15.1.17 2,00,000 15 30,00,000
10.1.17 To Sales A/c 10.1.17 2,00,000 10 20,00,000 1.3.17 By Cash A/c 1.3.17 1,00,000 60 60,00,000
INTERMEDIATE(IPC) EXAMINATION: MAY, 2019

15.2.17 To Sales A/c 15.2.17 2,00,000 46 92,00,000
31.3.17 To Balance of Products 1,58,00,000
31.3.17 To Interest on Balance 4,329 31.3.17 By Balance 1,80,00,000
for 1 day @ 10% of Products
1,58,00,000  10  [2,00,000 x
1 
  90]
 100  365 
 
 
31.3.17 By Balance 2,04,329

c/d
5,04,329 2,70,00,000 5,04,329 2,70,00,000
Note: While counting the number of days for closing balances, the opening date as well as date
upto which the account is prepared, has been considered.
9 In the books of Prime Ltd.

Total Debtors Account
` `
To Balance b/d 1,56,000 By Cash 8,50,000
To Bank (Cheque dishonoured) 15,000 By Discount Allowed 6,000
To Bill Receivables (Dishonoured) 5,000 By Bill Receivables 40,000
To Interest 2,400 By Returns Inward 17,000
To Sales 9,80,000 By Bad Debts 2,000
To Sundry Creditors (endorsed bill By Balance c/d 2,54,550
dishonoured with noting
charges) 11,150
11,69,550 11,69,550
Total Creditors Account
` `
To Cash 3,24,000 By Balance b/d 1,70,000
To B/R (endorsed) 15,800 By Purchases 5,60,000
To Discount received 5,000 By Sundry Debtors A/c
To Bills Payable 32,000 (endorsed Bill Receivables 11,150
dishonoured with noting
charges)
To Return outward 7,400 By Cash (over payments 1,200
refunded)
To Balance c/d 3,58,150
7,42,350 7,42,350
Note: Transactions relating to cash sales or purchases; honour of bills receivable or
payable; recovery of bad debts and discount or endorsement of bill will not be entered in
Total Debtors and Total Creditors Accounts.
10. Income and Expenditure Account of Retreat & Refresh Club for the year
ended 31st March, 2018
Expenditure Amount Income Amount
` `
To Honoraria to secretary 19,200 By Subscriptions (W.N.3) 41,960
To Misc. expenses 6,120 By Sale of old magazines 9,600
To Rates and taxes 5,040 By Entertainment fees 17,080
To Groundman's wages 3,360 By Bank interest 920

To Printing and stationary 1,880 By Bar receipts 29,800
To Telephone expenses 9,560 By Profit on sale of car 4,400
(W.N.5)
To Bar expenses:
Opening bar stock 2,840
Add: Purchases (W.N.2) 22,440
25,280
Less: Closing bar stock (3,480) 21,800
To Repairs 1,280
To Depreciation
Club premises (W.N.4) 2,040
Car (W.N. 6) 9,360 11,400
To Excess of income over
expenditure transferred
to capital fund 24,120
1,03,760 1,03,760
Balance Sheet of Retreat & Refresh Club as on 31 st March, 2018
Liabilities Amount Assets Amount
` `
Capital fund (W.N. 1) 87,200 Club Premises 38,760
Add: Excess of income Car 53,040
over expenditure 24,120 1,11,320 Bar stock 3,480
Outstanding liabilities Outstanding subscription 3,920
for bar purchases 1,720 Cash and bank 13,840
1,13,040 1,13,040
Working Notes:
1. Balance Sheet of Retreat & Refresh Club as on 1 st April, 2017
` `
Amount due for bar Club premises 1,16,000
purchases 2,360 Less: Depreciation (75,200) 40,800
Capital fund on 87,200 Car 48,760

1.4.2017 Less: Depreciation (41,160) 7,600
(balancing figure) Bar stock 2,840
Outstanding 4,800
subscription
Cash at bank 33,520
89,560 89,560
2. Calculation of bar purchases for the year
`
Bar payments as per receipts and payments account 23,080
Add: Amount due on 31 March, 2018
st 1,720
24,800
Less: Amount due on 1st April, 2017 (2,360)
22,440
3. Calculation of subscriptions earned during the year
`
Subscriptions received as per receipts and payments account 42,840
Add: Outstanding on 31st March, 2018 3,920
46,760
Less: Outstanding on 1st April, 2017 (4,800)
41,960
4. Depreciation on club premises and its written down value on 31 st March, 2018
`
Written down value on 1 April, 2017 (1,16,000- 75,200)
st 40,800
Less: Depreciation for the year @ 5% p.a. (2,040)
38,760
5. Calculation of profit on sale of car
`
Sale proceeds of old car 12,000
Less: Written down value of old car:
Cost of car on 1st April, 2017 48,760
Less: Depreciation upto 1st April, 2017 (41,160) (7,600)
4,400
6. Depreciation on car and its written down value on 31 st March, 2018

`
Cost of new car purchased (50,400 + 12,000) 62,400
Less: Depreciation for the year @ 15% p.a. (9,360)
Written down value on 31 st March, 2018 53,040
Note: The opening and closing balance of cash and bank shown in the Receipts and
Payments Account (given in the question), include the bank balance as per cash book.
Therefore, no adjustment has been made in the above solution on account of cheques
issued, but not presented for payment of printing expenses.
11. Trading and Profit and Loss Account of Mr. Preet
for the year ended 31 st March, 2018
Amount Amount
` `
To Opening stock 1,60,000 By Sales 13,98,000
To Purchases (W.N.5) 9,12,000 By Closing stock 1,40,000
To Gross profit c/d (Bal.fig.) 4,66,000 _______
15,38,000 15,38,000
To Expenses (W.N.7) 3,44,000 By Gross profit b/d 4,66,000
To Discount allowed (W.N.9) 32,500 By Discount received 16,000
(W.N.10)
To Depreciation on furniture 13,000 By Interest on Govt. 12,000
(W.N.1) Securities (W.N.8)
To Net profit 1,14,500 By Miscellaneous income 10,000
5,04,000 5,04,000
Balance Sheet of Mr. Preet as on 31st March, 2018
Amount Amount
Capital (W.N.6) 3,76,000 Furniture 1,27,000
Add: Additional capital 1,72,000 12% Government 2,00,000
(W.N.2) Securities
Accrued interest on Govt.
Add: Profit during the year 1,14,500 securities (W.N.8) 12,000
6,62,500 Debtors (W.N.3) 3,26,000
Less: Drawings (1,40,000) 5,22,500 Bills Receivable (W.N.4) 35,000

Creditors 3,00,000 Stock 1,40,000
Outstanding expenses 36,000 Prepaid expenses 14,000
Cash on hand 3,000
Bank balance 1,500
8,58,500 8,58,500
Working Notes:
1. Furniture account
` `
To Balance b/d 1,20,000 By Depreciation (bal. fig.) 13,000
To Bank 20,000 By Balance c/d 1,27,000
1,40,000 1,40,000
2. Cash and Bank account
` `
To Balance b/d By Creditors 7,84,000
Cash 4,000 By Drawings 1,40,000
Bank 20,000 By Furniture 20,000
To Debtors 11,70,000 By 12% Govt. securities 2,00,000
To Bill Receivable 1,22,500 By Expenses 3,50,000
To Miscellaneous 10,000 By Balance c/d
income
To Additional Capital 1,72,000 Cash 3,000
(bal.fig.)
_______ Bank 1,500
14,98,500 14,98,500
3. Debtors account
` `
To Balance b/d 3,20,000 By Cash and Bank 11,70,000
To Creditors (Bills 8,000 By Discount 30,000
receivable
dishonoured)
To Sales (W.N.11) 13,98,000 By Bills Receivable 2,00,000
By Balance c/d (bal.fig.) 3,26,000
17,26,000 17,26,000
4. Bills Receivable account

` `
To Debtors 2,00,000 By Bank 1,22,500
By Discount 2,500
By Creditors 40,000
By Balance c/d (bal. fig.) 35,000
2,00,000 2,00,000
5. Creditors account
` `
To Bank 7,84,000 By Balance b/d 2,20,000
To Discount 16,000 By Debtors (Bills receivable 8,000
dishonoured)
To Bills receivable 40,000 By Purchases (bal. fig.) 9,12,000
To Balance c/d 3,00,000
11,40,000 11,40,000
6. Balance Sheet as on 1 st April, 2017

Creditors 2,20,000 Furniture 1,20,000
Outstanding expenses 40,000 Debtors 3,20,000
Capital (balancing figure) 3,76,000 Stock 1,60,000
Prepaid expenses 12,000
Cash 4,000
_______ Bank balance 20,000
6,36,000 6,36,000
7. Expenses incurred during the year
`
Expenses paid during the year 3,50,000
Add: Outstanding expenses as on 31.3.2018 36,000
Prepaid expenses as on 31.3.2017 12,000 48,000
3,98,000
Less: Outstanding expenses as on 31.3.2017 40,000
Prepaid expenses as on 31.3.2018 14,000 (54,000)
Expenses incurred during the year 3,44,000
8. Interest on Government securities

2,00,000 x 12% x 6/12= ` 12,000
Interest on Government securities receivables for 6 months = ` 12,000
9. Discount allowed
`
Discount to Debtors  11,70,000  30,000
 97.5%  2.5% 
 
Discount on Bills Receivable  1,22,500 
 98%  2%  2,500
 
32,500
10. Discount received
`
Discount to Creditors  7,84,000  16,000
 98%  2% 
 
11. Credit sales

Cost of Goods sold = Opening stock + Net purchases – Closing stock
= ` 1,60,000 + ` 9,12,000 – ` 1,40,000
= ` 9,32,000
Sale price = ` 9,32,000 + 50% of 9,32,000 = ` 13,98,000
12.
`
(i) Price of two cars = ` 2,00,000 x 2 4,00,000
Less: Depreciation for the first year @ 30% 1,20,000
2,80,000
30
Less: Depreciation for the second year = ` 2, 80,000 x 84,000
100
Agreed value of two cars taken back by the hire vendor 1,96,000
(ii) Cash purchase price of one car 2,00,000
Less: Depreciation on ` 2,00,000 @20% for the first year 40,000
Written drown value at the end of first year 1,60,000
Less: Depreciation on ` 1,60,000 @ 20% for the second year 32,000

Book value of car left with the hire purchaser 1,28,000
(iii) Book value of one car as calculated in working note (ii) above 1,28,000
Book value of Two cars = ` 1,28,000 x 2 2,56,000
Value at which the two cars were taken back, calculated in 1,96,000
working note (i) above
Hence, loss on cars taken back = ` 2,56,000 – ` 1,96,000 = ` 60,000
(iv) Sale proceeds of cars repossessed 1,70,000
Less: Value at which cars were taken back ` 1,96,000
Repair ` 10,000 2,06,000
Loss on resale 36,000
13. Investment Account for the year ending on 31 st December, 2018
Scrip : 8% Convertible Debentures in C Ltd.
[Interest Payable on 31 st March and 30th September]
Date Particulars Nominal Interest Cost ` Date Particulars Nominal Interest Cost (`)
v alue ` ` Value (`
(`)
1.4.18 To Bank A/c 2,00,000 - 2,16,000 30.09.18 By Bank A/c - 12,000 -
1.7.18 To Bank A/c 1,00,000 2,000 1,10,000 [`3,00,000 x 8%
(W.N.1) x (6/12]
31.12.18 To P & L A/c - 14,033 - 1.10.18 By Bank A/c 80,000 84,000
[Interest] 1.10.18 By P&L A/c (loss) 2,933
(W.N.1)
1.12.18 By Bank A/c 733
(Accrued
interest)
(` 55,000 x .08 x
2/12)
1.12.18 By Equity shares 55,000 59,767
in C Ltd.
(W.N. 3 and 4)
31.12.18 By Balance c/d
(W.N.5) 1,65,000 3,300 1,79,300
3,00,000 16,033 3,26,000 3,00,000 16,033 3,26,000
SCRIP: Equity Shares in C LTD.

Date Particulars Cost (`) Date Particulars Cost (`)
1.12.18 To 8 % debentures 59,767 31.12.18 By balance c/d 59,767
Working Notes:
(i) Cost of Debenture purchased on 1 st July = `1,12,000 – `2,000 (Interest)
= `1,10,000
(ii) Cost of Debentures sold on 1 st Oct.
= (`2,16,000 + `1,10,000) x 80,000/3,00,000 = ` 86,933
(iii) Loss on sale of Debentures = ` 86,933– `84,000 = `2,933
Nominal value of debentures converted into equity shares =` 55,000
[(` 3,00,000 – 80,000) x.25]
Interest received before the conversion of debentures
Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733
(iv) Cost of Debentures converted = (` 2,16,000 + `1,10,000) x 55,000/3,00,000
= ` 59,767
(v) Cost of closing balance of Debentures = (` 2,16,000 + `1,10,000) x
1,65,000 / 3,00,000
= ` 1,79,300
(vii) Closing balance of Debentures has been valued at cost being lower than the market
value i.e. ` 1,81,500 (` 1,65,000 @ ` 110)
(viii) 5,000 equity Shares in C Ltd. will be valued at cost of ` 59,767 being lower than the
market value ` 75,000 (` 15 x5,000)
Note: It is assumed that interest on debentures, which are converted into cash, has been
received at the time of conversion.
14. Memorandum Trading Account for the Period from 1.1.2018 to 30.6.2018
` `
To Opening Stock (1.1.2018) 1,50,000 By Sales 11,50,000
To Purchases 9,50,000 Less: Sales
Less: Returns (12,500) 9,37,500 Returns (40,000) 11,10,000
To Cartage Inwards 17,500 By Closing Stock 2,80,000
To Wages 7,500 (Bal. Fig.)
To Gross Profit 2,77,500
(25% of ` 11,10,000)
13,90,000 13,90,000
Stock Destroyed Account

` `
To Trading Account 2,80,000 By Stock Salvaged Account 20,000
By Balance c/d (For Claim) 2,60,000
2,80,000 2,80,000
Statement of Claim
Items Cost Depreciation Salvage Claim
(` ) (` ) (` ) (` )
A B C D (E=B-C-D)
Stock 2,80,000 20,000 2,60,000
Buildings 3,75,000 1,25,000 + 9,375 4,000 2,36,625
Equipment 75,000 22,500 + 5,625 2,500 44,375
5,41,000
15. Revaluation Account
` `
To Stock 2,000 By Motor car 10,000
To Expenses 6,500 By Office equipment 5,000
To Purchases Omitted 4,000
To Capital A/c
Ajay 833
Vijay 1,250
Sanjay 417 2,500
15,000 15,000
Partners’ Capital Accounts
Particulars Ajay Vijay Sanjay Kamal Particulars Ajay Vijay Sanjay Kamal
Before admission
To Balance 20,000 - - - By bal b/d - 85,000 68,000 -
b/d
To Motor Car - 70,000 - - By Reserve 10,000 15,000 5,000
To Balance 16,087 69,130 81,127 - By Furniture 1,600 2,400 800
c/d
By Revaluation 833 1,250 417 -
A/c
By Goodwill 23,654 35,480 7,000 -
Total 36,087 1,39,130 81,217 36,087 1,39,130 81,217
At the time of admission

To Goodwill 17,395 26,094 5,250 17,395 By Balance b/d 16,087 69,130 81,127 -
To Balance - 43,036 75,967 - By assets -- - 8,000
c/d
By bal c/d 1,308 - - 9,395
Total 17,395 69,130 81,217 17,395 17,395 69,130 81,217 17,395
Adjustments to make Capital proportionate
To balance 1,308 - - 9,395 By bal b/d - 43,036 75,967 -
b/d
To Bank - - 56,351 -
(bal. fig.)
To balance 39,232 58,847 19,616 39,232 By Bank 40,540 15,811 - 48,627
c/d (WN 4) (bal. fig.)
Total 40,540 58,847 75,967 48,627 40,540 58,847 75,967 48,627
Balance Sheet of the Firm (after Kamal’s admission)

Equity & Liabilities ` Assets `
Capital Account: Furniture& fixture 37,800
Ajay 39,232 (30,000 +3,000+4,800)
Vijay 58,847 Office equipment 25,000
Sanjay 19,616 Stock (38,000 +5,000) 43,000
Kamal 39,232 Debtors 20,000
Creditors (25,000 +4,000) 29,000 Cash at Bank (W. N. 5) 66,627
Outstanding Expenses 6,500
1,92,427 1,92,427
Working Notes:
1. Computation of New Profit sharing ratio
Since Kamal’s Share= 1/4 th, Balance 3/4th to be shared by Ajay, Vijay and Sanjay in
the ratio 2:3:1
Ajay Vijay Sanjay Kamal Total
New Ratio 2 3 2 3 3 3 1 3 1 1 2 2:3:1:2
      
6 4 8 6 4 8 6 4 8 4 8
2. Computation of Goodwill
Year 1 2 3 Total
Profit 35,900 38,200 31,500
Less: Depreciation (800) (800) (800)
Purchase invoice omitted (4,000)

31,100 37,400 30,700 99,200
Average Profit 99,200/3 ` 33,067
Goodwill at 2 years purchase ` 33,067  2 ` 66,134
3. (i) Goodwill to be credited to Ajay, Vijay and Sanjay
Particulars Ajay Vijay Sanjay Total
First – ` 42,000 to be distributed among 14,000 21,000 7,000 42,000
all the Partners in the ratio of 2:3:1
Balance - ` 24,134 to be distributed
between Ajay and Vijay in the ratio 2:3 9,654 14,480 - 24,134
Total 23,654 35,480 7,000 66,134
(ii) Writing off Goodwill
Particulars Ajay Vijay Sanjay Kamal Total
First – ` 42,000 to be debited 10,500 15,750 5,250 10,500 42,000
among all the Partners in the
ratio of 2:3:1:2
Balance- ` 24,134 to be
distributed between
Ajay,Vijay and Kamal in the 6,895 10,344 - 6,895 24,134
ratio 2:3:2
Total 17,395 26,094 5,250 17,395 66,134
4. Computation of proportionate Capital of Partners
`
Combined Capital of Ajay, Vijay, Sanjay (Existing partners) – as per 1,17,695
balance derived in partners’ Capital Account = ` 43,036+ ` 75,967
-1,308= 1,17,695
Share of Ajay, Vijay and Sanjay in the new firm after deducting 3/4th
Kamal’s 1/4th share
Total Capital of the Firm after Kamal’s admission = ` 1,17,695÷ 3/4th 1,56,927
Apportionment of Capital in New Profit Sharing Ratio i.e. Proportionate Capital of

partners
Partners Ajay Vijay Sanjay Kamal

Ratio 2 3 1 2
Proportionate Capital of partners 39,232 58,847 19,616 39,232
(1,56,927)
5. Cash at Bank
= Given ` 18,000 +40,540+ 15,811+ 48,627– 56,351 = ` 66,627
Note:
1. In the above solution, adjustment of furniture for ` 4,800 has been routed through
Partners’ capital accounts. Alternatively, it may also be routed through Revaluation
A/c.
2. Since goodwill is not a purchased goodwill, it has been written off in the above
solution, in accordance with the AS 10.
3. As per the requirement given in the question, it is agreed among existing partners
that Sanjay’s interest in the goodwill of the firm is only upto the value of ` 42,000. It
has been assumed in the above solution that Sanjay is credited at the time of raising
of goodwill as well as debited only to the extent of ` 42,000 at the time of writing off
of goodwill.
16. Recently a growing trend has developed for outsourcing the accounting function to a third
party. The consideration for doing this is to save cost and to utilise the expertise of the
outsourced party. The third party maintains the accounting software and the client data,
does the processing and hands over the report from time to time.
The choice of outsourcing vendor is made on the basis of the proposals received from
these vendors. The proposals are evaluated and the decision is often taken based on the
following criteria:
1. The type of services provided and whether the same matches with the requirements,
2. The reputation and background of the vendor,
3. The comparative costs of the various propositions,
4. The assurance of quality.
17. (a) The question deals with the issue of Applicability of Accounting Standards for
corporate &non-corporate entities.
The companies can be classified under two categories viz SMCs and Non SMCs
under the Companies (AS) Rules, 2006.
As per the Companies (AS) Rules, 2006, criteria for above classification as SMCs,
are:
“Small and Medium Sized Company” (SMC) means, a company-

(i) whose equity or debt securities are not listed or are not in the process of listing
on any stock exchange, whether in India or outside India;
(ii) which is not a bank, financial institution or an insurance company;
(iii) whose turnover (excluding other income) does not exceed rupees fifty crore in
the immediately preceding accounting year;
(iv) which does not have borrowings (including public deposits) in excess of rupees
ten crore at any time during the immediately preceding accounting year; and
(v) which is not a holding or subsidiary company of a company which is not a small
and medium-sized company.
Since, XYZ Ltd.’s turnover of ` 35 lakhs does not exceed ` 50 crores & borrowings
of ` 10 lakhs is less than ` 10 crores, it is a small and medium sized company
The following relaxations and exemptions are available to XYZ Ltd.
1. AS 3 “Cash Flow Statements” is not mandatory.
2. AS 17 “Segment Reporting” is not mandatory.
3. SMEs are exempt from some paragraphs of AS 19 “Leases”.
4. SMEs are exempt from disclosures of diluted EPS (both including and excluding
extraordinary items).
5. SMEs are allowed to measure the ‘value in use’ on the basis of reasonable
estimate thereof instead of computing the value in use by present value
technique under AS 28 “Impairment of Assets”.
6. SMEs are exempt from certain disclosure requirements of AS 29 (Revised)
“Provisions, Contingent Liabilities and Contingent Assets”.
7. SMEs are exempt from certain requirements of AS 15 “Employee Benefits”.
8. Accounting Standards 21, 23, 27 are not applicable to SMEs.
(b) AS-1 “Disclosures of Accounting Policies”, states that the accounting treatment and
presentation in Financial Statements of transactions should be governed by their
substance and not merely by the legal form. The treatment in the given case would
depend on the terms of the Works Contract and also the substance of the agreement.
Accordingly, there can be two possibilities in the instant case, viz.
Situation 1
The Company acts as the agent of the customer.
Disclosure should be made to this effect that the material purchased belongs to the
customer.
Where ownership of goods vests with the customers and the company merely
purchases goods on behalf of its customers, it acts in the capacity of an agent for
execution of works under a works contract for which it receives full payment.
Hence, these purchases cannot be treated as the purchases of the Company and so,
the debit to its P&L A/c is not correct
Situation 2
The Company is the owner of the materials purchased in substance and has the right,
(though a restricted one) to use the materials, for all practical purposes.
If the terms of Works Contract provide for factor linked payment by customer and in
substance the materials acquired by the Company belongs to the company only,
irrespective of the legal form of ownership, the Company is justified in debiting its
P&L A/c.
18. (a) Cash flow statement consists of:(a) Cash in hand and deposits repayable on demand
with any bank or other financial institutions and (b) Cash equivalents, which are
short term, highly liquid investments that are readily convertible into known amounts
of cash and are subject to insignificant risk or change in value.
Cash flows are inflows (i.e. receipts) and outflows (i.e. payments) of cash and cash
equivalents. Any transaction, which does not result in cash flow, should not be
reported in the cash flow statement. Movements within cash or cash equivalents are
not cash flows because they do not change cash as defined by AS 3 “Cash Flow
Statements” which is sum of cash, bank and cash equivalents.
In the given case, due to increase in rate of foreign exchange by 75 paise, there is
increase (change) in bank balance. This increase of ` 18,750 (25,000 x 0.75) is not
a cash flow because neither there is any cash inflow nor there is any cash outflow.
Therefore, this change in bank balance amounting ` 18,750 need not be disclosed in
Cash Flow Statement of Ruby exports.
The net increase/decrease in Cash/Cash equivalents in the Cash Flow Statements
are stated exclusive of exchange gains and losses. T he resultant difference between
Cash and Cash Equivalents as per the Cash flow statement and that recognized in
the balance sheet is reconciled in the note on cash flow statements.
(b) Treatment as per AS 3 ‘Cash Flow Statement’
(i) Loans and advances given and interest earned
(1) to suppliers Cash flows from operating activities
(2) to employees Cash flows from operating activities
(3) to its subsidiary companies Cash flows from investing activities
(ii) Investment made in subsidiary company and dividend received
Cash flows from investing activities
(iii) Dividend paid for the year

Cash flows from financing activities
(iv) TDS on interest income earned on investments made
Cash flows from investing activities
(v) TDS on interest earned on advance given to suppliers
Cash flows from operating activities
19. (a) As per AS 7 ‘Construction Contracts’, when a contract covers number of assets, the
construction of each asset should be treated as a separate construction contract
when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation and the contractor and
customer have been able to accept or reject that part of the contract relating to
each asset; and
(c) the costs and revenues of each asset can be identified.
In the given case, each outlet is submitted as a separate proposal to different Zonal
Offices, which can be separately negotiated, and costs and revenues thereof can be
separately identified. Hence, each asset will be treated as a “single contract” even if
there is one single agreement for contracts.
Therefore, three separate contract accounts must be recorded and maintained in the
books of GTI Ltd. For each contract, principles of revenue and cost recognition must
be applied separately and net income will be determined for each asset as per AS 7.
(b) As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods,
performance should be regarded as being achieved when the following conditions are
fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a
price or all significant risks and rewards of ownership have been transferred to
the buyer and the seller retains no effective control of the goods transferred to
a degree usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that
will be derived from the sale of the goods.
In the given case, transfer of property in goods results in or coincides with the transfer
of significant risks and rewards of ownership to the buyer. Also, the sale price has
been recovered by the seller. Hence, the sale is complete but delivery has been
postponed at buyer’s request. Raj Ltd. should recognize the entire sale of ` 30,00,000
(` 5,00,000 x 6) and no part of the same is to be treated as Advance Received against
Sales.
20. (a) According to AS 10 (Revised), these costs can be capitalised:

1. Cost of the plant ` 50,00,000
2. Initial delivery and handling costs ` 4,00,000
3. Cost of site preparation ` 12,00,000
4. Consultants’ fees `14,00,000
5. Estimated dismantling costs to be incurred after 7 years ` 6,00,000
` 86,00,000
Note: Interest charges paid on “Deferred credit terms” to the supplier of the plant (not
a qualifying asset) of ` 4,00,000 and operating losses before commercial production
amounting to ` 8,00,000 are not regarded as directly attributable costs and thus
cannot be capitalised. They should be written off to the Statement of Profit and Loss
in the period they are incurred.
(b) As per AS 13 ‘Accounting for Investments’, where investments are reclassified from
current to long-term, transfers are made at the lower of cost or fair value at the date
of transfer.
In the given case, the market value of the investment (X Ltd. shares) is ` 2.50 lakhs,
which is lower than its cost i.e. ` 5 lakhs. Therefore, the transfer to long term
investments should be made at cost of ` 2.50 lakhs. The loss of ` 2.50 lakhs should
be charged to profit and loss account.
PAPER – 2: BUSINESS LAW, ETHICS & COMMUNICATION
PART – I: ANNOUNCEMENTS STATING APPLICABILITY

FOR MAY, 2019 EXAMINATIONS
Applicability for May, 2019 examinations
The Study Material (July 2015 edition), along with the “Supplementary Study Paper for
May 2019 examination and onwards” is relevant for May 2019 examinations.
Supplementary Study Paper contains the relevant amendments in the subject pertaining to
business law for the period 1st May 2015 to 30th April, 2018. Further, Chapter 6 – The Companies
Act, 2013, has been fully revised as per amendments upto 30 th April, 2018. Hence, the students
are advised that Module-2 (which is comprised of Chapter 6) of this paper is now to be read
from this supplementary study paper.
Further, all relevant amendments/ circulars/ notifications etc. in the Business Law and Company
law part for the period 1 st May 2018 to 31st October, 2018 are mentioned below:
Relevant Legislative amendments from 1 st May 2018 to 31st October, 2018
The Companies Act, 2013/ Corporate Laws
Sl. Amendments Relevant Amendments Page no. #
No. related to
I. Companies Following sections of the Companies Act, 2013
(Amendment) (hereinafter referred to as the principal Act) have
Act, 2017 been amended by the Companies (Amendment)
Act, 2017 via Notifications: S.O. 1833 (E) dated
7th May, 2018; S.O. 2422(E) dated 13 th June,
2018; SO. 3299(E) dated 5 th July, 2018; S.O.
3300(E) dated 5th July, 2018; S.O. 3684(E) dated
27th July, 2018; S.O. 3838(E) dated 31 st July,
2018; S.O. 3921(E) dated 7 th August, 2018 and
S.O. 4907(E) dated 19 th September, 2018.
1. In section 2 of the Companies Act, 2013
(hereinafter referred to as the principal Act)-
(i) in clause (6), for the Explanation, the following Pg 12 of SSP
Explanation shall be substituted, namely:—
'Explanation.—For the purpose of this clause,—
(a) the expression "significant influence" means
control of at least twenty per cent. of total voting
power, or control of or participation in business
decisions under an agreement;
(b) the expression "joint venture" means a joint

arrangement whereby the parties that have joint
control of the arrangement have rights to the net
assets of the arrangement;';
Enforcement Date: 7 th May, 2018

(ii) in clause (87), in sub-clause (ii), for the words Pg 28 of SSP
“total share capital”, the words “total voting
power” shall be substituted;

2. In section 7 of the principal Act, in sub-section Pg 61 of SSP
(1), in item (c), for the words "an affidavit", the
words "a declaration" shall be substituted.
Enforcement Date: 27 th July, 2018
3. In section 12 of the principal Act,— Pg 65 of SSP
(i) in sub-section (1), for the words "on and from
the fifteenth day of its incorporation", the words
"within thirty days of its incorporation" shall be
substituted;
(ii) in sub-section (4), for the words "within fifteen
days", the words "within thirty days" shall be
substituted.
Enforcement Date: 27th July, 2018

4. In section 26 of the principal Act, in sub- Pg 84 of SSP
section (1),—
(i) after the words "signed and shall", the following
shall be inserted, namely:—
"state such information and set out such reports
on financial information as may be specified by
the Securities and Exchange Board in
consultation with the Central Government:
Provided that until the Securities and Exchange

Board specifies the information and reports on
financial information under this sub-section, the
regulations made by the Securities and Exchange
Board under the Securities and Exchange Board
of India Act, 1992, in respect of such financial
PAPER – 2: BUSINESS LAW, ETHICS AND COMMUNICATION 3
information or reports on financial information

shall apply.";
(ii) clauses (a), (b) and (d) shall be omitted. Pg 84, 85 &
86 of SSP
5. For section 42 of the principal Act, the Pg 107, 108,
following section shall be substituted, namely:— 109, 110 &
'42. (1) A company may, subject to the provisions 111 of SSP
of this section, make a private placement of
securities.
(2) A private placement shall be made only to a
select group of persons who have been identified
by the Board (herein referred to as "identified
persons"), whose number shall not exceed fifty or
such higher number as may be prescribed
[excluding the qualified institutional buyers and
employees of the company being offered
securities under a scheme of employees stock
option in terms of provisions of clause (b) of sub-
section (1) of section 62], in a financial year
subject to such conditions as may be prescribed.
(3) A company making private placement shall
issue private placement offer and application in
such form and manner as may be prescribed to
identified persons, whose names and addresses
are recorded by the company in such manner as
may be prescribed:
Provided that the private placement offer and
application shall not carry any right of
renunciation.
Explanation I.—"private placement" means any
offer or invitation to subscribe or issue of
securities to a select group of persons by a
company (other than by way of public offer)
through private placement offer-cum-application,
which satisfies the conditions specified in this
section.
Explanation II.—"qualified institutional buyer"
means the qualified institutional buyer as defined
in the Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements)
Regulations, 2009, as amended from time to time,

made under the Securities and Exchange Board
of India Act, 1992.
Explanation III.—If a company, listed or unlisted,
makes an offer to allot or invites subscription, or
allots, or enters into an agreement to allot,
securities to more than the prescribed number of
persons, whether the payment for the securities
has been received or not or whether the company
intends to list its securities or not on any
recognised stock exchange in or outside India,
the same shall be deemed to be an offer to the
public and shall accordingly be governed by the
provisions of Part I of this Chapter.
(4) Every identified person willing to subscribe to
the private placement issue shall apply in the
private placement and application issued to such
person alongwith subscription money paid either
by cheque or demand draft or other banking
channel and not by cash:
Provided that a company shall not utilise monies
raised through private placement unless
allotment is made and the return of allotment is
filed with the Registrar in accordance with sub-
section (8).
(5) No fresh offer or invitation under this section
shall be made unless the allotments with respect
to any offer or invitation made earlier have been
completed or that offer or invitation has been
withdrawn or abandoned by the company:
Provided that, subject to the maximum number of
identified persons under sub-section (2), a
company may, at any time, make more than one
issue of securities to such class of identified
persons as may be prescribed.
(6) A company making an offer or invitation under
this section shall allot its securities within sixty
days from the date of receipt of the application
money for such securities and if the company is
not able to allot the securities within that period,
it shall repay the application money to the
subscribers within fifteen days from the expiry of
sixty days and if the company fails to repay the

application money within the aforesaid period, it
shall be liable to repay that money with interest at
the rate of twelve per cent. per annum from the
expiry of the sixtieth day:
Provided that monies received on application
under this section shall be kept in a separate bank
account in a scheduled bank and shall not be
utilised for any purpose other than—
(a) for adjustment against allotment of
securities; or
(b) for the repayment of monies where the
company is unable to allot
securities.
(7) No company issuing securities under this
section shall release any public advertisements or
utilise any media, marketing or distribution
channels or agents to inform the public at large
about such an issue.
(8) A company making any allotment of securities
under this section, shall file with the Registrar a
return of allotment within fifteen days from the
date of the allotment in such manner as may be
prescribed, including a complete list of all
allottees, with their full names, addresses,
number of securities allotted and such other
relevant information as may be prescribed.
(9) If a company defaults in filing the return of
allotment within the period prescribed under sub-
section (8), the company, its promoters and
directors shall be liable to a penalty for each
default of one thousand rupees for each day
during which such default continues but not
exceeding twenty-five lakh rupees.
(10) Subject to sub-section (11), if a company
makes an offer or accepts monies in
contravention of this section, the company, its
promoters and directors shall be liable for a
penalty which may extend to the amount raised
through the private placement or two crore
rupees, whichever is lower, and the company
shall also refund all monies with interest as
specified in sub-section (6) to subscribers within

a period of thirty days of the order imposing the
penalty.
(11) Notwithstanding anything contained in sub-
section (9) and sub-section (10), any private
placement issue not made in compliance of the
provisions of sub-section (2) shall be deemed to
be a public offer and all the provisions of this Act
and the Securities Contracts (Regulation) Act,
1956 and the Securities and Exchange Board of
India Act, 1992 shall be applicable.’.
Enforcement Date: 7 th August, 2018

6. In section 54, in sub-section (1), clause (c) Pg 123 of
shall be omitted. SSP

7. In section 73 of the principal Act, in sub- Pg 153 of
section (2),— SSP
(i) for clause (c), the following clause shall be
substituted, namely:—
"(c) depositing, on or before the thirtieth day of
April each year, such sum which shall not be less
than twenty per cent. of the amount of its deposits
maturing during the following financial year and
kept in a scheduled bank in a separate bank
account to be called deposit repayment reserve
account;";
(ii) clause (d) shall be omitted;
(iii) in clause (e), for the words "such deposits;",

the following shall be substituted, namely:—
"such deposits and where a default had occurred,
the company made good the default and a period
of five years had lapsed since the date of making
good the default;".

8. In section 74, in sub-section (1), for clause (b), Pg 160 of

the following clause shall be substituted, SSP
namely:—
"(b) repay within three years from such
commencement or on or before expiry of the
period for which the deposits were accepted,
whichever is earlier:
Provided that renewal of any such deposits shall
be done in accordance with the provisions of
Chapter V and the rules made thereunder.".

section (1), after the third proviso, the following SSP
proviso shall be inserted, namely:—
"Provided also that this section shall not apply to
such charges as may be prescribed in
consultation with the Reserve Bank of India.".

10. In section 78 of the principal Act, for the Pg 166 of
words and figures "register the charge within the SSP
period specified in section 77", the words,
brackets and figures "register the charge within
the period of thirty days referred to in sub-section
(1) of section 77" shall be substituted.
Enforcement Date : 7 th May, 2018

section (1),— SSP
(i) the words, brackets and figures "and the
provisions of sub-section (1) of section 77 shall,
as far as may be, apply to an intimation given
under this section" shall be omitted;
(ii) the following proviso shall be inserted,

namely:—
"Provided that the Registrar may, on an
application by the company or the charge holder,
allow such intimation of payment or satisfaction to
be made within a period of three hundred days of

such payment or satisfaction on payment of such
additional fees as may be prescribed.".
Enforcement Date: : 5 th July, 2018

12. In section 89 of the principal Act,— Pg 182 of
(i) in sub-section (6), the words and figures, SSP
"within the time specified under section 403" shall
be omitted;
(ii) in sub-section (7), for the words and figures,

"under the first proviso to sub-section (1) of
section 403", the word "therein", shall be
substituted;
(iii) after sub-section (9), the following sub-

section shall be inserted, namely:—
"(10) For the purposes of this section and section
90, beneficial interest in a share includes, directly
or indirectly, through any contract, arrangement
or otherwise, the right or entitlement of a person
alone or together with any other
person to—
(i) exercise or cause to be exercised any or all of
the rights attached to such share; or
(ii) receive or participate in any dividend or other
distribution in respect of such share.".
Enforcement Date: 7 th May, 2018 [for (i) and

(ii)]
13th June, 2018 [for (iii)]
13. For section 90 of the principal Act, the Pg 183 of
following section shall be substituted, SSP
namely:—
'(1) Every individual, who acting alone or
together, or through one or more persons or trust,
including a trust and persons resident outside
India, holds beneficial interests, of not less than
twenty-five per cent. or such other percentage as
may be prescribed, in shares of a company or the
right to exercise, or the actual exercising of

significant influence or control as defined in
clause (27) of section 2, over the company (herein
referred to as "significant beneficial owner"), shall
make a declaration to the company, specifying
the nature of his interest and other particulars, in
such manner and within such period of acquisition
of the beneficial interest or rights and any change
thereof, as may be prescribed:
Provided that the Central Government may
prescribe a class or classes of persons who shall
not be required to make declaration under this
sub-section.
(2) Every company shall maintain a register of the
interest declared by individuals under sub-section
(1) and changes therein which shall include the
name of individual, his date of birth, address,
details of ownership in the company and such
other details as may be prescribed.
(3) The register maintained under sub-section (2)
shall be open to inspection by any member of the
company on payment of such fees as may be
prescribed.
(4) Every company shall file a return of significant
beneficial owners of the company and changes
therein with the Registrar containing names,
addresses and other details as may be prescribed
within such time, in such form and manner as may
be prescribed.
(5) A company shall give notice, in the prescribed
manner, to any person (whether or not a member
of the company) whom the company knows or has
reasonable cause to believe—
(a) to be a significant beneficial owner of the
company;
(b) to be having knowledge of the identity of a
significant beneficial owner or another person
likely to have such knowledge; or
(c) to have been a significant beneficial owner of
the company at any time during the three years
immediately preceding the date on which the
notice is issued,
and who is not registered as a significant

beneficial owner with the company as required
under this section.
(6) The information required by the notice under
sub-section (5) shall be given by the concerned
person within a period not exceeding thirty days
of the date of the notice.
(7) The company shall,—
(a) where that person fails to give the company
the information required by the notice within the
time specified therein; or
(b) where the information given is not
satisfactory,
apply to the Tribunal within a period of fifteen
days of the expiry of the period specified in the
notice, for an order directing that the shares in
question be subject to restrictions with regard to
transfer of interest, suspension of all rights
attached to the shares and such other matters as
may be prescribed.
(8) On any application made under sub-section
(7), the Tribunal may, after giving an opportunity
of being heard to the parties concerned, make
such order restricting the rights attached with the
shares within a period of sixty days of receipt of
application or such other period as may be
prescribed.
(9) The company or the person aggrieved by the
order of the Tribunal may make an application to
the Tribunal for relaxation or lifting of the
restrictions placed under sub-section (8).
(10) If any person fails to make a declaration as
required under sub-section (1), he shall be
punishable with fine which shall not be less than
one lakh rupees but which may extend to ten lakh
rupees and where the failure is a continuing one,
with a further fine which may extend to one
thousand rupees for every day after the first
during which the failure continues.
(11) If a company, required to maintain register
under sub-section (2) and file the information
under sub-section (4), fails to do so or denies
inspection as provided therein, the company and

every officer of the company who is in default
shall be punishable with fine which shall not be
less than ten lakh rupees but which may extend
to fifty lakh rupees and where the failure is a
continuing one, with a further fine which may
extend to one thousand rupees for every day after
the first during which the failure continues.
(12) If any person wilfully furnishes any false or
incorrect information or suppresses any material
information of which he is aware in the declaration
made under this section, he shall be liable to
action under section 447.'.
Enforcement Date: 13 th June, 2018

SSP
(i) in sub-section (4), the words and figures,
"within the time as specified, under section 403"
shall be omitted;
(ii) in sub-section (5), for the words and figures,

"under section 403 with additional fees" the word
"therein" shall be substituted.
15. Section 93 of the principal Act shall be Pg 187 of
omitted. SSP

(i) in sub-section (1), in the first proviso, the words SSP
"and the Registrar has been given a copy of the
proposed special resolution in advance" shall be
omitted;
(ii) in sub-section (3), the following proviso shall

be inserted, namely:—
"Provided that such particulars of the register or
index or return as may be prescribed shall not be
available for inspection under sub-section (2) or
for taking extracts or copies under this sub-

section.".

section (2), in the proviso, for the words "Provided SSP
that", the following shall be substituted, namely:—
"Provided that annual general meeting of an
unlisted company may be held at any place in
India if consent is given in writing or by electronic
mode by all the members in advance:
Provided further that".

18. In section 117 of the principal Act,— Pg 220/221
of SSP
(i) in sub-section (1), the words and figures
“within the time specified under section 403” shall
be omitted;
(ii) in sub-section (2),—

(a) for the words and figures “under section 403
with additional fees”, the word “therein” shall be
substituted;
(b) for the words "not be less than five lakh
rupees", the words "not be less than one lakh
rupees" shall be substituted;
(c) for the words "one lakh rupees", the words
"fifty thousand rupees" shall be substituted;
(iii) in sub-section (3),—

(a) clause (e) shall be omitted;
(b) in clause (g), in the proviso, the word “and”
shall be omitted and the following proviso shall be
inserted, namely:—
"Provided further that nothing contained in this
clause shall apply to a banking company in
respect of a resolution passed to grant loans, or
give guarantee or provide security in respect of
loans under clause (f) of sub-section (3) of section

179 in the ordinary course of its business; and.".

SSP
(i) in sub-section (2), the words and figures
“within the time as specified, under section 403”
shall be omitted;
(ii) in sub-section (3), for the words and figures

“under section 403 with additional fees”, the word
“therein” shall be substituted.

II. Notification The Central Government has amended the Pg 28 of SSP
G.S.R. 433(E) Companies (Specification of Definitions Details)
dated 7th May, Rules, 2014, by the Companies (Specification of
2018 Definitions Details) Amendment Rules, 2018. It
shall come into force on 7 th May, 2018.
In the Companies (Specification of Definitions
Details) Rules, 2014, in rule 2, in sub-rule (1),
clause (r) shall be omitted.
Please note: The said clause (r) deals with ‘Total

Share Capital’
III. Notification The Central Government has amended the Pg 124 of
G.S.R. 434(E) Companies (Share Capital and Debentures) SSP
dated 7th May, Rules, 2014, by the Companies (Share Capital
2018 and Debentures) Second Amendment Rules,
2018. It shall come into force on 7 th May, 2018.
In the Companies (Share Capital and
Debentures) Rules, 2014, in the principal rules, in
rule 8, in sub-rule (1), in the Explanation, in
clause (i) in sub-clause (a), the words “for at least
last one year” shall be omitted.
IV. Notification The Central Government has amended the Pg 158 of
G.S.R. 612 (E) Companies (Acceptance of Deposits) Rules, SSP
dated 5th July, 2014, by the Companies (Acceptance of
2018
Deposits) Amendment Rules, 2018. It shall come

into force on 15th August, 2018.
In the Companies (Acceptance of Deposits)
Rules, 2014 in rule 14, in sub-rule (1), clause (k)
shall be omitted;
V. Notification The Central Government has amended the Pg 47 of SSP
G.S.R. 708(E) Companies (Incorporation) Rules, 2014, by the
dated 27th Companies (Incorporation) Third Amendment
July, 2018 Rules, 2018. It shall come into force on 27 th July,
2018.
In the Companies (Incorporation) Rules, 2014._
(a) in rule 3, for Explanation to sub-rule (1), the
following shall be substituted, namely:-
“Explanation I. - For the purposes of this rule,
the term "resident in India" means a person who
has stayed in India for a period of not less than
one hundred and eighty two days during the
immediately preceding financial year.
Explanation II.- For the purposes of this rule,
while counting the number of days of stay of a
director in India for the financial year 2018-2019,
any period of stay between 01.01.2018 till the
date of notification of this rule shall also be
counted”;
The Negotiable Instruments Act, 1881
Amendments The Ministry of Law and Justice has made
to the amendments to the Negotiable Instruments Act,
Negotiable 1881 through the Negotiable Instruments
Instruments (Amendment) Act, 2018. This Amendment Act
Act, 1881 received the assent of the President and
published in the Official Gazette on 2 nd August,
2018.
In the Negotiable Instruments Act, 1881 -
(hereinafter referred to as the principal Act), after (The section
section 143, the following section shall be is newly
inserted, namely:— inserted)
‘‘143A. Power to direct interim compensation.
(1) Notwithstanding anything contained in the

Code of Criminal Procedure, 1973, the Court
trying an offence under section 138 may order the
drawer of the cheque to pay interim compensation

to the complainant—
(a) in a summary trial or a summons case, where
he pleads not guilty to the accusation made in the
complaint; and
(b) in any other case, upon framing of charge.
(2) The interim compensation under sub-section
(1) shall not exceed twenty per cent. of the
amount of the cheque.
(3) The interim compensation shall be paid within
sixty days from the date of the order under sub-
section (1), or within such further period not
exceeding thirty days as may be directed by the
Court on sufficient cause being shown by the
drawer of the cheque.
(4) If the drawer of the cheque is acquitted, the
Court shall direct the complainant to repay to the
drawer the amount of interim compensation, with
interest at the bank rate as published by the
Reserve Bank of India, prevalent at the beginning
of the relevant financial year, within sixty days
from the date of the order, or within such further
period not exceeding thirty days as may be
directed by the Court on sufficient cause being
shown by the complainant.
(5) The interim compensation payable under this
section may be recovered as if it were a fine under
section 421 of the Code of Criminal Procedure,
1973.
(6) The amount of fine imposed under section 138
or the amount of compensation awarded under
section 357 of the Code of Criminal Procedure,
1973, shall be reduced by the amount paid or
recovered as interim compensation under this
section.’’.
(2) In the principal Act, after section 147, the -
following section shall be inserted, (The section
namely:— is newly
‘‘148. Power of Appellate Court to order inserted)
payment pending appeal against conviction.
(1) Notwithstanding anything contained in the
Code of Criminal Procedure, 1973, in an appeal
by the drawer against conviction under section

138, the Appellate Court may order the appellant
to deposit such sum which shall be a minimum of
twenty per cent. of the fine or compensation
awarded by the trial Court:
Provided that the amount payable under this sub-
section shall be in addition to any interim
compensation paid by the appellant under section
143A.
(2) The amount referred to in sub-section (1) shall
be deposited within sixty days from the date of the
order, or within such further period not exceeding
thirty days as may be directed by the Court on
sufficient cause being shown by the appellant.
(3) The Appellate Court may direct the release of
the amount deposited by the appellant to the
complainant at any time during the pendency of
the appeal:
Provided that if the appellant is acquitted, the
Court shall direct the complainant to repay to the
appellant the amount so released, with interest at
the bank rate as published by the Reserve Bank
of India, prevalent at the beginning of the relevant
financial year, within sixty days from the date of
the order, or within such further period not
exceeding thirty days as may be directed by the
Court on sufficient cause being shown by the
complainant.’’.
# Page number of the Study material (SM)/ Supplementary study paper (SSP) with
reference of relevant provisions
Please note: The Ministry of Corporate Affairs has replaced Rule 14 of the Companies
(Prospectus and Allotment of Securities) Rule, 2014 through Companies (Prospectus and
Allotment of Securities) Second Rule, 2018. Hence, students are advised not to read the content
related to Rule 14(2) of the Companies (Prospectus and Allotment of Securities) Rule, 2014 as
contained on pages 110 and Page 111 of SSP. [For May 2019 examinations the said amended
rule has not been made applicable for the students.]
PART – II : QUESTIONS AND ANSWERS
QUESTIONS
DIVISION A - MULTIPLE CHOICE QUESTIONS

1. Rajesh has formed a ‘One Person Company (OPC)’ with his wife Roopali as nominee. For
the last two years his wife Roopali is suffering from terminal illness and due to this hard
fact he wants to change her as nominee. He has a trusted and experienced friend
Ramnivas who could be made nominee or his (Rajesh) son Rakshak who is of seventeen
years of age. Whom should he nominate as nominee in place of his wife?
(a) Since blood relation can only be appointed as nominee in case of OPC, Rajesh needs
to appoint his son Rakshak.
(b) Rajesh can appoint his friend Ramnivas as nominee in his OPC
(c) Roopali is not agreeable to the proposal of Rajesh and hence, Rajesh cannot change
her as the nominee
(d) Either Rakshak or Mr. Ramnivas can be appointed as nominee
2. A Company limited by shares can issue equity shares with differential voting rights. Which
of the following is not a necessary condition to be fulfilled before issue of such shares:
(a) The articles of association of the company shall authorize issue of shares with
differential rights;
(b) The issue of shares shall be authorized by an ordinary resolution passed at a general
meeting of the shareholders;
(c) The issue of shares shall be authorized by special resolution passed at a general
meeting of the shareholders;
(d) The company shall have consistent track record of distributable profits for the last
three years;
3. A Ltd. is the holding company of B Ltd. Another company C Ltd. is the subsidiary company
of B Ltd. Is there any relationship between A Ltd. and C Ltd.
(a) There is no relationship between A Ltd. and C Ltd.
(b) C Ltd. is deemed to be the subsidiary of A Ltd.
(c) A Ltd. shall be deemed to be the holding company of C Ltd. provided A Ltd. acquires
at least 10% stake in C Ltd.
(d) C Ltd. shall be deemed to be the subsidiary of A Ltd. if the latter company acquires
minimum 10% stake in the former company within six months after C Ltd. becomes
subsidiary of B Ltd.
4. Shruti, a common friend of Suchitra and Sukanya, got incorporated OPC sometime before
and during a chit-chat with her friends informed them that there is some limit on the
maximum capital which her OPC can have and she would have to convert her OPC either
into a private or public limited company if such limit exceeded. Suchitra and Sukanya who
are desirous of forming a private limited company for carrying on textile trading business,
are unsure about the maximum capital which a private limited company can have. Advise.
(a) A private limited company can have maximum of ` One crore as share capital.
(b) A private limited company can have maximum of ` Two crores as share capital.
(c) A private limited company can have maximum of ` Five crores as share capital.
(d) A private limited company can have unlimited share capital.
5. Vinay and Sanjay made a name reservation application accompanied by requisite fee to
the Registrar for forming a new private company. The Registrar accorded its approval for
reservation of most preferred name Vinanjay Softwares Private Ltd. on 7 th July, 2018. By
which date necessary documents for incorporation of the company must be submitted to
the Registrar so that the reserved name does not get lapsed.
(a) Latest by 20th July, 2018
(b) Latest by 27th July, 2018
(c) Latest by 4th August, 2018
(d) Latest by 4th September, 2018
6. Aman contracts to indemnify Megha against the consequences of any proceedings which
Chandar may take against Megha in respect of a sum of ` 15000/- advanced by Chandar
to Megha. Now, Megha who is called upon to pay the sum of money to Chandar but she
fails to do so. Now, as per the provisions of the Indian Contract Act, 1872, advise the future
course of action to be taken by Chandar.
(a) Chandar can recover the amount only from Megha
(b) Chandar can recover the full amount from Aman
(c) Chandar cannot recover the amount from Aman
(d) Chandar can recover at least 10% of the total amount from Megha
DIVISION B - DETAILED QUESTIONS
PART – A: BUSINESS LAWS
The Indian Contract Act,1872
1. Mr. Pal, an old man, by a registered deed of gift, granted certain land property to Anisha,
his daughter. By the terms of the deed, it was stipulated that an annuity of ` 20, 000 should
be paid every year to B, who was the brother of Mr. Pal. On the same day Anisha made a
promise to B and executed in his favour an agreement to give effect to the stipulation.
Anisha failed to pay the stipulated sum. In an action against her by B, she contended that
since B had not furnished any consideration, he has no right of action.
Examining the provisions of the Indian Contract Act, 1872, decide, whether the contention
of Anisha is valid?
2. Prem, aged 16 years, was studying in an engineering college. On 1 st March, 2017 he took a
loan of ` 1 lakh from Salim for the payment of his college fee and agreed to pay by
30th May, 2018. Prem possesses assets worth ` 10 lakhs. On due date Prem fails to pay back
the loan to Salim. Salim now wants to recover the loan from Prem out of his assets. Whether
Salim would succeed? Decide, referring to the provisions of the Indian Contract Act, 1872.
The Negotiable Instruments Act, 1881
3. Manoj owes money to Umesh. Therefore, he makes a promissory note for the amount in
favour of Umesh, for safety of transmission he cuts the note in half and posts one half to
Umesh. He then changes his mind and calls upon Umesh to return the half of the note
which he had sent. Umesh requires Manoj to send the other half of the promissory note.
Decide how a rights of the parties are to be adjusted.
Give your answer in reference to the Provisions of Negotiable Instruments Act, 1881.
The Payment of Bonus Act, 1965
4. Mr. Navin joined as supervisor on monthly salary of ` 13,400 on 1. 02. 2018 and resigned
from his job on 28.02.2018. The company declared a bonus of 20% to all eligible
employees and paid it on time. Mr. Navin knowing the facts made a claim to HRD, which
in turn rejected the claim. Examine the validity in the light of the provisions of the Payment
of Bonus Act, 1965.
The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
5. An employee of a limited company filed a claim for provident fund settlement with the
Provident Fund Commissioner. However, he did not get any settlement from the authority
even after six months. Referring to the Employees’ Provident Funds and Miscellaneous
Provisions Act, 1952 what course of action an authority should have taken in this respect.
The Payment of Gratuity Act, 1972
6. An employee, working in an establishment which is governed by the Payment of Gratuity
Act, 1972, committed a theft in the course of his employment. And consequently his
services was terminated. State in this connection, whether the gratuity payable to him shall
be wholly or partly forfeited.
The Companies Act, 2013
7. MNO a One Person company (OPC) was incorporated during the year 2015-16 with an
authorised capital of ` 45 lakhs (4.5 lakhs shares of ` 10 each). The capital was fully
subscribed and paid up. Turnover of the company during 2015-16 and 2016-17 was ` 2
crores and ` 2.5 crores respectively. Promoter of the company seeks your advice in the
following circumstances, whether MNO (OPC) can convert into any other kind of company
during 2017-18. Please, advise with reference to relevant provisions of the Companies Act,
2013 in the below mentioned circumstances:
(i) If promoter increases the paid up capital of the company by ` 10 lakhs during 2017-18
(ii) If turnover of the company during 2017-18 was ` 3 crores.
8. The paid-up share capital of Altar Private Limited is ` 1 crore, consisting of 8 lacs Equity
Shares of ` 10 each, fully paid-up and 2 lacs Cumulative Preference Shares of `10 each,
fully paid-up. New Private Limited and Ultra Private Limited are holding 3 lacs Equity
Shares and 50,000 Equity Shares respectively in Altar Private Limited. New Private Limited
and Ultra Private Limited are the subsidiaries of PQR Private Limited. With reference to
the provisions of the Companies Act, 2013 examine whether Altar Private Limited is a
subsidiary of PQR Private Limited? Would your answer be different if PQR Private Limited
has 8 out of 9 Directors on the Board of Altar Private Limited?
9. Data Limited (listed on Stock Exchange) was incorporated on 1st October, 2018 with a paid-
up share capital of ` 200 crores. Within this small time of 4 months it has earned huge
profits and has topped the charts for its high employee friendly environment. The company
wants to issue sweat equity to its employees. A friend of the CEO of the company has told
him that they cannot issue sweat equity shares as 2 years have not elapsed since the time
company has commenced its business. The CEO of the company has approached you to
advise them about the essential conditions to fulfilled before the issue of sweat equity
shares especially since their company is just a few months old.
PART – B: ETHICS
10. State the objectives of the Central Consumer Protection Council in India.
11. What reasons force a marketing executive to adopt ethical practices in marketing? Explain.
12. Write note on:
(i) Harassment at workplace.
(ii) Ecological ethics
PART – C: COMMUNICATION
13. Explain the functions of interpersonal communication.
14. “Once the process of consensus building has begun, mediators try to assist the parties in
their efforts to generate a creative resolution of differences". State in brief the process
which should be followed by mediators to resolve the differences between the parties.
15. The Board of Safe Gopal Ltd., appoint and authorize Mr. Shah giving powers to sell and
sign transfer deeds for transfer of shares and debentures by executing an instrument of
the "Power of Attorney". Draft such instrument of "Power of Attorney".
DIVISION A - ANSWER TO MULTIPLE CHOICE QUESTIONS

Question No. 1 2 3 4 5 6
Correct Option (b) (c) (b) (d) (b) (b)
DIVISION B - ANSWER TO DETAILES QUESTIONS
1. The problem as asked in the question is based on the provisions of the Indian Contract
Act, 1872 as contained in section 2(d) and on the principle ‘privity of consideration’.
Consideration is one of the essential elements to make a contract valid and it can flow from
the promisee or any other person. In view of the clear language used in definition of
‘consideration’ in Section 2(d) “…. the promisee or any other person…..”, it is not necessary
that consideration should be furnished by the promisee only. A promise is enforceable if
there is some consideration for it and it is quite immaterial whether it moves from the
promisee or any other person. The leading authority in the decision of the Chinnaya Vs.
Ramayya, held that the consideration can legitimately move from a third party and it is an
accepted principle of law in India.
In the given problem, Mr. Pal has entered into a contract with Anisha, but Mr. B has not
given any consideration to Anisha but the consideration did flow from Mr. Pal to Anisha
and such consideration from third party is sufficient to the enforce the promise of Anisha,
the daughter, to pay an annuity to B. Further, the deed of gift and the promise made by
Anisha to B to pay the annuity were executed simultaneously and therefore they should be
regarded as one transaction and there was sufficient consideration for it.
Thus, a stranger to the contract cannot enforce the contract but a stranger to the
consideration may enforce it.
2. According to Section 11 of the Indian Contract Act, 1872, a person who is of the age of
majority to the law to which he is subject is competent to enter into any contract. A person
who has completed the age of 18 years is a major and otherwise he will be treated as
minor. Thus, Prem who is a minor is incompetent to contract and any agreement with him
is void [Mohori Bibi Vs Dharmodas Ghose]. Section 68 of the Indian Contract Act, 1872
however, prescribes the liability of a minor for the supply of the things which are the
necessaries of life to him. It says that though minor is not personally liable to pay the price
of necessaries supplied to him or money lent for the purpose, the supplier or lender will be
entitled to claim the money/price of goods or services which are necessaries suited to his
condition of life provided that the minor has a property. The liability of minor is only to the
extent of the minor’s property. This type of contract is called a Quasi-contract and the right
of the supplier/lender is based on the principle of equity. Thus, according to the above
provision, Salim will be entitled to recover the amount of loan given to Prem for payment
of the college fees from the property of the minor.
3. The question arising in this problem is whether the making of promissory note is complete
when one half of the note was delivered to Umesh. Under Section 46 of the Negotiable
Instruments Act, 1881, the making of a promissory note is completed by delivery, actual or
constructive. Delivery refers to the whole of the instrument and not merely a part of it.
Delivery of half instrument cannot be treated as constructive delivery of the whole. So, the
claim of Umesh to have the other half of the promissory note sent to him is not
maintainable. Manoj is justified in demanding the return of the first half sent by him. He
can change his mind and refuse to send the other half of the promissory note.
4. Under section 8 of the Payment of Bonus Act, 1965 an employee is entitled for bonus in
an accounting year if he has worked in the establishment for not less than thirty working
days in that year. Under section 2 (13), an employee is defined to include an employee
drawing a salary of less than ` 21,000 per month.
In the given case, Mr. Navin was an eligible employee within the meaning of the term under
section 2 (13) but became ineligible to receive bonus as he worked in the accounting year
only for 28 days and hence will not be entitled to receive bonus.
5. The Provident Fund “claims” complete in all respects submitted along with the requisite
documents are required to be settled and the benefit amount paid to the beneficiaries within
30 days from the date of its receipt of the complete “claims” by the Commissioner.
If there is any deficiency in the claim, the same shall be recorded in writing and
communicated to the applicant within 30 days from the date of receipt of such application.
In case the Commissioner fails without sufficient cause to settle a claim complete in all
respects within 30 days, the Commissioner shall be liable for the delay beyond the said
period and penal interest at the rate of 12% per annum may be charged on the benefit
amount and the same may be deducted from the salary of the Commissioner.
6. Reduction and forfeiture of Gratuity: Under Section 4(6)(a) of the Payment of Gratuity
Act, 1972, in the case of damage, loss or destruction of property of employer, due to the
willful omission or negligence of the employee, the amount of gratuity to the extent of loss
or damage shall be forfeited by the employer.
Further, under section 4(6)(b), the gratuity payable to an employee may be wholly or
partially forfeited, where the services of an employee are terminated on the ground of:
(i) riotous or disorderly conduct or act of violence; or
(ii) committing an offence involving moral turpitude in the course of his employment.
Theft is an offence involving moral turpitude and consequently, if the services of an
employee had been terminated for committing theft in the course of his employment, the
gratuity payable to him under the provisions of the Act shall be wholly forfeited in view of
Section 4(6)(b)(ii). [Bharat Gold Mines Ltd. Vs Regional Labour Commissioner (Central),].
7. As per Rule 3 of the Companies (Incorporation) Rules, 2014, One Person Company (OPC)
cannot convert voluntarily into any kind of company unless two years have expired from
the date of incorporation, except where the paid up share capital is increased beyond fifty
lakh rupees or its average annual turnover during the relevant period exceeds two crore
rupees.
Besides, Section 18 of the Companies Act, 2013 provides that a company of any class
registered under this Act may convert itself as a company of other class under this Act by
alteration of memorandum and articles of the company in accordance with the provisi ons
of the Chapter II of the Act.
According to the above provisions, following are the answers to the given circumstances:
(i) Where, if the promotors increases the paid up capital of the company by ` 10.00 lakh
during 2017-2018 i.e., to ` 55 lakh (45+10= 55), MNO (OPC) may convert itself
voluntarily into any other kind of company due to increase in the paid up share capital
exceeding 50 lakh rupees. This could be done by MNO by alteration of memorandum
and articles of the company in compliance with the Provisions of the Act.
(ii) Where if the turnover of the MNO during 2017-18 was ` 3.00 crore, there will be no
change in the answer, as it meets up the requirement of minimum turnover i.e, ` 2
crore for voluntarily conversion of MNO (OPC) into any other kind of company.
8. In terms of section 2 (87) of the Companies Act 2013 "subsidiary company" or "subsidiary",
in relation to any other company (that is to say the holding company), means a company
in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own or
together with one or more of its subsidiary companies:
Explanation.—For the purposes of this clause,—
(a) a company shall be deemed to be a subsidiary company of the holding company even
if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary
company of the holding company;
(b) the composition of a company's Board of Directors shall be deemed to be controlled
by another company if that other company by exercise of some power exercisable by
it at its discretion can appoint or remove all or a majority of the directors.
In the present case, New Pvt. Ltd. and Ultra Pvt. Ltd. together hold less than one half of
the total share capital i.e. less than one-half of total voting power. Hence, PQR Private Ltd.
(holding of New Pvt. Ltd. and Ultra Pvt. Ltd) will not be a holding company of Altar Pvt. Ltd.
However, if PQR Pvt. Ltd. has 8 out of 9 Directors on the Board of Altar Pvt. Ltd. i.e.
controls the composition of the Board of Directors; it (PQR Pvt. Ltd.) will be treated as the
holding company of Altar Pvt. Ltd.
9. Sweat equity shares of a class of shares already issued.

According to section 54 of the Companies Act, 2013, a company may issue sweat equity
shares of a class of shares already issued, if the following conditions are fulfilled, namely—
(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) 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 prescribed under Rule 8 of
the Companies (Share and Debentures) Rules, 2014.
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.
Data Limited can issue Sweat equity shares by following the conditions as mentioned
above. It does not make a difference that the company is just a few months old.
10. The objectives of the Central Consumer Protection Council in India are to promote and
protect the rights of the consumers such as:-
(i) the right to be protected against the marketing of goods and services which are
hazardous to life and property;
(ii) the right to be informed about the quality, quantity, potency, purity, standard and price
of goods/services so as to protect the consumer against unfair trade practices;
(iii) the right to be assured, whichever possible, access to a variety of goods and services
at competitive prices;
(iv) the right to be heard and to be assured that consumers interest will receive due
consideration at appropriate terms;
(v) the right to seek redressal against unfair trade practices;
(vi) the right to consumer education.
11. Pragmatic reasons for maintaining ethical behaviour: Marketing executives should
practice ethical bahaviour because it is morally correct. To maintain ethical behaviour in
marketing, the following positive reasons may be useful to the marketing executives:
1. To reverse declining public confidence in marketing: Sometime misleading

package labels, false claim in advertisement, phony list prices, infringement of
trademarks pervert the market trends and such behaviour damages the marketers’
reputation. To reverse this situation, business leaders must demonstrate convincingly
that they are aware of their ethical responsibility and will fulfil it. Companies must set
high ethical standards and enforce them. Moreover, it is in management’s interest to be
concerned with the well-being of consumers, since they are the lifeblood of a business.
2. To avoid increase in government regulation: Business apathy, resistance, or token
responses to unethical behaviour increase the probability of more governmental
regulation. The governmental limitations may also result from management’s failure
to live up to its ethical responsibilities. Moreover, once the government control is
introduced, it is rarely removed.
3. To retain power granted by society: Marketing executives wield a great deal of
social power as they influence markets and speak out on economic issues. However,
there is a responsibility tied to that power. If marketers do not use their power in a
socially acceptable manner, that power will be lost in the long run.
4. To protect the image of the organisation: Buyers often form an impression of an
entire organisation based on their contact with one person. That person represents
the marketing function. Sometimes, a single sales clerk may pervert the market
opinion in relation to that company which he represents.
Therefore, the ethical behaviour in marketing may be strengthened only through the
behaviour of the marketing executives.
12. (i) Harassment at workplace: Harassment is “tormenting by subjecting to constant
interference or intimidation”. Law prohibits harassing acts and conduct that “creates
an intimidating hostile or offensive working environment,” which could be a term or
condition of an individual’s employment, either explicitly or implicitly or such conduct
which has the purpose or effect of unreasonably interfering with an individual’s work
performance or creating an intimidating, hostile or offensive working environment.
Another type of harassment is sexual harassment – situations in which an employee
is coerced into giving in to another employee’s sexual demands by the threat of losing
some significant job benefit, such as a promotion, raise or even the job. Sexual
harassment is prohibited and an employer is held responsible for all sexual
harassment engaged in by employees, “regardless of whether the employer knew or
should have known” the harassment was occurring and regardless of whether it was
“forbidden by the employer.”
(ii) Ecological Ethics: The problem of pollution and other environmental issues can best
be framed in terms of our duty to recognize and preserve the ecological system s
within which we live. An ecological system is an interrelated and interdependent set
of organisms and environments, such as a lake, in which the fish depend on small
aquatic organisms, which in turn live off decaying plant and fish waste products.
Since, the various parts of an ecological system are interrelated, the activities of one
of its parts will affect all other parts. Business and all social firms are parts of a larger
ecological system.
Business firms depend on the natural environment for their energy, material
resources, waste disposal and that environment in turn is affected by the commercial
activities of business firms. Thus, they are inter-dependent on each other.
Ecological ethics is based on the idea that the environment should be protected not
only for the sake of human being but also for its own sake. The issue of environmental
ethics goes beyond the problem relating to protection of environment or nature in
terms of pollution, resource utilization or waste disposal. It is the issue of exploitive
human nature and attitudes that should be addressed in a rational way. Problems
like global warming, ozone depletion and disposal of hazardous waste that concern
the entire world. They require international co-operation and have to be tackled at
the global level.
13. Functions of Interpersonal Communication: Interpersonal communication is important
because of the following functions it achieves:
Gaining Information: One reason, we engage in interpersonal communication, is to gain
knowledge about another individual. We attem pt to gain information about others so that
we can interact with them more effectively.
Building Understanding: Interpersonal communication helps us to understand better
what someone says in a given context. Words can mean very different things depending
on how they are said or in what context. Content Messages refer to the surface level
meaning of a message. Relationship Messages refer to how a message is said. The two
are sent simultaneously, but each affects the meaning assigned to the communication and
helps us understand each other better.
Establishing Identity: We also engage in interpersonal communication to establish an
identity based on our relationships and the image we present to others.
Interpersonal Needs: We also engage in interpersonal communication to express
interpersonal needs. William Schutz has identified three such needs: inclusion, control,
and affection.
• Inclusion is the need to establish identity with others.
• Control is the need to exercise leadership and prove one's abilities.

• Affection is the need to develop relationships with people. Groups are an excellent
way to make friends and establish relationships.
14. Process which should be followed by mediators to resolve the differences between
the parties- Efforts which help to generate a creative resolution are:
(i) Problem – solving orientation – It is important to be constructive and maintain a
problem solving orientation, even in the face of strong differences and personal
antagonism. It is in every participant’s best interest to behave in a fashion, they would
like others to follow. Concerns or disagreement should be expressed in an
unconditionally constructive manner.
(ii) Engage in active listening – Participants in every consensus building process
should be encouraged (indeed, instructed, if necessary) to engage in what is known
as active listening.
(iii) Disagree without being disagreeable – Participants in every consensus building
process should be instructed to ‘disagree without being disagreeable’.
(iv) Strive for the greatest degree of transparency possible – To the greatest extent
possible, consensus building process should be transparent. That is, the group’s
mandate, its agenda and ground rules, the list of participants and the groups or
interests they are representing, the proposals they are considering, the decision rules
they have adopted, their finances and their final report should, at an appropriate time,
be open to scrutiny by anyone affected by the group’s recommendations.
(v) Strive to invent options for mutual gain – The goals of a consensus building
process ought to be to create as much value as possible and to ensure that whatever
value is created be divided in ways that take account of all relevant considerations.
The key to creating value is to invent options for mutual gain.
15. Power of Attorney to execute a deed for the transfer of shares & debentures:-
BY THIS POWER OF ATTORNEY, Gopal Ltd. (full details), the company hereby appoints
Mr. Shah (full details) as Attorney of the company, to act in his name and on his behalf and
to do or execute all or any of the acts or things relating to transfer of shares and
debentures, that is to say:
1. To receive from………(Full details), the transferee the sum of `……….(Rupees….…..
only) being the price agreed to be paid to the company by the said transferee for the
purchase of (full description of shares and debentures) under an agreement
dated…………and to give proper receipt and discharge for the same.
2. To execute a transfer deed of the said shares and debentures

3. To present the said transfer deed for registration before the proper registration
authority, to admit the execution thereof, to do all acts, deeds and things which may
be necessary for registering the said transfer deed.
4. To execute or to do all acts, things or deeds or assurance for the completion of the
transfer of the said shares and debentures.
AND, the company DO HEREBY AGREE to ratify all acts, things, deeds or proceedings
lawfully done by the said Attorney on behalf of the company and in the name of the
company by virtue of this power of attorney and the same shall be binding on company in
full force or effect.
IN WITNESS WHEREOF the company have executed this power at ……this……..day
of……20……….
Witness:
1 _______ Signature
2 _______
PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT

PART-I: COST ACCOUNTING
QUESTIONS
Material
1. Ananya Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of
Exe, 2 kg of Dee is required. As per the sales forecast conducted by the company, it will
able to sale 10,000 units of Exe in the coming year. The following is the information
regarding the raw material Dee:
(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 20 kg. more than the average consumption per day.
(iii) There is an opening stock of 1,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is `125 per kg.
There is an opening stock of 900 units of the finished product Exe.
The rate of interest charged by bank on Cash Credit facility is 13.76%.
To place an order company has to incur ` 720 on paper and documentation work.
From the above information find out the followings in relation to raw material Dee:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) Calculate the impact on the profitability of the company by not ordering the EOQ.
[Take 364 days for a year]
Labour
2. A Company is undecided as to what kind of wage scheme should be introduced. The
following particulars have been compiled in respect of three workers. Which are under
consideration of the management.
I II III
Actual hours worked 380 100 540
Hourly rate of wages (in `) 40 50 60
Productions in units:
- Product A 210 - 600
- Product B 360 - 1350
- Product C 460 250 -

Standard time allowed per unit of each product is:
A B C
Minutes 15 20 30
For the purpose of piece rate, each minute is valued at ` 1/-
You are required to calculate the wages of each worker under:
(i) Guaranteed hourly rate basis
(ii) Piece work earning basis, but guaranteed at 75% of basic pay (Guaranteed hourly
rate if his earnings are less than 50% of basic pay.)
(iii) Premium bonus basis where the worker received bonus based on Rowan scheme.
Overheads
3. The Unibion Ltd. has the following account balances and distribution of direct charges on
31st March, 2019.
Production Depts. Service Depts.
Total
Machine Shop Packing General Plant Stores
Allocated Overheads: (`) (`) (`) (`) (`)
Indirect labour 29,000 8,000 6,000 4,000 11,000
Maintenance Material 9,900 3,400 1,600 2,100 2,800
Misc. supplies 5,900 1,500 2,900 900 600
Supervisor’s salary 16,000 -- -- 16,000 --
Cost & payroll salary 80,000 -- -- 80,000 --
Overheads to be apportioned:
Power 78,000
Rent 72,000
Fuel and Heat 60,000
Insurance 12,000
Taxes 8,400
Depreciation 1,20,000
The following data were compiled by means of the factory survey made in the previous
year:
Floor Space Radiator No. of Investment H.P.
Section employees hours
Machine Shop 2,000 Sq. ft. 45 20 8,00,000 3,500
PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 3
Packing 800 Sq. ft. 90 12 2,40,000 500

General Plant 400 Sq. ft. 30 4 80,000 -
Stores & 1,600 Sq. ft. 60 8 1,60,000 1,000
maintenance
Expenses charged to the stores departments are to be distributed to the other departments
by the following percentages:
Machine shop 50%; Packing 20%; General Plant 30%;
General Plant overheads is distributed on the basis of number of employees.
(a) Prepare an overhead distribution statement with supporting schedules to show
computations and basis of distribution.
(b) Determine the service department distribution by simultaneous equation method.
Non-integrated Accounting
4. The following is the summarised Trading and Profit and Loss Account of XYZ Ltd. for the
year ended 31 st March 2019:
Particulars Amount (`) Particulars Amount
(`)
Direct Material 14,16,000 Sales (30,000 units) 30,00,000
Direct wages 7,42,000 Finished stock (2,000 units) 1,67,500
Works overheads 4,26,000 Work-in-progress:
Administration overheads 1,50,000 - Materials 34,000
Selling and distribution 1,65,000 - Wages 16,000
overheads
Net profit for the year 3,22,500 - Works overhead 4,000 54,000
32,21,500 32,21,500
The company’s cost records show that in course of manufacturing a standard unit (i) works
overheads have been charged @ 20% on prime cost, (ii) administration overheads are
related with production activities and are recovered at `5 per finished unit, and (iii) selling
and distribution overheads are recovered at `6 per unit sold.
You are required to prepare:
(i) Costing Profit and Loss Account indicating the net profits,
(ii) A Statement showing reconciliation between profit as disclosed by the Cost Accounts
and Financial Accounts.
Contract Costing
5. Dream house (P) Ltd. is engaged in building two residential housing projects in the city.
Particulars related to two housing projects are as below:
HP-1 (`) HP-2 (`)
Work in Progress on 1 st April 2018 7,80,000 2,80,000
Materials Purchased 6,20,000 8,10,000
Land purchased near to the site to open an office - 12,00,000
Brokerage and registration fee paid on the above purchase - 60,000
Wages paid 85,000 62,000
Wages outstanding as on 31 st March, 2019 12,000 8,400
Donation paid to local clubs 5,000 2,500
Plant hire charges paid for three years effecting from 72,000 57,000
1st April 2018
Value of materials at site as on 31st March, 2019 47,000 52,000
Contract price of the projects 48,00,000 36,00,000
Value of work certified 20,50,000 16,10,000
Work not certified 1,90,000 1,40,000
A concrete mixture machine was bought on 1st April 2018 for `8,20,000 and used for 180
days in HP-1 and for 100 days in HP-2. Depreciation is provided @ 15% p.a. (this machine
can be used for any other projects)
As per the contract agreement contractee shall retain 20% of work certified as retention
money.
Prepare contract account for the two housing projects showing the profit or loss on each
project for the year ended 31st March, 2019.
Operating Costing
6. P Ltd. distributes its goods to dealers using a delivery van. The dealers’ premises are 40
kilometre away from the company’s office. The van has a capacity of 10 tonnes and makes
the journey twice a day fully loaded on the outward journeys and empty on return journey.
The following information is available for a four weekly period during the year 20X9:
Diesel consumption 10 kilometre per litre
Diesel cost `48 per litre
Lubricant oil `600 per week
Drivers salary `12,000 per month
Repairs & Maintenance `1,800 per month

Garage rent `4,800 per months
Cost of van (excluding tyres) `16,00,000
Life of van 3,80,000 kilometres
Insurance `5,400 per annum
Cost of tyres `22,000
Life of tyres 80,000 kilometres
Estimated sale value of van at end of its life `2,40,000
Vehicle permit fee `3,600 per annum
Other overhead cost `66,000 per annum
The van operates five-day a week.
Required:
(i) A statement to show the total monthly cost of operating the vehicle.
(ii) Calculate the operating cost per kilometre and per tonne kilometre
Process Costing
7. Following information is available regarding process A for the month of February, 20X9:
Production Record:
Units in process as on 01.02.20X9 4,000
(All materials used, 25% complete for labour and overhead)
New units introduced 16,000
Units completed 14,000
Units in process as on 28.02.20X9 6,000
(All materials used, 33-1/3% complete for labour and overhead)
Cost Records:
Work-in-process as on 01.02.20X9 (`)
Materials 6,00,000
Labour 1,00,000
Overhead 1,00,000
8,00,000
Cost during the month
Materials 25,60,000
Labour 15,00,000
Overhead 15,00,000
55,60,000
Presuming that average method of inventory is used, prepare:
(i) Statement of Equivalent Production.
(ii) Statement showing Cost for each element.
(iii) Statement of Apportionment of cost.
(iv) Process Cost Account for Process A.
Joint Product and By Product
8. A company processes a raw material in its Department 1 to produce three products, viz.
A, B and X at the same split-off stage. During a period 1,80,000 kgs of raw materials were
processed in Department 1 at a total cost of ` 12,88,000 and the resultant output of A, B
and X were 18,000 kgs, 10,000 kgs and 54,000 kgs respectively. A and B were further
processed in Department 2 at a cost of `1,80,000 and `1,50,000 respectively.
X was further processed in Department 3 at a cost of `1,08,000. There is no waste in
further processing. The details of sales affected during the period were as under:
A B X
Quantity Sold (kgs.) 17,000 5,000 44,000
Sales Value (`) 12,24,000 2,50,000 7,92,000
There were no opening stocks. If these products were sold at split-off stage, the selling
prices of A, B and X would have been ` 50, ` 40 and ` 10 per kg respectively.
Required:
(i) Prepare a statement showing the apportionment of joint costs to A, B and X.
(ii) Present a statement showing the cost per kg of each product indicating joint cost and
further processing cost and total cost separately.
(iii) Prepare a statement showing the product wise and total profit for the period.
(iv) State with supporting calculations as to whether any or all the products should be
further processed or not
Standard Costing
9. XYZ Ltd. produces a product X by using two raw materials A and B. The following standards
have been set for the production:
Material Standard Mix Standard Price (`)
A 40% 40 per kg.
B 60% 30 per kg.
The standard loss in processing is 15%.

During July, 2018 the company produced 2,000 kg. of finished output.
The positions of stock and purchases for the month of July, 2018 are as under:
Material Stock on 1 st July 2018 Stock on 31st July 2018 Purchases during July 2018
Quantity Amount (`)
A 40 kg. 10 kg. 900 kg. 42.50
B 50 kg. 60 kg. 1,400 kg. 25.00
Calculate the following variances:
(i) Material Price Variance; (ii) Material Usage Variance;
(iii) Material Mix Variance; (iv) Material Yield Variance;
(v) Total Material Cost Variance.
The company follows FIFO method of stock valuation.
Marginal Costing
10. MNP Ltd sold 2,75,000 units of its product at ` 375 per unit. Variable costs are ` 175 per
unit (manufacturing costs of `140 and selling cost ` 35 per unit). Fixed costs are incurred
uniformly throughout the year and amount to ` 3,50,00,000 (including depreciation of
` 1,50,00,000). there are no beginning or ending inventories.
Required:
(i) Compute breakeven sales level quantity and cash breakeven sales level quantity.
(ii) Compute the P/V ratio.
(iii) Compute the number of units that must be sold to earn an income (EBIT) of
` 25,00,000.
(iv) Compute the sales level achieve an after-tax income (PAT) of ` 25,00,000. Assume
40% corporate Income Tax rate.
Budget and Budgetary Control
11. Aditya Ltd. manufactures two products K and H. The sales director has anticipated to sale
8,000 units of Product K and 4,200 units of Product H. The Standard cost data for the
products for next year are as follows:
Product- K Product- H
Per unit Per unit
Direct materials:
- Material X @ ` 15 per kg. 12 kg. 15 kg.
- Material Y@ ` 16 per kg. 15 kg. 6 kg.
- Material Z @ ` 5 per ltr. 8 ltr. 14 ltr.

Direct wages:
- Unskilled @ ` 40 per hour 12 hour 10 hour
- Skilled @ ` 75 per hour 8 hour 5 hour
Budgeted stocks for next year are as follows:
(Units) (Units)
1st April, 2018 800 1,600
31st March, 2019 1,000 2,100
Material-X Material-Y Material-Z
(kg) (kg) (ltr)
1st April, 2018 25,000 30,000 14,000
31st March, 2019 30,000 18,000 7,500
Prepare the following budgets for next year:
(a) Production budget, in units;
(b) Material purchase budget, in quantity and in value;
(c) Direct labour budget, in hours and in value.
Miscellaneous
12. (a) Distinguish between Cost Control and Cost Reduction.
(b) Discuss the accounting treatment of Idle time and overtime wages.
(c) Discuss cost classification based on variability and controllability.
SUGGESTED HINTS/ANSWERS
1. Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘Dee’:
Sales forecast of the product ‘Exe’ 10,000 units
Less: Opening stock of ‘Exe’ 900 units
Fresh units of ‘Exe’ to be produced 9,100 units
Raw material required to produce 9,100 units of ‘Exe’ 18,200 kg.
(9,100 units × 2 kg.)
Less: Opening Stock of ‘Dee’ 1,000 kg.
Annual demand for raw material ‘Dee’ 17,200 kg.
(ii) Computation of Economic Order Quantity (EOQ):

2  Annualdemandof 'Dee '  Orderingcos t
EOQ =
Carryingcos t per unit per annum
2 17,200kg. ` 720 2 17,200kg. ` 720

= = = 1,200 kg.
` 125 13.76% ` 17.2
(iii) Re- Order level:
= (Maximum consumption per day × Maximum lead time)
 AnnualConsumptionof 'Dee '  
=   20kg.   8 days 
 364 days  
 18,200kg.  
=   20kg.   8 days  = 560 kg.
 364 days  
(iv) Minimum consumption per day of raw material ‘Dee’:
Average Consumption per day = 50 Kg.
Hence, Maximum Consumption per day = 50 kg. + 20 kg. = 70 kg.
So Minimum consumption per day will be
Min.consumption  Max.consumption
Average Consumption =
2
Min.consumption  70kg.
Or, 50 kg. =
2
Or, Min. consumption = 100 kg – 70 kg. = 30 kg.
(a) Re-order Quantity :
EOQ – 200 kg. = 1,200 kg. – 200 kg. = 1,000 kg.
(b) Maximum Stock level:
= Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead
time)
= 560 kg. + 1,000 kg. – (30 kg. × 4 days)
= 1,560 kg. – 120 kg. = 1,440 kg.
(c) Minimum Stock level:
= Re-order level – (Average consumption per day × Average lead time)
= 560 kg. – (50 kg. × 6 days) = 260 kg.
(d) Impact on the profitability of the company by not ordering the EOQ.
When purchasing the ROQ When purchasing the EOQ
I Order quantity 1,000 kg. 1,200 kg.
II No. of orders a 17,200kg. 17,200kg.
year 17.2or18orders 14.33or15orders
1,000kg. 1,200kg.
III Ordering Cost 18 orders × ` 720 = 15 orders × ` 720 = `10,800
`12,960
IV Average Inventory 1,000kg. 1,200kg.
 500kg.  600kg.
2 2
V Carrying Cost 500 kg. × ` 17.2 = ` 8,600 600 kg. × ` 17.2 = ` 10,320
VI Total Cost ` 21,560 ` 21,120
Extra Cost incurred due to not ordering EOQ = ` 21,560 - ` 21,120 = `440
2. (i) Computation of wages of each worker under guaranteed hourly rate basis
Worker Actual hours Hourly wage rate Wages (` )
worked (Hours) (` )
I 380 40 15,200
II 100 50 5,000
III 540 60 32,400
(ii) Computation of Wages of each worker under piece work earning basis
Product Piece rate Worker-I Worker-II Worker-III
per unit
(` ) Units Wages Units Wages Units Wages
(` ) (` ) (` )
A 15 210 3,150 - - 600 9,000
B 20 360 7,200 - - 1,350 27,000
C 30 460 13,800 250 7,500 - -
Total 24,150 7,500 36,000
Since each worker’s earnings are more than 50% of basic pay. Therefore, worker -I,
II and III will be paid the wages as computed i.e. ` 24,150, ` 7,500 and ` 36,000
respectively.
Working Notes:
1. Piece rate per unit
Product Standard time per Piece rate each Piece rate per unit
unit in minute minute (`) (`)
A 15 1 15
B 20 1 20
C 30 1 30
2. Time allowed to each worker

Worker Product-A Product-B Product-C Total Time
(H ours)
I 210 units × 15 360 units × 20 460 units × 30 24,150/60
= 3,150 = 7,200 = 13,800 = 402.50
II - - 250 units × 30 7,500/60
= 7,500 = 125
III 600 units × 15 1, 350 units × 20 - 36,000/60
= 9,000 = 27,000 = 600
(iii) Computation of wages of each worker under Premium bonus basis (where each
worker receives bonus based on Rowan Scheme)
Worker Time Time Time Wage Earnings Bonus Total
Allowed Taken saved Rate per (`) (`)* Earning
(Hr.) (Hr.) (Hr.) hour (`) (`)
I 402.5 380 22.5 40 15,200 850 16,050
II 125 100 25 50 5,000 1,000 6,000
III 600 540 60 60 32,400 3,240 35,640
Time Taken
*  TimeSaved  WageRate
Time Allowed
380
Worker-I =  22.5  40  850
402.5
100
Worker-II =  25  50  1,000
125
540
Worker-III =  60  60  3,240
600
3. (a) Overhead Distribution Statement
Production Service Departments
Departments
Machine Packing General Stores
Shops Plant
Allocated Overheads: (`) (`) (`) (`)
Indirect labour 8,000 6,000 4,000 11,000
Maintenance Material 3,400 1,600 2,100 2,800
Misc. supplies 1,500 2,900 900 600
Supervisor’s salary -- -- 16,000 --
Cost & payroll salary -- -- 80,000 --
Total allocated overheads 12,900 10,500 1,03,000 14,400
Add: Apportioned Overheads 1,84,350 70,125 22,775 73,150
(As per Schedule below)
1,97,250 80,625 1,25,775 87,550
Schedule of Apportionment of Overheads
Production Service Departments
Departments
Item of Cost Basis
Machine Packing General Stores
Shops (`) (`) Plant (`) (`)
Power HP hours 54,600 7,800 -- 15,600
(7 : 1 : - : 2)
Rent Floor space 30,000 12,000 6,000 24,000
(5 : 2 : 1 : 4)
Fuel & Heat Radiator sec. 12,000 24,000 8,000 16,000
(3 : 6 : 2 : 4)
Insurance Investment 7,500 2,250 750 1,500
(10 : 3 : 1 : 2)
Taxes Investment 5,250 1,575 525 1,050
(10 : 3 : 1 : 2)
Depreciation Investment 75,000 22,500 7,500 15,000
(10 : 3 : 1 : 2)
1,84,350 70,125 22,775 73,150
(b) Re-distribution of Overheads of Service Departments to Production

Departments:
Let, the total overheads of General Plant = ‘a’ and the total overheads of Stores = ‘b’
a = 1,25,775 + 0.3b ..........................................(i)
b = 87,550 + 0.2a ..........................................(ii)
Putting the value of ‘b’ in equation no. (i)
a = 1,25,775 + 0.3 (87,550 + 0.2a)
Or a = 1,25,775 + 26,265 + 0.06a
Or 0.94a = 1,52,040 Or a = 1,61,745 (appx.)
Putting the value of a = 1,61,745 in equation no. (ii) to get the value of ‘b’
b = 87,550 + 0.2 × 1,61,745 = 1,19,899
Secondary Distribution Summary
Particulars Total (`) Machine Shops (`) Packing (`)
Allocated and Apportioned 2,77,875 1,97,250.00 80,625.00
overheads as per Primary
distribution
- General Plant 1,61,745 80,872.50 48,523.50
5 3
(1,61,745 × ) (1,61,745 × )
10 10
- Stores 1,19,899 59,949.50 23,979.80
(1,19,899 × 50%) (1,19,899 × 20%)
3,38,072.00 1,53,128.30
4. (i) Costing Profit and Loss Account for the year ended 31 st March 2019:
Particulars Amount (` ) Particulars Amount (` )
Material consumed 14,16,000 Sales (30,000 units) 30,00,000
Direct wages 7,42,000
Prime Cost 21,58,000
Works overheads 4,31,600
(20% of Prime cost)
25,89,600
Less: Work in progress (54,000)
Factory cost 25,35,600
Administration overheads 1,60,000

(`5 × 32,000 units)
Cost of production 26,95,600
Less: Finished stock (1,68,475)
Cost of goods sold 25,27,125
Selling and distribution 1,80,000
overheads
(`6 × 30,000 unit)
Cost of sales 27,07,125
Profit (balancing figure) 2,92,875
30,00,000 30,00,000
(ii) Statement reconciling the profit as per costing profit and loss account with the profit
as per financial accounts
Particulars Amount (`) Amount (`)
Profit as per cost records 2,92,875
Add: Overheads over-absorbed:
- Works overheads (` 4,31,600 – ` 4,26,000) 5,600
- Administration OH (` 1,60,000 – ` 1,50,000) 10,000
- Selling and Distribution (` 1,80,000 – ` 1,65,000) 15,000 30,600
Less: Closing stock overvalued (` 1,68,475 – ` 1,67,500) (975)
Profit as per financial accounts 3,22,500
*It is assumed that the number of units Produced
= Number of units sold + Finished stock = 30,000 + 2,000 = 32,000 units.
5. Dr. Contract Account for the year ended 31 st March, 2019 Cr.
Particulars HP-1 (`) HP-2 (`) Particulars HP-1 (`) HP-2 (`)
To Balance b/d: W-I-P 7,80,000 2,80,000 By Closing 47,000 52,000
material at site
To Material purchased 6,20,000 8,10,000 By W-I-P:
To Wages: Value of work 20,50,000 16,10,000
(`85,000+`12,000) 97,000 certified
(`62,000+`8,400) 70,400 Cost of work not
certified 1,90,000 1,40,000
To Donation to local club* 5,000 2,500
To Plant hire charges:

(`72,000x1/3) 24,000
(`57,000x1/3) 19,000
To Depreciation on
concrete mixture**:
(`8,20,000x15%x180/365) 60,658
(`8,20,000x15%x100/365) 33,699
To Notional profit 7,00,342 5,86,401
(balance c/d)
22,87,000 18,02,000 22,87,000 18,02,000
To Costing P & L A/c 1,86,758 1,56,374 By Notional profit 7,00,342 5,86,401
(WN-2) (balance b/d)
To Costing P& L Reserve 5,13,584 4,30,027
A/c.
7,00,342 5,86,401 7,00,342 5,86,401
* Assuming donation paid to local club was exclusively for the above projects, hence
included in the contract account.
** Depreciation on concrete mixture machine is charged on the basis of number of days
used for the projects, as it is clearly mentioned in the question that this machine can be
used for other projects also.
Working Notes:
1 Computation of Stage of completion of the projects:
Value of work certified
 100
Value of contract
` 20,50,000
HP  1   100  42.71%
` 48,00,000
` 16,10,000
HP  2   100  44.72%
` 36,00,000
2 Computation of profit to be recognized in the Costing profit & loss A/c.
1 Cash Received
 Notional profit 
3 Value of work certified
1
HP  1   ` 7,00,342  80%  `1,86,758
3
1
HP  2   ` 5,86,401 80%  `1,56,374
3
(Land purchased and brokerage and registration fee paid for this purpose cannot be
charged to contract account, hence not included in the contract account)
6. (i) Workings:
(a) Distance travelled in a month = 40 k.m. × 2 × 2 trips × 5 days × 4 weeks
= 3,200 k.m.
(b) Total Tonne-km. = 10 tonnes × 40 k.m. × 2 trips × 5 days × 4 weeks
= 16,000 tonne-k.m.
(c) Consumption of diesel = 3,200 k.m. ÷ 10 k.m = 320 litre.
(d) Tyre cost = `22,000 ÷ 80,000 k.m. × 3,200 k.m = `880
`16,00,000  `2,40,000
(e) Depreciation of van =  3,200k.m. = `11,453
3,80,000k.m.
Monthly Operating Cost Statement
Particulars Amount (`)
Running costs:
- Cost of diesel (320 ltr × `48) 15,360
- Lubricant oil (`600 × 4 weeks) 2,400
- Repairs & Maintenance 1,800
- Cost of tyres 880
- Depreciation 11,453
Total Running cost (A) 31,893
Fixed Costs:
- Driver’s salary 12,000
- Garage rent 4,800
- Insurance (`5,400 ÷ 12) 450
- Permit fee (`3,600 ÷ 12) 300
- Other overheads (`66,000 ÷ 12) 5,500
Total fixed cost (B) 23,050
Total cost {(A) + (B)} 54,943
`54,943
(ii) Operating Cost per kilometre = = `17.17
3,200km.
`54,943
Cost per tonne-km = = `3.43
16,000tonne  km.
7. (i) Statement of Equivalent Production (Average cost method)
Input Particulars Output Equivalent Production
(Units) Units Materials Labour Overheads
(%*) Units** (%)* Units** (%)* Units**
20,000 Completed 14,000 100 14,000 100 14,000 100 14,000
WIP 6,000 100 6,000 33-1/3 2,000 33-1/3 2,000
20,000 20,000 20,000 16,000 16,000
*Percentage of completion ** Equivalent units
(ii) Statement showing Cost for each element
Particulars Materials Labour Overhead Total
Cost of opening work-in- 6,00,000 1,00,000 1,00,000 8,00,000
progress (`)
Cost incurred during the 25,60,000 15,00,000 15,00,000 55,60,000
month (`)
Total cost (`) : (A) 31,60,000 16,00,000 16,00,000 63,60,000
Equivalent units : (B) 20,000 16,000 16,000
Cost per equivalent unit (`) : 158 100 100 358
C = (A ÷ B)
(iii) Statement of Apportionment of cost
(` ) (` )
Value of output transferred: (A) (14,000 units × ` 358) 50,12,000
Value of closing work-in-progress: (B)
Material (6,000 units × `158) 9,48,000
Labour (2,000 units × ` 100) 2,00,000
Overhead (2,000 units × ` 100) 2,00,000 13,48,000
Total cost : (A + B) 63,60,000
(iv) Process- A Account
Particulars Units (` ) Particulars Units (` )
To Opening WIP 4,000 8,00,000 By Completed 14,000 50,12,000
units
To Materials 16,000 25,60,000 By Closing WIP 6,000 13,48,000

To Labour 15,00,000
To Overhead 15,00,000
20,000 63,60,000 20,000 63,60,000
8. (i) Statement showing the apportionment of joint costs to A, B and X
Products A B X Total
Output (kg) 18,000 10,000 54,000
Sales value at 9,00,000 4,00,000 5,40,000 18,40,000
the point of split (` 50 x 18,000) (` 40 x 10,000) (` 10 x 54,000)
off (`)
Joint cost 6,30,000 2,80,000 3,78,000 12,88,000
apportionment  ` 12,88,000   ` 12,88,000   ` 12,88,000 
on the basis of  ` 18,40,000 x ` 9,00,000   x ` 4,00,000   ` 18,40,000 x ` 5,40,000 
   ` 18,40,000   
sales value at
the point of split
off (`)
(ii) Statement showing the cost per kg. of each product

(indicating joint cost; further processing cost and total cost separately)
Products A B X
Joint costs apportioned (`) : (I) 6,30,000 2,80,000 3,78,000
Production (kg) : (II) 18,000 10,000 54,000
Joint cost per kg (`): (I ÷ II) 35 28 7
Further processing Cost per kg. 10 15 2
(`)  ` 1,80,000   ` 1,50,000   ` 1,08,000 
     
 18,000kg   10,000kg   54,000kg 
Total cost per kg (`) 45 43 9
(iii) Statement showing the product wise and total profit for the period
Sales value (`) 12,24,000 2,50,000 7,92,000
Add: Closing stock value (`)
(Refer to Working note 2) 45,000 2,15,000 90,000
Value of production (`) 12,69,000 4,65,000 8,82,000 26,16,000
Apportionment of joint cost (`) 6,30,000 2,80,000 3,78,000
Add: Further processing cost (`) 1,80,000 1,50,000 1,08,000

Total cost (`) 8,10,000 4,30,000 4,86,000 17,26,000
Profit (`) 4,59,000 35,000 3,96,000 8,90,000
Working Notes
1.
Products A B X
Sales value (`) 12,24,000 2,50,000 7,92,000
Quantity sold (Kgs.) 17,000 5,000 44,000
Selling price `/kg 72 50 18
 ` 12,24,000   ` 2,50,000   ` 7,92,000 
     
 17,000kg   5,000kg   44,000kg 
2. Valuation of closing stock:

Since the selling price per kg of products A, B and X is more than their total
costs, therefore closing stock will be valued at cost.
Closing stock 1,000 5,000 10,000
(kgs.)
Cost per kg 45 43 9
(`)
Closing stock 45,000 2,15,000 90,000 3,50,000
value (`) (` 45 x 1,000 kg) (` 43 x 5,000 kg) (`9x10,000 kg)
(iv) Calculations for processing decision

Products A B X
Selling price per kg at the point of split off (`) 50 40 10
Selling price per kg after further processing (`) 72 50 18
(Refer to working Note 1)
Incremental selling price per kg (`) 22 10 8
Less: Further processing cost per kg (`) (10) (15) (2)
Incremental profit (loss) per kg (`) 12 (5) 6
Product A and X has an incremental profit per unit after further processing, hence,
these two products may be further processed. However, further processing of product
B is not profitable hence, product B shall be sold at split off point.
9. Workings:
1. Calculation of Actual Materials Consumed:
Particulars Material A (kg.) Material B (kg.)
Opening stock 40 50
Add: Purchases 900 1,400
Less: Closing Stock (10) (60)
Material Consumed 930 1,390
(i) Material Price Variance:
Actual Quantity (Std. Price – Actual Price) = AQ × SP – AQ × AP
Material A = (930 kg × `40) - {(40 kg × `40) + (890 kg × `42.50)}
= `37,200 – (`1,600 + `37,825) = `2,225 (A)
Material B = (1,390 kg × `30) - {(50 kg × `30) + (1,340 kg × `25)}
= `41,700 – (`1,500 + `33,500) = `6,700 (F)
(ii) Material Usage Variance = Std. Price (Std. Quantity - Actual Quantity)
40% of 2,000
Material A = `40 {( ) - 930 kg}
0.85
= `40 (941.18 kg. – 930 kg) = `447 (F)
60% of 2,000
Material B = `30 {( ) - 1,390 kg}
0.85
= `30 (1,411.76 kg. – 1,390 kg) = `653 (F)
(iii) Material Mix Variance = Std. Price (Revised Std. Quantity – Actual Quantity)
Material A = `40 {(40% of 2,320) - 930 kg} = `80 (A)
Material B = `30 { (60% of 2,320) - 1,390 kg} = `60 (F)
(iv) Material Yield Variance = Std. Price (Std. Quantity – Revised Std. Quantity)
40% of 2,000
Material A = `40 {( ) - (40% of 2,320)}
0.85
= `40 { 941.18 kg. – 928 kg.} = 527 (F)
60% of 2,000
Material B = `30 {( ) - (60% of 2,320)}
0.85
= `30 {1,411.76 kg. – 1,392 kg.} = 593 (F)

(v) Total Material Cost Variance = Std. Price × Std Qty. – Actual Price × Actual Qty.
40% of 2,000
Material A = [{`40 × ( )} – {(40 kg × `40) + (890 kg × `42.50)}]
0.85
= {`40 × 941.18 kg.} – {`1,600 + `37,825}
= `37,647 – `39,425 = `1,778 (A)
60% of 2,000
Material B = [{`30 × ( )} - {(50 kg × `30) + (1,340 kg × `25)}]
0.85
= {`30 × 1,411.76 kg.} – {`1,500 + `33,500}
= `42,353 – `35,000 = `7,353 (F)
10. (i) Contribution = `375 - `175 = `200 per unit.
Fixed cost
Break even Sales Quantity = = ` 3,50,00,000 = 1,75,000 units
Contribution margin per unit ` 200
Cash Fixed Cost

Cash Break even Sales Qty= = `2,00,00,000 = 1,00,000 units.
Contribution margin per unit `200
Contribution/ unit ` 200

(ii) P/V ratio = 100 =  100 = 53.33%
Selling Pr ice / unit ` 375
(iii) No. of units that must be sold to earn an Income (EBIT) of ` 25,00,000
Fixed cost  Desired EBIT level 3,50,00,000  25,00,000
= = 1,87,500 units
Contribution margin per unit 200
(iv) After Tax Income (PAT) = `25,00,000
Tax rate = 40%
`25,00,000
Desired level of Profit before tax = 100 = `41,66,667
60
FixedCost  DesiredPr ofit
Estimate Sales Level =
P / Vratio
 FixedCost  DesiredPr ofit 

Or,   SellingPr ice per unit 
 Contributionper unit 
`3,50,00,000  ` 41,66,667
= = `7,34,42,091
53.33%
11. (a) Production Budget (in units)

(units) (units)
Expected sales 8,000 4,200
Add: Closing stock 1,000 2,100
Less: Opening stock (800) (1,600)
Units to be produced 8,200 4,700
(b) Material Purchase Budget
Material-X Material-Y Material-Z
(kg.) (kg.) (ltr.)
Materials required:
- Product-K 98,400 1,23,000 65,600
(8,200 units ×12 kg.) (8,200 units×15 kg.) (8,200 units× 8 ltr.)
- Product- H 70,500 28,200 65,800
(4,700 units ×15 kg.) (4,700 units × 6 kg.) (4,700 units×14ltr.)
Total 1,68,900 1,51,200 1,31,400
Add: Closing stock 30,000 18,000 7,500
Less: Opening stock (25,000) (30,000) (14,000)
Quantity to be 1,73,900 1,39,200 1,24,900
purchased
Rate `15 per kg. `16 per kg. `5 per ltr.
Purchase cost ` 26,08,500 ` 22,27,200 ` 6,24,500
(c) Direct Labour Budget
Unskilled Skilled
(hours) (hours)
For Product K 98,400 65,600
(8,200 units × 12 hours) (8,200 units × 8 hours)
For Product H 47,000 23,500
(4,700 units × 10 hours) (4,700 units × 5 hours)
Labour hours required 1,45,400 89,100
Rate ` 40 per hour ` 75 per hour
Wages to be paid ` 58,16,000 ` 66,82,500
12. (a) Difference between Cost Control and Cost Reduction

Cost Control Cost Reduction
1. Cost control aims at 1. Cost reduction is concerned with
maintaining the costs in reducing costs. It challenges all
accordance with the standards and endeavours to better
established standards. them continuously
2. Cost control seeks to attain 2. Cost reduction recognises no
lowest possible cost under condition as permanent, since a
existing conditions. change will result in lower cost.
3. In case of cost control, 3. In case of cost reduction, it is on
emphasis is on past and present and future.
present
4. Cost control is a preventive 4. Cost reduction is a corrective
function function. It operates even when an
efficient cost control system exists.
5. Cost control ends when targets 5. Cost reduction has no visible end.
are achieved.
(b) Accounting treatment of idle time wages & overtime wages in cost accounts:
Normal idle time is treated as a part of the cost of production. Thus, in the case of
direct workers, an allowance for normal idle time is built into the labour cost rates. In
the case of indirect workers, normal idle time is spread over all the products or jobs
through the process of absorption of factory overheads.
Under Cost Accounting, the overtime premium is treated as follows:
➢ If overtime is resorted to at the desire of the customer, then the overtime
premium may be charged to the job directly.
➢ If overtime is required to cope with general production program or for meeting
urgent orders, the overtime premium should be treated as overhead cost of
particular department or cost center which works overtime.
➢ Overtime worked on account of abnormal conditions should be charged to
costing Profit & Loss Account.
➢ If overtime is worked in a department due to the fault of another department the
overtime premium should be charged to the latter department.
(c) Cost classification based on variability
(a) Fixed Costs – These are the costs which are incurred for a period, and which,
within certain output and turnover limits, tend to be unaffected by fluctuations in
the levels of activity (output or turnover). They do not tend to increase or de -
crease with the changes in output. For example, rent, insurance of factory
building etc., remain the same for different levels of production.
(b) Variable Costs – These costs tend to vary with the volume of activity. Any
increase in the activity results in an increase in the variable cost and vice-versa.
For example, cost of direct labour, etc.
(c) Semi-variable Costs – These costs contain both fixed and variable components
and are thus partly affected by fluctuations in the level of activity. Examples of
semi variable costs are telephone bills, gas and electricity etc.
Cost classification based on controllability
(a) Controllable Costs - Cost that can be controlled, typically by a cost, profit or
investment centre manager is called controllable cost. Controllable costs
incurred in a particular responsibility centre can be influenced by the action of
the executive heading that responsibility centre. For example, direct costs
comprising direct labour, direct material, direct expenses and some of the
overheads are generally controllable by the shop level management.
(b) Uncontrollable Costs - Costs which cannot be influenced by the action of a
specified member of an undertaking are known as uncontrollable costs. For
example, expenditure incurred by, say, the tool room is controllable by the
foreman in-charge of that section but the share of the tool-room expenditure
which is apportioned to a machine shop is not to be controlled by the machine
shop foreman.
PART-II: FINANCIAL MANAGEMENT

QUESTIONS
Time Value of Money

1. Calculate if `10,00,000 is invested at interest rate of 12% per annum, what is the amount
after 3 years if the compounding of interest is done?
(i) Annually
(ii) Semi-annually
(iii) Quarterly
Ratio Analysis
2. From the following table of financial ratios of R. Textiles Limited, comment on various ratios
given at the end:
Ratios 2017 2018 Average of Textile
Industry
Liquidity Ratios
Current ratio 2.2 2.5 2.5
Quick ratio 1.5 2 1.5
Receivable turnover ratio 6 6 6
Inventory turnover 9 10 6
Receivables collection period 87 days 86 days 85 days
Operating profitability
Operating income –ROI 25% 22% 15%
Operating profit margin 19% 19% 10%
Financing decisions
Debt ratio 49.00% 48.00% 57%
Return
Return on equity 24% 25% 15%
Comment on the following aspect of R. Textiles Limited
(i) Liquidity
(ii) Operating profits
(iii) Financing
(iv) Return to the shareholders
Fund Flow Analysis

3. The following are the Balance Sheets of Gama Limited for the year ending March 31, 20X 8
and March 31, 20X9:
Balance Sheet as at March, 31
20X9 (`) 20X8 (`)
Capital and Liabilities
Share Capital 7,87,500 6,75,000
General Reserves 2,81,250 2,25,000
Capital Reserve (Profit on Sale of investment) 11,250 -
Profit & Loss Account 2,25,000 1,12,500
15% Debentures 2,25,000 3,37,500
Accrued Expenses 13,500 11,250
Creditors 2,81,250 1,80,000
Provision for Dividends 38,250 33,750
Provision for Taxation 85,500 78,750
Total 19,48,500 16,53,750
Assets
Fixed Assets 13,50,000 11,25,000
Less: Accumulated depreciation 2,81,250 2,25,000
Net Fixed Assets 10,68,750 9,00,000
Long-term Investments (at cost) 2,02,500 2,02,500
Stock (at cost) 3,03,750 2,25,000
Debtors (net of provision for doubtful debts of ` 2,75,625 2,53,125
45,000 and ` 56,250 respectively for 20X8 and 20X9
respectively)
Bills receivables 73,125 45,000
Prepaid Expenses 13,500 11,250
Miscellaneous Expenditure 11,250 16,875
19,48,500 16,53,750
Additional Information:
(i) During the year 20X8-X9, fixed assets with a net book value of ` 11,250 (accumulated
depreciation, ` 33,750) was sold for ` 9,000.
(ii) During the year 20X8-X9, Investments costing ` 90,000 were sold, and also
Investments costing ` 90,000 were purchased.
(iii) Debentures were retired at a Premium of 10%.
(iv) Tax of ` 61,875 was paid for 20X7-X8.
(v) During the year 20X8-X9, bad debts of ` 15,750 were written off against the provision
for Doubtful Debt account.
(vi) The proposed dividend for 20X7-X8 was paid in 20X8-X9.
Required:
Prepare a Funds Flow Statement (Statement of changes in Financial Position on working
capital basis) for the year ended March 31, 20X9.
Cost of Capital
4. As a financial analyst of a large electronics company, you are required to determine the
weighted average cost of capital of the company using (a) book value weights and (b)
market value weights. The following information is available for your perusal.
The Company’s present book value capital structure is:
(`)
Debentures (`100 per debenture) 8,00,000
Preference shares (`100 per share) 2,00,000
Equity shares (`10 per share) 10,00,000
20,00,000
All these securities are traded in the capital markets. Recent prices are:
Debentures, `110 per debenture, Preference shares, `120 per share, and Equity shares,
` 22 per share
Anticipated external financing opportunities are:
(i) ` 100 per debenture redeemable at par; 10 year maturity, 11 per cent coupon rate, 4
per cent flotation costs, sale price, ` 100
(ii) ` 100 preference share redeemable at par; 10 year maturity, 12 per cent dividend
rate, 5 per cent flotation costs, sale price, `100.
(iii) Equity shares: ` 2 per share flotation costs, sale price = ` 22.
In addition, the dividend expected on the equity share at the end of the year is ` 2 per
share, the anticipated growth rate in dividends is 7 per cent and the firm has the practice
of paying all its earnings in the form of dividends. The corporate tax rate is 35 per cent.
Capital Structure
5. Akash Limited provides you the following information:
(`)
Profit (EBIT) 2,80,000
Less: Interest on Debenture @ 10% (40,000)
EBT 2,40,000
Less Income Tax @ 50% (1,20,000)
1,20,000
No. of Equity Shares (` 10 each) 30,000
Earnings per share (EPS) 4
Price /EPS (PE) Ratio 10
The company has reserves and surplus of ` 7,00,000 and required ` 4,00,000 further for
modernisation. Return on Capital Employed (ROCE) is constant. Debt (Debt/ Debt +
Equity) Ratio higher than 40% will bring the P/E Ratio down to 8 and increase the interest
rate on additional debts to 12%. You are required to ascertain the probable price of the
share.
(i) If the additional capital are raised as debt; and
(ii) If the amount is raised by issuing equity shares at ruling market price.
Leverage
6. A Company had the following Balance Sheet as on March 31, 2019:
Equity and Liabilities (` in crore) Assets (` in crore)
Equity Share Capital Fixed Assets (Net) 250
(10 crore shares of ` 10 each) 100
Reserves and Surplus 20 Current Assets 150
15% Debentures 200
Current Liabilities 80
400 400
The additional information given is as under:
Fixed Costs per annum (excluding interest) ` 80 crores
Variable operating costs ratio 65%
Total Assets turnover ratio 2.5
Income-tax rate 40%
Required:
Calculate the following and comment:
(i) Earnings per share
(ii) Operating Leverage
(iii) Financial Leverage
(iv) Combined Leverage.
Capital Budgeting
7. BT Pathology Lab Ltd. is using an X-ray machines which reached at the end of their useful
lives. Following new X-ray machines are of two different brands with same features are
available for the purchase.
Maintenance Cost
Cost of Life of Rate of
Brand Year Year Year
Machine Machine Depreciation
1-5 6-10 11-15
XYZ `6,00,000 15 years ` 20,000 ` 28,000 ` 39,000 4%
ABC `4,50,000 10 years ` 31,000 ` 53,000 -- 6%
Residual Value of both of above machines shall be dropped by 1/3 of Purchase price in
the first year and thereafter shall be depreciated at the rate mentioned above.
Alternatively, the machine of Brand ABC can also be taken on rent to be returned back to
the owner after use on the following terms and conditions:
• Annual Rent shall be paid in the beginning of each year and for first year it shall be
` 1,02,000.
• Annual Rent for the subsequent 4 years shall be ` 1,02,500.
• Annual Rent for the final 5 years shall be ` 1,09,950.
• The Rent Agreement can be terminated by BT Labs by making a payment of
` 1,00,000 as penalty. This penalty would be reduced by ` 10,000 each year of the
period of rental agreement.
You are required to:
(a) Advise which brand of X-ray machine should be acquired assuming that the use of
machine shall be continued for a period of 20 years.
(b) State which of the option is most economical if machine is likely to be used for a
period of 5 years?
The cost of capital of BT Labs is 12%.
Working Capital Management

8. A company is considering its working capital investment and financial policies for the next
year. Estimated fixed assets and current liabilities for the next year are ` 2.60 crores and
` 2.34 crores respectively. Estimated Sales and EBIT depend on current assets
investment, particularly inventories and book-debts. The Financial Controller of the
company is examining the following alternative Working Capital Policies:
(` in crore)
Working Capital Policy Investment in Current Assets Estimated Sales EBIT
Conservative 4.50 12.30 1.23
Moderate 3.90 11.50 1.15
Aggressive 2.60 10.00 1.00
After evaluating the working capital policy, the Financial Controller has advised the
adoption of the moderate working capital policy. The company is now examining the use
of long-term and short-term borrowings for financing its assets. The company will use
` 2.50 crores of the equity funds. The corporate tax rate is 35%. The company is
considering the following debt alternatives.
(` in crore)
Financing Policy Short-term Debt Long-term Debt
Conservative 0.54 1.12
Moderate 1.00 0.66
Aggressive 1.50 0.16
Interest rate-Average 12% 16%
You are required to calculate the following:

(i) Working Capital Investment for each policy:
(a) Net Working Capital position
(b) Rate of Return
(c) Current ratio
(ii) Financing for each policy:
(a) Net Working Capital position.
(b) Rate of Return on Shareholders’ equity.
(c) Current ratio.
Management of Working Capital

9. A proforma cost sheet of a company provides the following particulars:
Amount per unit (`)
Raw materials cost 100.00
Direct labour cost 37.50
Overheads cost 75.00
Total cost 212.50
Profit 37.50
Selling Price 250.00
The Company keeps raw material in stock, on an average for one month; work-in-progress,
on an average for one week; and finished goods in stock, on an average for two weeks.
The credit allowed by suppliers is three weeks and company allows four weeks credit to its
debtors. The lag in payment of wages is one week and lag in payment of overhead
expenses is two weeks.
The Company sells one-fifth of the output against cash and maintains cash-in-hand and at
bank put together at `37,500.
Required:
Prepare a statement showing estimate of Working Capital needed to finance an activity
level of 1,30,000 units of production. Assume that production is carried on evenly
throughout the year, and wages and overheads accrue similarly. Work-in-progress stock
is 80% complete in all respects.
Miscellaneous
10. Write short notes on the following:
(a) Functions of Finance Manager.
(b) Inter relationship between investment, financing and dividend decisions.
(c) Debt securitisation
SUGGESTED HINTS/ANSWERS
1. Computation of future value

Principal (P0) = ` 10,00,000
Rate of interest (i) = 12% p.a.
Time period (n) = 3 years
Amount if compounding is done:

(i) Annually
Future Value = P(1+i)n
= `10,00,000 (1 + 0.12) 3
= `10,00,000 × 1.404928
= ` 14,04,928
(ii) Semi Annually
32
 12 
Future Value = `10,00,000  1  
 100  2 
= `10,00,000 (1 + 0.06) 6
= `10,00,000 × 1.418519
= ` 14,18,519
(iii) Quarterly
34
 12 
Future Value = `10,00,000  1  
 100  2 
= `10,00,000 (1 + 0.03) 12
= `10,00,000 × 1.425761
= `14,25,761
2.
Ratios Comment
Liquidity Current ratio has improved from last year and matching the
industry average.
Quick ratio also improved than last year and above the
industry average. This may happen due to reduction in
receivable collection period and quick inventory turnover.
However, this also indicates idleness of funds.
Overall it is reasonably good. All the liquidity ratios are
either better or same in both the year compare to the
Industry Average.
Operating Profits Operating Income-ROI reduced from last year but
Operating Profit Margin has been maintained. This may
happen due to variability of cost on turnover. However,
both the ratio are still higher than the industry average.
Financing The company has reduced its debt capital by 1% and

saved operating profit for equity shareholders. It also
signifies that dependency on debt compared to other
industry players (57%) is low.
Return to the R’s ROE is 24 per cent in 2017 and 25 per cent in 2018
shareholders compared to an industry average of 15 per cent. The ROE
is stable and improved over the last year.
3. Fund Flow Statement as at 31st March 20X9

(`)
A. Sources of Funds:
(i) Fund from Business Operations (W.N. 1) 3,16,125
(ii) Sale of Fixed Assets 9,000
(iii) Sale of Investments (` 90,000 + ` 11,250) 1,01,250
(iv) Issue of Shares (` 7,87,500 - ` 6,75,000) 1,12,500
Total sources 5,38,875
B. Application of Funds:
(i) Purchase of Fixed Assets 2,70,000
(ii) Purchase of Investments 90,000
(iii) Payment to Debenture holders {(` 3,37,500 – ` 2,25,000) × 110%} 1,23,750
(iv) Payment of Dividends 33,750
Total uses 5,17,500
Increase in Working Capital (A - B) 21,375
Working Notes (W.N.):
1. Computation of Funds from Business Operation
(`)
Profit and loss as on March 31, 20X9 2,25,000
Add: Depreciation 90,000
Loss on Sale of Asset 2,250
Misc. Expenditure written off 5,625
Transfer to Reserves 56,250
Premium on Redemption of debentures 11,250
Provision for Dividend 38,250
4,28,625
Less: Profit and loss as on March 31, 20X7 1,12,500
Fund from Operations 3,16,125
2. Accumulated Depreciation A/c
To Fixed Asset A/c 33,750 By Balance b/d 2,25,000
To Balance c/d 2,81,250 By P/L A/c (Prov. for 90,000
depreciation) (Bal. Fig.)
3,15,000 3,15,000
3. Fixed Assets A/c
To Balance b/d 11,25,000 By Acc. Depreciation A/c 33,750
To Bank (Purchase of Fixed Asset) (Bal. 2,70,000 By Cash 9,000
fig.)
By P/L (Loss on sale) 2,250
By Balance c/d 13,50,000
13,95,000 13,95,000
4. Statement of Changes in Working Capital
Change in Working
March 31, March 31, Capital
20X8 20X9
Increase Decrease
Current Assets
Stock 2,25,000 3,03,750 78,750 --
Debtors 2,53,125 2,75,625 22,500 --
Bills Receivables 45,000 73,125 28,125 --
Prepaid Expenses 11,250 13,500 2,250 --
5,34,375 6,66,000 -- --
Current Liabilities
Accrued Expenses 11,250 13,500 -- 2,250
Creditors 1,80,000 2,81,250 -- 1,01,250
Provision for Taxation 78,750 85,500 -- 6,750
2,70,000 3,80,250 -- --
Working Capital 2,64,375 2,85,750 -- --
Increase in Working Capital 21,375 - - 21,375
2,85,750 2,85,750 1,31,625 1,31,625
4. Determination of specific costs:

(RV  NP) (`100  `96)
Interest (1  t)  `11(1  0.35) 
N 10 years
(i) Cost Debt (Kd) = =
(RV  NP) (`100  `96)
2 2
` 7.15  ` 0.4
= = 0.077 or 7.70%
` 98
(RV  NP) (`100  `95)

PD  `12 
N 10 years
(ii) Cost of Preference Shares (K ) = =
p (RV  NP) (`100  `95)
2 2
` 12  ` 0.5
= = 0.1282 or 12.82%
` 97.5
D1 `2
(iii) Cost of Equity shares (K ) = G =  0.07 = 0.17 or 17%
e P0 ` 22  ` 2
I – Interest, t – Tax, RV- Redeemable value, NP- Net proceeds, N- No. of years, PD-
Preference dividend, D 1- Expected Dividend, P0- Price of share (net)
Using these specific costs, we can calculate WACC on the basis of book value and
market value weights as follows:
(a) Weighted Average Cost of Capital (K0) based on Book value weights
Source of capital Book value Weights Specific WACC (%)

(` ) cost (%)
Debentures 8,00,000 0.40 7.70 3.08
Preferences 2,00,000 0.10 12.82 1.28
shares
Equity shares 10,00,000 0.50 17.00 8.50
20,00,000 1.00 12.86
(b) Weighted Average Cost of Capital (K0) based on market value weights:
Source of capital Market Weights Specific WACC

value (` ) cost (%) (%)
Debentures 8,80,000 0.265 7.70 2.04
 `8,00,000 
  `110 
 `100 
Preferences shares 2,40,000 0.072 12.82 0.92
 `2,00,000 
  `120 
 `100 
Equity shares 22,00,000 0.663 17.00 11.27
 `10,00,000 
  `22 
 `10 
33,20,000 1.000 14.23
5. Ascertainment of probable price of shares of Akash limited
Plan-I Plan-II
If ` 4,00,000 If ` 4,00,000
Particulars is raised as is raised by
debt (`) issuing
equity shares
(`)
Earnings Before Interest and Tax (EBIT)
{20% of new capital i.e. 20% of (`14,00,000 + `4,00,000)} 3,60,000 3,60,000
(Refer working note1)
Less: Interest on old debentures
(40,000) (40,000)
(10% of `4,00,000)
Less: Interest on new debt
(48,000) --
(12% of `4,00,000)
Earnings Before Tax (EBT) 2,72,000 3,20,000
Less: Tax @ 50% (1,36,000) (1,60,000)
Earnings for equity shareholders (EAT) 1,36,000 1,60,000
No. of Equity Shares (refer working note 2) 30,000 40,000
Earnings per Share (EPS) ` 4.53 ` 4.00
Price/ Earnings (P/E) Ratio (refer working note 3) 8 10
Probable Price Per Share (PE Ratio × EPS) ` 36.24 ` 40
Working Notes:
1. Calculation of existing Return of Capital Employed (ROCE):
(`)
Equity Share capital (30,000 shares × `10) 3,00,000

 100 
10% Debentures  `40,000   4,00,000
 10 
Reserves and Surplus 7,00,000
Total Capital Employed 14,00,000
Earnings before interest and tax (EBIT) (given) 2,80,000
`2,80,000
ROCE =  100 20%
`14,00,000
2. Number of Equity Shares to be issued in Plan-II:

` 4,00,000
=  10,000shares
` 40
Thus, after the issue total number of shares = 30,000+ 10,000 = 40,000 shares
3. Debt/Equity Ratio if ` 4,00,000 is raised as debt:
`8,00,000
=  100 = 44.44%
`18,00,000
As the debt equity ratio is more than 40% the P/E ratio will be brought down to
8 in Plan-I
6. Total Assets = ` 400 crores
Asset Turnover Ratio = 2.5
Hence, Total Sales = 400  2.5 = ` 1,000 crores
Computation of Profits after Tax (PAT)
(` in crore)
Sales 1,000
Less: Variable operating cost (65% of `1,000 crore) (650)
Contribution 350
Less: Fixed cost (other than Interest) (80)
EBIT 270
Less: Interest on debentures (15%  `200 crore) (30)
EBT 240
Less: Tax 40% (96)
EAT (earnings available to equity share holders) 144
(i) Earnings per share (EPS)

` 144 crores
 EPS  = ` 14.40
10 crore equity shares
(ii) Operating Leverage
Contribution 350
Operating leverage =  = 1.296
EBIT 270
It indicates sensitivity of earnings before interest and tax (EBIT) to change in sales at
a particular level.
(iii) Financial Leverage
EBIT 270
Financial Leverage = = = 1.125
EBT 240
The financial leverage is very comfortable since the debt service obligation is small
vis-à-vis EBIT.
(iv) Combined Leverage
Contribution EBIT
Combined Leverage = 
EBIT EBT
Or, Operating Leverage × Financial Leverage = 1.296  1.125 = 1.458
The combined leverage studies the choice of fixed cost in cost structure and choice
of debt in capital structure. It studies how sensitive the change in EPS is vis -à-vis
change in sales.
7. Since the life span of each machine is different and time span exceeds the useful lives of
each model, we shall use Equivalent Annual Cost method to decide which brand should
be chosen.
(i) If machine is used for 20 years
Present Value (PV) of cost if machine of Brand XYZ is purchased
Period Cash Outflow (`) PVF@12% Present Value
0 6,00,000 1.000 6,00,000
1-5 20,000 3.605 72,100
6-10 28,000 2.045 57,260
11-15 39,000 1.161 45,279
15 (64,000) 0.183 (11,712)
7,62,927
PVAF for 1-15 years 6.811

`7,62,927
Equivalent Annual Cost = = ` 1,12,014
6.811
Present Value (PV) of cost if machine of Brand ABC is purchased
0 4,50,000 1.000 4,50,000
1-5 31,000 3.605 1,11,755
6 -10 53,000 2.045 1,08,385
10 (57,000) 0.322 (18,354)
6,51,786
`6,51,786
5.65
Present Value (PV) of cost if machine of Brand ABC is taken on Rent
0 1,02,000 1.000 1,02,000
1-4 1,02,500 3.037 3,11,293
5-9 1,09,950 2.291 2,51,895
6,65,188
`6,65,188
5.65
Decision: Since Equivalent Annual Cash Outflow is least in case of purchase of
Machine of brand XYZ the same should be purchased.
(ii) If machine is used for 5 years
(a) Scrap Value of Machine of Brand XYZ
= ` 6,00,000 – ` 2,00,000 – ` 6,00,000 × 0.04 × 4 = ` 3,04,000
(b) Scrap Value of Machine of Brand ABC
= ` 4,50,000 – ` 1,50,000 – ` 4,50,000 × 0.06 × 4 = ` 1,92,000
Present Value (PV) of cost if machine of Brand XYZ is purchased

0 6,00,000 1.000 6,00,000
1-5 20,000 3.605 72,100
5 (3,04,000) 0.567 (1,72,368)
4,99,732
Present Value (PV) of cost if machine of Brand ABC is purchased
0 4,50,000 1.000 4,50,000
1-5 31,000 3.605 1,11,755
5 (1,92,000) 0.567 (1,08,864)
4,52,891
Present Value (PV) of cost if machine of Brand ABC is taken on Rent
0 1,02,000 1.000 1,02,000
1-4 1,02,500 3.037 3,11,293
5 50,000 0.567 28,350
4,41,643
Decision: Since Cash Outflow is least in case of lease of Machine of brand ABC the
same should be taken on rent.
8. (i) Statement showing Working Capital Investment for each policy
(` in crore)
Working Capital Policy
Conservative Moderate Aggressive
Current Assets: (i) 4.50 3.90 2.60
Fixed Assets: (ii) 2.60 2.60 2.60
Total Assets: (iii) 7.10 6.50 5.20
Current liabilities: (iv) 2.34 2.34 2.34
Net Worth: (v) = (iii) - (iv) 4.76 4.16 2.86
Total liabilities: (iv) + (v) 7.10 6.50 5.20
Estimated Sales: (vi) 12.30 11.50 10.00
EBIT: (vii) 1.23 1.15 1.00

(a) Net working capital position: (i) - (iv) 2.16 1.56 0.26
(b) Rate of return: (vii) /(iii) 17.32% 17.69% 19.23%
(c) Current ratio: (i)/ (iv) 1.92 1.67 1.11
(ii) Statement Showing Effect of Alternative Financing Policy
(` in crore)
Financing Policy Conservative Moderate Aggressive
Current Assets (i) 3.90 3.90 3.90
Fixed Assets (ii) 2.60 2.60 2.60
Total Assets (iii) 6.50 6.50 6.50
Current Liabilities (iv) 2.34 2.34 2.34
Short term Debt (v) 0.54 1.00 1.50
Total current liabilities
2.88 3.34 3.84
(vi) = (iv) + (v)
Long term Debt (vii) 1.12 0.66 0.16
Equity Capital (viii) 2.50 2.50 2.50
Total liabilities (ix) = (vi)+(vii)+(viii) 6.50 6.50 6.50
Forecasted Sales 11.50 11.50 11.50
EBIT (x) 1.15 1.15 1.15
Less: Interest on short-term debt 0.06 0.12 0.18
(12% of `0.54) (12% of ` 1) (12% of ` 1.5)
Interest on long term debt 0.18 0.11 0.03
(16% of `1.12) (16% of `0.66) (16% of `0.16)
Earnings before tax (EBT) (xi) 0.91 0.92 0.94
Taxes @ 35% (xii) 0.32 0.32 0.33
Earnings after tax: (xiii) = (xi) – (xii) 0.59 0.60 0.61
(a) Net Working Capital
Position: (i) - [(iv) + (v)] 1.02 0.56 0.06
(b) Rate of return on
shareholders Equity capital: 23.6% 24.0% 24.4%
(xiii)/ (viii)
(c) Current Ratio (i) / (vi) 1.35 1.17 1.02
9. Statement showing Estimate of Working Capital Needs

(Amount in `) (Amount in `)
A. Current Assets
(i) Inventories:
Raw material (1 month or 4 weeks)
 1,30,000units  `100 
  4 weeks 
 52 weeks  10,00,000
WIP Inventory (1 week)
 1,30,000units  `212.50 
  1week  × 0.8 4,25,000
 52 weeks 
Finished goods inventory (2 weeks)
 1,30,000units  `212.50  24,87,500
  2 weeks  10,62,500
 52 weeks 
(ii) Receivables (Debtors) (4 weeks)
 1,30,000units  `212.50  4
  4 weeks   17,00,000
 52 weeks  5th
(iii) Cash and bank balance 37,500
Total Current Assets 42,25,000
B. Current Liabilities:
(i) Payables (Creditors) for materials (3 weeks)
 1,30,000units  `100  7,50,000
  3 weeks 
 52 weeks 
(ii) Outstanding wages (1 week)
 1,30,000units  `37.50  93,750
  1week 
 52 weeks 
(iii) Outstanding overheads (2 weeks)
 1,30,000units  `75 
  2 weeks 
 52 weeks  3,75,000
Total Current Liabilities 12,18,750

Net Working Capital Needs (A – B) 30,06,250
10. (a) Functions of Finance Manager

The Finance Manager’s main objective is to manage funds in such a way so as to
ensure their optimum utilisation and their procurement in a manner that the risk, cost
and control considerations are properly balanced in a given situation. To achieve
these objectives the Finance Manager performs the following functions:
(i) Estimating the requirement of Funds: Both for long-term purposes i.e.
investment in fixed assets and for short-term i.e. for working capital. Forecasting
the requirements of funds involves the use of techniques of budgetary control
and long-range planning.
(ii) Decision regarding Capital Structure: Once the requirement of funds has been
estimated, a decision regarding various sources from which these funds would
be raised has to be taken. A proper balance has to be made between the loan
funds and own funds. He has to ensure that he raises sufficient long term funds
to finance fixed assets and other long term investments and to provide for the
needs of working capital.
(iii) Investment Decision: The investment of funds, in a project has to be made after
careful assessment of various projects through capital budgeting. Assets
management policies are to be laid down regarding various items of current
assets. For e.g. receivable in coordination with sales manager, inventory in
coordination with production manager.
(iv) Dividend decision: The finance manager is concerned with the decision as to
how much to retain and what portion to pay as dividend depending on the
company’s policy. Trend of earnings, trend of share market prices, requirement
of funds for future growth, cash flow situation etc., are to be considered.
(v) Evaluating financial performance: A finance manager has to constantly review
the financial performance of the various units of organisation generally in terms
of ROI Such a review helps the management in seeing how the funds have been
utilised in various divisions and what can be done to improve it.
(vi) Financial negotiation: The finance manager plays a very important role in
carrying out negotiations with the financial institutions, banks and public
depositors for raising of funds on favourable terms.
(vii) Cash management: The finance manager lays down the cash management and
cash disbursement policies with a view to supply adequate funds to all units of
organisation and to ensure that there is no excessive cash.
(viii) Keeping touch with stock exchange: Finance manager is required to analyse
major trends in stock market and their impact on the price of the company share.
(b) Inter-relationship between Investment, Financing and Dividend Decisions

The finance functions are divided into three major decisions, viz., investment,
financing and dividend decisions. It is correct to say that these decisions are inter -
related because the underlying objective of these three decisions is the same, i.e.
maximisation of shareholders’ wealth. Since investment, financing and dividend
decisions are all interrelated, one has to consider the joint impact of these decisions
on the market price of the company’s shares and these decisions should also be
solved jointly. The decision to invest in a new project needs the finance for the
investment. The financing decision, in turn, is influenced by and influences dividend
decision because retained earnings used in internal financing deprive shareholders
of their dividends. An efficient financial management can ensure optimal joint
decisions. This is possible by evaluating each decision in relation to its effect on the
shareholders’ wealth.
The above three decisions are briefly examined below in the light of their inter -
relationship and to see how they can help in maximising the shareholders’ wealth i.e.
market price of the company’s shares.
Investment decision: The investment of long term funds is made after a careful
assessment of the various projects through capital budgeting and uncertainty
analysis. However, only that investment proposal is to be accepted which is expected
to yield at least so much return as is adequate to meet its cost of financing. This have
an influence on the profitability of the company and ultimately on its wealth.
Financing decision: Funds can be raised from various sources. Each source of funds
involves different issues. The finance manager has to maintain a proper balance
between long-term and short-term funds. With the total volume of long-term funds, he
has to ensure a proper mix of loan funds and owner’s funds. The optimum financing
mix will increase return to equity shareholders and thus maximise their wealth.
Dividend decision: The finance manager is also concerned with the decision to pay
or declare dividend. He assists the top management in deciding as to what portion of
the profit should be paid to the shareholders by way of dividends and what portion
should be retained in the business. An optimal dividend pay-out ratio maximises
shareholders’ wealth.
The above discussion makes it clear that investment, financing and dividend
decisions are interrelated and are to be taken jointly keeping in view their joint effect
on the shareholders’ wealth.
(c) Debt Securitisation: It is a method of recycling of funds. It is especially beneficial to
financial intermediaries to support the lending volumes. Assets generating steady
cash flows are packaged together and against this asset pool, market securities can
be issued, e.g. housing finance, auto loans, and credit card receivables.
Process of Debt Securitisation

(i) The origination function – A borrower seeks a loan from a finance company,
bank. The credit worthiness of borrower is evaluated and contract is entered into
with repayment schedule structured over the life of the loan.
(ii) The pooling function – Similar loans on receivables are clubbed together to
create an underlying pool of assets. The pool is transferred in favour of Special
purpose Vehicle (SPV), which acts as a trustee for investors.
(iii) The securitisation function – SPV will structure and issue securities on the basis
of asset pool. The securities carry a coupon and expected maturity which can
be asset-based/mortgage based. These are generally sold to investors through
merchant bankers. Investors are – pension funds, mutual funds, insurance
funds.
PAPER 4: TAXATION
SECTION A: INCOME TAX
PART I: STATUTORY UPDATE

The Income-tax law, as amended by the Finance Act, 2018, including significant notifications/
circulars issued upto 31 st October, 2018 are applicable for May, 2019 examination. The
relevant assessment year for May, 2019 examination is A.Y.2019-20. The July 2018 edition of
the Study Material is based on the provisions of income-tax law as amended by the Finance
Act, 2018 and significant notifications/circulars issued upto 30 th April, 2018.
The significant notifications/circulars made between 1.4.2018 and 31.10.2018 which are
relevant for May, 2019 examination are given hereunder.
Chapter 3: Incomes which do not form part of Total Income
Computation of admissible deduction u/s 10AA of the Income-tax Act, 1961 [Circular No.
4/2018, Dated 14-8-2018]
As per the provisions of section 10AA(7), the profits derived from export of articles or things or
services (including computer software) shall be the amount which bears to the profits of the
business of the undertaking, being the Unit, the same proportion as the export turnover in
respect of such articles or things or services bears to the total turnover of the business carried
on by the undertaking.
Further as per clause (i) to Explanation 1 to section 10AA, "export turnover" means the
consideration in respect of export by the undertaking, being the Unit of articles or things or
services received in, or brought into, India by the assessee, but does not include freight,
telecommunication charges or insurance attributable to the delivery of the articles or things
outside India or expenses, if any, incurred in foreign exchange in rendering of services
(including computer software) outside India.
The issue of whether freight, telecommunication charges and insurance expenses are to be
excluded from both "export turnover"' and "total turnover' while working out deduction
admissible under section 10AA on the ground that they are attributable to delivery of articles
or things outside India has been highly contentious. Similarly, the issue whether charges for
rendering services outside India are to be excluded both from "export turnover" and "total
turnover" while computing deduction admissible under section 10AA on the ground that such
charges are relatable towards expenses incurred in convertible foreign exchange in rendering
services outside India has also been highly contentious.
The controversy has been finally settled by the Hon'ble Supreme Court vide its judgment
dated 24.4.2018 in the case of Commissioner of Income Tax, Central-III Vs. M/s HCL
Technologies Ltd. (CA No. 8489-8490 of 2013, NJRS Citation 2018-LL-0424-40), in relation to
section 10A.
The issue had been examined by CBDT and it is clarified, in line with the above decision of
the Supreme Court, that freight, telecommunication charges and insurance expenses are
to be excluded both from "export turnover" and "total turnover', while working out
deduction admissible under section 10AA to the extent they are attributable to the
delivery of articles or things outside India.
Similarly, expenses incurred in foreign exchange for rendering services outside India are
to be excluded from both "export turnover" and "total turnover" while computing
deduction admissible under section 10AA.
Note: Though this CBDT Circular is issued in relation to erstwhile section 10A, the same is
also relevant in the context of section 10AA. Accordingly, the reference to section 10A in the
Circular and the relevant sub-section and Explanation number thereto have been modified and
given with reference to section 10AA and the corresponding sub-sections, Explanation number
and clause of Explanation.
Chapter 9: Advance Tax and Tax Deduction at Source
No tax is required to be deducted at source on interest payable on “Power Finance

Corporation Limited 54EC Capital Gains Bond” and “Indian Railway Finance
Corporation Limited 54EC Capital Gains Bond” – [Notification No. 27 & 28/2018, dated
18-06-2018]
Section 193 (Interest on securities) provides that the person responsible for paying to a
resident any income by way of interest on securities shall, at the time of credit of such income
to the account of the payee or at the time of payment thereof in cash or by issue of a cheque
or draft or by any other mode, whichever is earlier, deduct income-tax @ 10%, being the rates
in force on the amount of the interest payable.
As per clause (iib) of the proviso to section 193, no tax is required to be deducted at source
from any interest payable on such debentures, issued by any institution or authority, or any
public sector company, or any co-operative society (including a co-operative land mortgage
bank or a co-operative land development bank), as the Central Government may, by
notification in the Official Gazette, specify in this behalf.
Accordingly, the Central Government has, vide this notification, specified -
(i) “Power Finance Corporation Limited 54EC Capital Gains Bond” issued by Power Finance
Corporation Limited {PFCL} and
(ii) “Indian Railway Finance Corporation Limited 54EC Capital Gains Bond” issued by Indian
Railway Finance Corporation Limited {IRFCL}
PAPER – 4: TAXATION 3
The benefit of this exemption would, however, be admissible in the case of transfer of such
bonds by endorsement or delivery, only if the transferee informs PFCL/IRFCL by registered
post within a period of sixty days of such transfer.
PART II: QUESTIONS AND ANSWERS
OBJECTIVE TYPE QUESTIONS
I. Mr. Sumit is an Indian citizen and a member of the crew of an America bound Indian ship
engaged in carriage of freight in international traffic departing from Kochi on 25 th April,
2018. From the following details for the P.Y. 2018-19, determine the residential status of
Mr. Sumit for A.Y. 2019-20, assuming that his stay in India in the last 4 previous years
preceding P.Y. 2018-19 is 365 days and last seven previous years preceding P.Y.
2018-19 is 730 days:
Date entered in the Continuous Discharge Certificate in respect of joining the ship by Mr.
Sumit: 25th April, 2018
Date entered in the Continuous Discharge Certificate in respect of signing off the ship by
Mr. Sumit: 24th October, 2018
Mr. Sumit has been filing his income tax return in India as a Resident for previous 2
years.
What is his residential status for A.Y. 2019-20:
(a) Resident and ordinarily resident
(b) Resident but not-ordinarily resident
(c) Non-resident
(d) Non-resident till 24.10.2018 and resident till 31.03.2019
II. Aashish earns the following income during the P.Y. 2018-19:
• Interest on U.K. Development Bonds (1/4th being received in India): `4,00,000
• Capital gain on sale of a building in India but received in Holland: ` 6,00,000
If Aashish is a resident but not ordinarily resident in India, then what will be amount of
income chargeable to tax in India for A.Y. 2019-20?
(a) ` 7,00,000
(b) ` 10,00,000
(c) ` 6,00,000
(d) ` 1,00,000
III. Mr. Anay (aged 25) has agricultural income of ` 2,10,000 and business income of
` 2,35,000. Which of the following statement is correct?
(a) Agricultural income always has to be aggregated with business income for rate
purposes
(b) No aggregation is required since business income which constitutes his total
income, is less than basic exemption limit
(c) No aggregation is required since agricultural income is less than basic exemption
limit
(d) Agricultural income is exempt under section 10(1) but the same has to be
aggregated with business income, since it exceeds ` 5,000
IV. Miss Riya has started working in a reputed company. This is her first job. She earned
total income of `8 Lakhs in P.Y. 2018-19. While filing her return of income she had a
doubt with respect to deduction of transport allowance. Her father advised her that she
cannot claim deduction of transport allowance while her friend told that maximum
deduction of `1600 p.m. in respect of the said allowance can be claimed. According to
you, what is the correct treatment for the same?
(a) Transport allowance upto a maximum `1600 per month can be claimed.
(b) Transport allowance upto a maximum `800 per month can be claimed.
(c) No separate deduction for transport allowance is allowed. However, a standard
deduction of ` 40,000 is allowed to salaried assessees.
(d) Deduction of transport allowance is allowed without any monetary limit.
V. In respect of loss from house property, which of the following statements are correct?
(a) While computing income from any house property, the maximum interest deduction
allowable under section 24 is ` 2 lakhs
(b) Loss from house property relating to a particular year can be set-off against income
under any other head during that year only to the extent of ` 2 lakhs
(c) The loss in excess of ` 2 lakh, which is not set-off during the year, can be carried
forward for set-off against any head of income in the succeeding year(s)
(d) All the above
VI. M/s ABC, an eligible assessee, following mercantile system of accounting, carrying on
eligible business under section 44AD provides the following details:
♦ Total turnover for the financial year 2018-19 is ` 130 lakh
♦ Out of the above:
• ` 25 lakh received by A/c payee cheque during the financial year 2018-19;
• ` 50 lakh received by cash during the financial year 2018-19;
• ` 25 lakh received by A/c payee bank draft before the due date of filing of
return;
• ` 30 lakh not received till due date of filing of return.
Compute the amount of deemed profits of M/s ABC under section 44AD(1) for A.Y.
2019-20.
(a) ` 10.4 lakh
(b) ` 7.0 lakh
(c) ` 5.5 lakh
(d) ` 9.4 lakh
VII. Ram owns 500, 15% debentures of Reliance Industries Ltd. of ` 500 each. Annual
interest of ` 37,500 was declared on these debentures for P.Y. 2018-19. He transfers
interest income to his friend Shyam, without transferring the ownership of these
debentures. While filing return of income for A.Y. 2019-20, Shyam showed ` 37,500 as
his income from debentures. As tax advisor of Shyam, do you agree with the tax
treatment done by Shyam in his return of income?
(a) Yes, since interest income was transferred to Shyam therefore, after transfer it
becomes his income.
(b) No, since Ram has not transferred debentures to Shyam, interest income on the
debentures is not taxable income of Shyam.
(c) Yes, if debentures are not transferred, interest income on debentures can be
declared by anyone, Ram or Shyam, as taxable income depending upon their
discretion.
(d) No, since Shyam should have shown the income as interest income received from
Mr. Ram and not as interest income earned on debentures.
VIII. Mr. Rajan incurred loss of ` 5.3 lakh in the P.Y.2018-19 in toy business. Against which
of the following income earned during the same year, can he set-off such loss?
(a) profit of ` 2 lakh from wholesale cloth business
(b) speculative business income of ` 80,000
(c) long-term capital gains of ` 1.20 lakhs on sale of land
(d) All of the above
IX. Mr. Ajay is a recently qualified doctor. He joined a reputed hospital in Delhi on
01.01.2019. He earned total income of ` 3,40,000 till 31.03.2019. His employer advised
him to claim rebate u/s 87A while filing return of income for A.Y. 2019-20. He approached
his father to enquire regarding what is rebate u/s 87A of the Act. His father told him:
(i) An individual who is resident in India and whose total income does not exceed
` 3,50,000 is entitled to claim rebate under section 87A.
(ii) An individual who is resident in India and whose total income does not exceed
` 5,00,000 is entitled to claim rebate under section 87A.
(iii) Maximum rebate allowable under section 87A is ` 5,000.
(iv) Rebate under section 87A is available in the form of exemption from total income.
(v) Maximum rebate allowable under section 87A is ` 2,500.
(vi) Rebate under section 87A is available in the form of deduction from tax liability.
As a tax expert, do you agree with the explanation given by Mr. Ajay’s father? Choose
the correct option from the following:
(a) (ii), (iii), (vi)
(b) (i), (v), (vi)
(c) (ii), (iii), (iv)
(d) (i), (iv), (v)
X. Mr. P is a professional who is responsible for paying a sum of ` 2,00,000 as rent for use
of building to Mr. Harshit for the month of February, 2019. The gross receipts of Mr. P are
as under:
From 01.04.2017 to 31.03.2018: ` 55,00,000
From 01.04.2018 to 28.02.2019: ` 45,00,000
Find out whether Mr. P is responsible for deducting any tax at source from the rent of
` 2,00,000 payable to Mr. Harshit.
(a) Tax at source is required to be deducted u/s 194-I at the rate of 10%.
(b) Tax at source is required to be deducted u/s 194-IB at the rate of 5%.
(c) Tax at source is required to be deducted u/s 194-IB at the rate of 10%.
(d) No tax is required to be deducted at source.
DESCRIPTIVE QUESTIONS
1. Determine the residential status of Ms. Nicole Kidman, an Australian actress, for the A.Y.
2019-20, from the following information about her stay in India contained in her passport.
F.Y. From To F.Y. From To
2018-19 May 3 rd August 12th 2013-14 May 3 rd August 12th
2017-18 July 23rd August 11h 2012-13 May 3rd August 12th
2016-17 February 9th March 26th 2011-12 May 3rd August 12th
2015-16 September 8th March 26th 2010-11 May 3rd August 12th
2014-15 May 17th September 30th - - -
2. Mr. Rana, a resident and ordinarily resident aged 42 years, manufactures rubber from the
latex processed from rubber plants grown in Kerala. Thereafter, he sold the rubber for
` 47 lakhs. The cost of growing rubber plants was ` 25 lakhs and the cost of
manufacturing rubber was ` 7 lakhs. He has no other income during the previous year
2018-19. Compute his tax liability for the Assessment Year 2019-20.
3. Ms. Aarohi is the HR manager in Shipra limited. She gives you the following particulars:
Basic Salary ` 70,000 p.m.
Dearness Allowance ` 24,000 p.m. (30% of which forms part of retirement benefits)
Bonus ` 21,000 p.m.
Her employer has provided her with an accommodation on 1st April 2018 at a
concessional rent. The house was taken on lease by Shipra Ltd. for ` 12,000 p.m.
Ms. Aarohi occupied the house from 1 st November, 2018, ` 4,800 p.m. is recovered from
the salary of Ms. Aarohi.
The employer gave her a gift voucher of ` 10,000 on her birthday. She contributes 18%
of her salary (Basic Pay plus DA) towards recognised provident fund and the company
contributes the same amount.
The company pays medical insurance premium to effect insurance on the health of
Ms. Aarohi ` 20,000.
Motor car owned by the employer (cubic capacity of engine exceeds 1.6 litres) provided
to Ms. Aarohi from 1 st November, 2018 which is used for both official and personal
purposes. Repair and running expenses of ` 70,000 were fully met by the company. The
motor car was self-driven by the employee.
Compute the income chargeable to tax under the head "Salaries" in the hands of
Ms. Aarohi for the Assessment Year 2019-20.
4. Shraddha has two flats in Mumbai, both of which are self-occupied. The particulars of
these are given below:
(Value in `)
Flat at Flat at Navi
Particulars
Goregaon Mumbai
Municipal Valuation per annum 1,40,000 1,35,000
Fair Rent per annum 1,60,000 1,80,000
Standard rent per annum 1,40,000 1,90,000

Date of completion of construction 1-02-2012 24-08-2006
Municipal taxes payable during the year (paid for Flat at 10% 12%
Navi Mumbai only)
Interest on money borrowed for repair of property during - 72,000
current year
Compute Shraddha's income from house property for the Assessment Year 2019-20.
Also, suggest which flat should be opted by Shraddha to be assessed as self-occupied
so that her tax liability is minimum.
5. Mr. Jai Prakash commenced the business of operating goods vehicles on 1.4.2018. He
purchased the following vehicles during the P.Y.2018-19. Compute his income under
section 44AE for A.Y.2019-20.
Gross Vehicle Weight Number Date of purchase
(in kilograms)
(1) 8,500 3 11.05.2018
(2) 9,500 1 16.03.2019
(3) 10,000 1 21.09.2018
(4) 11,500 2 12.01.2019
(5) 15,000 1 21.07.2018
(6) 15,000 2 23.01.2019
Would your answer change if the goods vehicles purchased in January, 2019 were put to
use only in July, 2019?
6. Mr. Pratap, a proprietor has transferred his unit RS to Mr. Raj by way of Slump Sale on
December 7, 2018. The summarised Balance Sheet of Mr. Pratap as on that date is given
below:
(` In lacs) (` In lacs)
Own Capital 1,850 Fixed Assets:
Accumulated P & L balance 870 Unit PT 250
Liabilities: Unit QL 170
Unit PT 190 Unit RS 950
Unit QL 260 Other Assets:
Unit RS 340 Unit PT 790
Unit QL 860
Unit RS 490
Total 3,510 Total 3,510
Other information:
(i) Slump sale consideration on transfer of Unit RS was ` 1540 lacs.
(ii) Fixed Assets of Unit RS includes land which was purchased at ` 90 lacs in the year
2008 and was revalued at ` 180 lacs.
(iii) Other fixed assets are reflected at ` 770 lacs, (i.e., ` 950 lacs less value of land)
which represents written down value of those assets as per books. The written
down value of these assets is ` 630 lacs as per Income-tax Act, 1961.
(iv) Unit RS was set up by Mr. Pratap in December, 2006.
Compute the Capital Gains arising in the hands of Mr. Pratap from slump sale of Unit RS
for Assessment year 2019-20.
Note: Cost Inflation Indices for the financial year 2006-07 and financial year 2018-19 are
122 and 280, respectively.
7. Mr. Suraj sold a house to his friend Mr. Ganesh on 18 th September, 2018 for a
consideration of ` 42,00,000. On the date of registration stamp duty value of the said
property is ` 45,00,000. However, on the date of agreement stamp duty value of the said
property was ` 44,00,000. Mr. Ganesh had paid 10% of the value of the property by way
of A/c payee cheque at the time of agreement. Assume value of land is 70% of the total
value of the property.
What are the tax implications in the hands of Mr. Suraj and Mr. Ganesh for the
assessment year 2019-20? Mr. Suraj had purchased the land on 19 th February, 2013 for
` 9,20,000 and completed the construction of house on 18 th January, 2017 for
` 15,50,000.
Cost Inflation Index: F.Y. 2012-13 – 200; F.Y. 2016-17 – 264; F.Y. 2018-19 - 280.
8. On 10th April, 2018, Mr. Mayur made a gift of ` 4,45,000 to his handicapped son, Master
Tanmay aged 10 years. He deposited such amount in a fixed deposit account in a
Nationalised bank. The bank credited a sum of ` 42,500 as interest on fixed deposit on
31st March, 2019.
Mayur's father gifted 10,000 unlisted equity shares of an Indian company to Master
Tejas, another son of Mr. Mayur (Date of birth 19th June, 2011) in September 2011 which
were purchased by him on 18th December, 2004 for ` 95,000. Tejas received a dividend
of ` 10,000 on these shares in October 2018. He sold these shares on 1st December,
2018 for ` 4,80,000 and deposited ` 3,10,000 in a company at 14% interest per annum.
Cost Inflation Index
Financial Year Cost Inflation Index
2004-05 113
2011-12 184
2018-19 280
Mr. Mayur has a taxable income of ` 4,50,000 from his profession during the financial
year 2018-19. Compute his Gross Total Income for the A.Y. 2019-20.
9. Compute the gross total income of Mr. Avinash and show the items eligible for carry
forward and the assessment years upto which such losses can be carry forward from the
following information furnished by him for the year ended 31-03-2019:
Loss from speculative business MNO 12,000
Income from speculative business BPO 25,000
Loss from specified business covered under section 35AD 45,000
Income from salary (computed) 4,18,000
Loss from house property 2,20,000
Income from trading business 2,80,000
Income from owning and maintaining race horses 8,000
Long-term capital gain from sale of urban land 2,05,000
Long-term capital loss on sale of equity shares (STT not paid) 85,000
Long-term capital loss on sale of listed equity shares in recognized 1,10,000
stock exchange (STT paid at the time of acquisition and sale of
shares)
Following are the brought forward losses:
(1) Losses from owning and maintaining of race horses pertaining to A.Y. 2017-18
` 12,000.
(2) Brought forward loss from speculative business MNO 18,000 relating to A.Y. 2016-17.
(3) Brought forward loss from trading business of ` 12,000 relating to A.Y. 2015-16.
Assume Mr. Avinash has furnished his return of income on or before the due date
specified under section 139(1) in all the above previous years.
10. Mr. Darshan aged 61 years, working with G Ltd., submits the following particulars of
investments and payments made by him during the previous year 2018-19:
- Deposit of ` 1,50,000 in public provident fund
- Payment of life insurance premium of ` 62,000 on the policy taken on 01.4.2017 to
insure his life (Sum assured – ` 3,00,000).
- Deposit of ` 55,000 in a five year term deposit with bank.
- Contributed ` 1,95,000, being 15% of his salary (basic salary plus dearness
allowance, which forms part of retirement benefits) to the NPS of the Central
Government. A matching contribution was made by G Ltd.
- On 1.4.2018, mediclaim premium of ` 1,08,000 and ` 80,000 paid as lumpsum to
insure his and his wife (aged 58 years) health, respectively for four years medical
insurance and incurred ` 46,000 towards medical expenditure of his father, aged 90
years, not dependent on him. No insurance policy taken for his father.
- He spent ` 6,000 for the preventive health-check up of his wife.
- He has incurred an expenditure of ` 90,000 for the medical treatment of his mother,
being a person with severe disability.
His income comprises of income from salary of ` 18,50,000 and interest on fixed
deposits of ` 75,000.
Compute the deduction available to Mr. Darshan under Chapter VI-A for A.Y.2019-20.
Would your answer be different, if Mr. Darshan contributed ` 1,30,000 (being, 10% of his
salary) towards NPS of the Central Government?
11. Mr. Krishan, aged 58 years, a resident individual and practicing Chartered Accountant,
furnishes you the receipts and payments account for the financial year 2018-19.
Receipts and Payments Account
Receipts ` Payments `
Opening Balance Staff salary, bonus and stipend 17,50,000
(01-04-2018) to articled clerks
Cash & Bank 80,000 Other general and administrative 22,00,000
expenses
Fee from professional 49,60,000 Office rent 1,48,000
services
Motor car loan from ICICI 5,00,000 Life Insurance Premium (Sum 49,000
@12% interest per annum Assured ` 5,00,000]
Sale receipts of 5,800 listed 5,95,000 Motor car (Acquired in January 9,50,000
equity shares (sold on 31 st 2019 by way of online payment)
January 2019)
Books bought by way of A/c 80,000
payee cheque in the month of
May, June and September 2018
(annual publications)
Computer acquired on 1-11- 52,000
2018 for professional use
(payment made by A/c payee
cheque)
Domestic drawings 6,23,000
Motor car maintenance 72,000
Public Provident Fund 1,50,000
subscription
Closing balances (31-03-2019)
Cash & Bank 61,000
61,35,000 61,35,000
Other information:
(i) Listed equity shares on which STT was paid were acquired in August 2016 for
` 1,21,800. The fair market value of such shares as on 31 st January 2018 and on
1st April 2018 was ` 75 per share and ` 85 per share, respectively.
(ii) Motor car was put to use for both official and personal purposes.1/5th of the motor
car is for personal purpose. No interest on car loan was paid during the previous
year 2018-19.
(ii) Mr. Krishan purchased a flat in Gwalior for ` 35,00,000 in July 2012 cost of which
was partly financed by a loan from Punjab National Housing Finance Limited of
` 25,00,000, his own-savings ` 1,00,000 and a deposit from Canara Bank for
` 9,00,000. The flat was given to Canara Bank on lease for 10 years @ ` 35,000
per month. The following particulars are relevant:
(a) Municipal taxes paid by Mr. Krishan ` 8,200 per annum
(b) House insurance ` 11,000
As per interest certificate issued by Punjab National Housing Finance Limited for the
financial year 2018-19, he paid ` 1,80,000 towards principal and ` 2,01,500 as interest.
(iii) He earned ` 1,20,000 in share speculation business and lost ` 1,80,000 in
commodity speculation business.
(iv) Mr. Krishan received a gift of ` 21,000 each from four of his family friends.
(v) He contributed ` 1,21,000 to Prime Minister's Drought Relief Fund by way of bank
draft.
(vi) He donated to a registered political party ` 3,50,000 by way of cheque.
(vii) He follows cash system of accounting.
(viii) Cost Inflation Index : F.Y. 2016-17 – 264; F.Y. 2018-19 - 280
Compute the total income of Mr. Krishan and the tax payable for the Assessment year 2019-20.
12. (a) Mr. Narayan is engaged in the retail business of groceries. During the previous year
2018-19 his turnover was ` 1.65 crores. Out of this, receipt of ` 1.30 crore
represents online transactions and ` 35 lakhs cash transactions. He opted for
paying tax as per presumptive taxation scheme laid down in section 44AD. He has
no other income during the previous year.
Is he liable to pay advance tax and if so, what is the minimum amount of advance
tax to be paid and the due date for payment of such advance tax?
(b) Mr. Shivpal, a very senior citizen, has reported a Total Income ` 4,90,000 and the
deductions eligible under Chapter VI-A amounting to ` 1,70,000 for the previous
year 2018-19. Is he liable to file his return of income under section 139(1) for the
Assessment year 2019-20? If so why?
SUGGESTED ANSWERS
OBJECTIVE TYPE QUESTIONS

I. (a)
II. (a)
III. (b)
IV. (c)
V. (b)
VI. (d)
VII. (b)
VIII. (d)
IX. (b)
X. (a)
DESCRIPTIVE QUESTIONS
1. The residential status of Ms. Nicole Kidman, a foreign national, would be determined in
the following manner -
Previous 2018-19 2017-18 2016-17 2015-16 2014-15 2013-14 2012-13 2011-12 2010-11
Year
No. of
days of 102 20 46 201 137 102 102 102 102
stay in
India
Ms. Nicole Kidman is said to be resident if she satisfies any one of the following basic
conditions:
(i) Has been in India during the previous year for a total period of 182 days or more
(or)
(ii) Has been in India during the 4 years immediately preceding the previous year for a
total period of 365 days or more and has been in India for at least 60 days during
the previous year.
Ms. Nicole Kidman’s stay in India during the P.Y.2018-19 is less than 182 days. However,
her stay in India during the P.Y.2018-19 is 102 days, which exceeds 60 days; and her stay
in India during the four previous years prior to P.Y.2018-19 is 404 days
[20 + 46 + 201 + 137], which exceeds 365 days. Hence, she is a resident for P.Y.2018-19.
Further, Ms. Nicole Kidman would be “Resident but not ordinarily resident” in India in
during the previous year 2018-19, if she:
(a) has been a non-resident in 9 out of 10 previous years preceding the relevant
previous year; or
(b) has during the 7 previous years immediately preceding the relevant previous year
been in India for less than 730 days.
If she does not satisfy both of these conditions, she would be a resident and ordinarily
resident.
In the present case, her stay in India in the last seven previous years prior to P.Y.2018-
19 is 710 days [20 +46 +201+137 +102 +102 +102], which is less than 730 days.
Therefore, she is resident but not ordinarily resident for the P.Y.2018-19 even if she is
resident in the two assessment years i.e., A.Y.2016-17 and A.Y.2015-16 as per the
information given in the question.
2. In cases where the assessee himself grows rubber plants and manufactures rubber
processed from latex obtained from rubber plants in India, then, as per Rule 7A, 35% of
profit on sale of rubber is taxable as business income under the head “Profits and gains
from business or profession”, and the balance 65% is agricultural income, which is
exempt from tax.
Profits from manufacture and sale of rubber processed from latex = ` 47 lakhs – ` 25
lakhs – ` 7 lakhs = ` 15 lakhs
Agricultural Income = 65% of ` 15 lakhs = ` 9.75 lakhs
Business Income = 35% of ` 15 lakhs = ` 5.25 lakhs.
The tax liability of Mr. Rana has to be computed applying the concept of partial
integration, since his total income comprises of both agricultural income and non-
agricultural income and his agricultural income exceeds ` 5,000 p.a and his non-
agricultural income exceeds the basic exemption limit i.e., ` 2,50,000 (applicable, in his
case).
Accordingly, his tax liability would be computed in the following manner:
Computation of tax liability of Mr. Rana for the A.Y. 2019-20
Particulars `
Tax on total income of ` 15,00,000, being agricultural income and 2,62,500
non-agricultural income
Less: Tax on agricultural income and basic exemption limit i.e.,
` 12,25,000 [` 9,75,000 plus ` 2,50,000] 1,80,000
82,500
Add: Health and Education cess@4% 3,300
Total Tax liability 85,800
3. Computation of income chargeable to tax under the head “Salaries” in the hands of
Ms. Aarohi for A.Y.2019-20
Particulars `
Basic Salary [` 70,000 x 12] 8,40,000
Dearness allowance [` 24,000 x 12] 2,88,000
Bonus [` 21,000 x 12] 2,52,000
Perquisite value in respect of concessional rent [See Working Note 36,000
below]
Gift voucher given by employer on Ms. Aarohi’s birthday (entire
amount is taxable since the perquisite value exceeds `5,000) [See 10,000
Note for Alternative view]
Employer’s contribution to recognized provident fund in excess of
12% of salary 91,872
= 18% x [(` 70,000 + ` 24,000) x 12] – 12% x {[` 70,000 + ` 7,200

(being 30% of ` 24,000)] x 12} = 2,03,040 – 1,11,168
[Salary = Basic Salary + Dearness allowance, to the extent it forms
part of pay for retirement benefits]
Medical insurance premium of ` 20,000 paid by the employer to effect -
an insurance on the health of an employee is an exempt perquisite
Provision of motor car (engine cubic capacity more than 1.6 litres)
owned by employer to an employee without chauffeur for both official
and personal purpose, where the expenses are fully met by the
employer - the perquisite value would be `2400/- p.m. [`2,400 × 5 12,000
months]
Gross salary 15,29,872
Less: Standard deduction under section 16(ia) 40,000
Salary chargeable to tax 14,89,872
Working Note:
Where the accommodation is taken on lease or rent by the employer, the actual amount
of lease rent paid or payable by the employer or 15% of salary, whichever is lower, in
respect of the period during which the house is occupied by the employee, as
reduced by the rent recoverable from the employee, is the value of the perquisite.
Actual rent paid by the employer from 1.11.2018 to 31.3.2019 = ` 60,000 [ ` 12,000 x 5
months]
15% of salary = ` 73,650 [15% x (` 70,000 + ` 7,200 + ` 21,000) x 5 months]
Salary = Basic Salary + Dearness Allowance, to the extent it forms part of pay for
retirement benefits + Bonus
Lower of the above is ` 60,000 which is to be reduced by the rent recovered from the
employee.
Hence, the perquisite value of concessional rent = ` 60,000 – `24,000 [` 4,800 x 5
months] = ` 36,000
Note: As per Rule 3(7)(iv), the value of any gift or voucher received by the employee or
by member of his household on ceremonial occasions or otherwise from the employer
shall be determined as the sum equal to the amount of such gift. However, the value of
any gift or voucher received by the employee or by member of his household below
` 5,000 in aggregate during the previous year would be exempt as per the proviso to
Rule 3(7)(iv).
In this case, the gift voucher of ` 10,000 was received by Ms. Aarohi from her employer
on the occasion of her birthday. Since the value of the gift voucher exceeds the limit of
` 5,000, the entire amount of ` 10,000 is liable to tax as perquisite. The above solution
has been worked out accordingly.
Alternative view - An alternate view is also possible is that only the sum in excess of
` 5,000 is taxable in view of the language of Circular No.15/2001 dated 12.12.2001,
which states that such gifts upto ` 5,000 in the aggregate per annum would be exempt,
beyond which it would be taxed as a perquisite. As per this view, the value of perquisite
would be ` 5,000. The salary chargeable to tax, in this case, would be ` 14,84,872.
4. In this case, Shraddha has more than one house property for self-occupation. As per
section 23(4), Shraddha can avail the benefit of self-occupation (i.e., benefit of “Nil”
Annual Value) only in respect of one of the house properties, at her option. The other
house property would be treated as “deemed let-out” property, in respect of which the
expected rent would be the gross annual value. Shraddha should, therefore, consider the
most beneficial option while deciding which flat should be treated by her as self-
occupied.
OPTION 1 [Flat at Goregaon – Self-occupied and Flat at Navi Mumbai – Deemed to
be let out]
If Flat at Goregaon is opted to be self-occupied, Shraddha's income from house property
for A.Y.2019-20 would be –
Particulars Amount in `
Flat at Goregaon (Self-occupied) [Annual value is Nil] Nil
Flat at Navi Mumbai (Deemed to be let-out) [See Working Note 42,660
below]
Income from house property 42,660
OPTION 2 [Flat at Goregaon – Deemed to be let out and Flat at Navi Mumbai – Self-
occupied]
If Flat at Navi Mumbai is opted to be self-occupied, Shraddha’s income from house
property for A.Y.2019-20 would be –
Particulars Amount in `
Flat at Goregaon (Deemed to be let-out) [See Working Note below] 98,000
Flat at Navi Mumbai (Self-occupied) [Annual value is Nil, but interest
deduction would be available, subject to a maximum of ` 30,000. In
case of money borrowed for repair of self-occupied property, the (30,000)
interest deduction would be restricted to ` 30,000, irrespective of the
date of borrowal].
Income from house property 68,000
Since Option 1 is more beneficial, Shraddha should opt to treat Flat at Goregaon as
Self-occupied and Flat at Navi Mumbai as Deemed to be let out, in which case, her
income from house property would be ` 42,660 for the A.Y. 2019-20.
Working Note:
Computation of income from Flats at Goregaon & Navi Mumbai assuming that both
are deemed to be let out
Particulars Amount in Rupees
Flat at Flat at Navi
Goregaon Mumbai
Gross Annual Value (GAV)
Expected Rent is the GAV of house property
Expected Rent = Higher of Municipal Value and Fair
Rent but restricted to Standard Rent 1,40,000 1,80,000
Less: Municipal taxes (paid by the owner during the Nil 16,200
previous year)
Net Annual Value (NAV) 1,40,000 1,63,800
Less: Deductions under section 24
(a) 30% of NAV 42,000 49,140
(b) Interest on borrowed capital (allowed in
full in case of deemed let out property) - 72,000
Income from deemed to be let-out house property 98,000 42,660
5. Since Mr. Jai Prakash does not own more than 10 vehicles at any time during the
previous year 2018-19, he is eligible to opt for presumptive taxation scheme under
section 44AE. ` 1,000 per ton of gross vehicle weight or unladen weight per month or
part of the month for each heavy goods vehicle and ` 7,500 per month or part of month
for each goods carriage other than heavy goods vehicle, owned by him would be deemed
as his profits and gains from such goods carriage.
Heavy goods vehicle means any goods carriage, the gross vehicle weight of which
exceeds 12,000 kg.
(1) (2) (3) (4)
Number of Date of No. of months for No. of months × No. of
Vehicles purchase which vehicle is vehicles
owned [(1) × (3)]
For Heavy goods vehicle
1 21.07.2018 9 9
2 23.01.2019 3 6
15
For goods vehicle other than heavy goods vehicle
3 11.5.2018 11 33
1 16.3.2019 1 1
1 21.9.2018 7 7
2 12.1.2019 3 6
47
The presumptive income of Mr. Jai Prakash under section 44AE for A.Y.2019-20 would
be ` 5,77,500, i.e., ` 3,52,500 (47 × ` 7,500, being for other than heavy goods vehicle) +
` 2,25,000 (15 x ` 1,000 x 15 ton, being for heavy goods vehicle).
The answer would remain the same even if the two vehicles purchased in January, 2019
were put to use only in July, 2019, since the presumptive income has to be calculated per
month or part of the month for which the vehicle is owned by Mr. Jai Prakash.
6. Computation of capital gain on slump sale of Unit RS for A.Y. 2019-20
Particulars `
Full value of consideration 15,40,00,000
Less: Deemed cost of acquisition (Net worth is deemed to be the
cost of acquisition) [Refer Working Note below] 8,70,00,000
Long-term capital gain [Since the Unit is held for more than 36 6,70,00,000
months]
Working Note: Net worth of Unit-RS

Particulars `
Cost of Land (Revaluation not to be considered) 90,00,000
WDV of other depreciable fixed assets as per the Income-tax Act, 1961 6,30,00,000
Other Assets (book value) 4,90,00,000
12,10,00,000
Less: Liabilities 3,40,00,000
Net worth 8,70,00,000
Notes:
(1) In case of slump sale, net worth of the undertaking transferred shall be deemed to
be the cost of acquisition and cost of improvement as per section 50B.
(2) “Net worth” of the undertaking shall be the aggregate value of total assets of the
undertaking or division as reduced by the value of liabilities of such undertaking or

division as appearing in the books of accounts.
However, any change in the value of assets on account of revaluation shall not be
considered for this purpose.
(3) For calculating aggregate value of total assets of the undertaking or division in case
of slump sale in case of depreciable assets, the written down value of block of
assets determined in accordance with the provisions contained in section 43(6) of
Income-tax Act, 1961 is to be considered and for all other assets, book value is to
be considered.
(4) Since Unit RS is held by the assessee for more than 36 months, the capital gain
arising from slump sale is a long-term capital gain.
(5) Indexation benefit is not available in case of slump sale
7. In the hands of the seller, Mr. Suraj
As per section 50C, where the consideration received or accruing as a result of transfer
of land or building or both, is less than the value adopted or assessed or assessable by
the stamp valuation authority, the value adopted or assessed or assessable by the stamp
valuation authority shall be deemed to be the full value of consideration received or
accruing as a result of transfer.
However, where the date of registration and date of agreem ent are not the same and part
or whole of the consideration is received by way of A/c payee cheque or A/c payee bank
draft or by use of ECS on or before the date of agreement, then stamp duty value on the
date of agreement may be taken to be the full value of consideration.
Further, where the stamp duty value on the date of agreement or registration, as the case
may be, does not exceed 105% of the amount of consideration received or receivable
then the consideration so received would be deemed to be the full value of the
consideration.
In the present case, since Mr. Suraj has received 10% of the consideration by way of A/c
payee cheque on the date of agreement, the stamp duty value of ` 44,00,000 on the date
of agreement would be taken for the purpose of computing full value of consideration.
Further, since the stamp duty of land and building of ` 44,00,000 does not exceed
` 44,10,000 i.e., 105% of ` 42,00,000, the consideration received i.e., ` 42,00,000 in
respect of land and building would be deemed to be the full value of consideration.
In the given problem, land has been held for a period exceeding 24 months and building
for a period less than 24 months immediately preceding the date of transfer. So land is a
long-term capital asset, while building is a short-term capital asset.
Accordingly, capital gains would be determined in the following manner:

Particulars `
Long term capital gain on sale of land
Consideration received or accruing as a result of transfer of land [70% of 29,40,000
` 42,00,000]
Less: Indexed cost of acquisition ` 9,20,000 x 280/200 12,88,000
Long-term capital gain (A) 16,52,000
Short-term capital loss on sale of building
Consideration received or accruing from transfer of building [30% of 12,60,000
` 42,00,000]
Less: Cost of acquisition 15,50,000
Short term capital loss (B) (2,90,000)
As per section 70(2), short-term capital loss can be set-off against long-term capital
gains. Therefore, the net taxable long-term capital gains would be ` 13,62,000 (i.e.,
` 16,52,000 – ` 2,90,000). The same would be taxable @ 20% under section 112, after
adjusting un-exhausted basic exemption limit, if any, against such long term capital gain.
In the hands of the buyer Mr. Ganesh
As per section 56(2)(x), where any person receives from a non-relative, any immovable
property for a consideration which is less than the stamp duty value on the date of
agreement or date of registration as the case may be, and the difference between actual
consideration and stamp duty value so considered is more than the higher of ` 50,000 or
5% of the consideration so received, then the difference between such value and actual
consideration of such property is chargeable to tax as income from other sources.
Where the date of registration and date of agreement are not the same and part or whole
of the consideration is paid by way of A/c payee cheque or A/c payee bank draft or by
use of ECS on or before the date of agreement, then stamp duty value on the date of
agreement may be taken for the purpose of determining income taxable under the head
“Income from other sources”.
Since in the present case, Mr. Ganesh has paid 10% of the consideration by way of A/c
payee cheque, the stamp duty value on the date of agreement has to be taken. Further,
since the difference of ` 2,00,000 is not more than ` 2,10,000 being higher of ` 50,000
and ` 2,10,000 (5% of ` 42,00,000), no income would be chargeable to tax as income
from other sources in the hands of Mr. Ganesh.
8. Computation of Gross Total Income of Mr. Mayur for the A.Y. 2019-20
Particulars ` ` `
Income from profession 4,50,000
Income of minor son Tejas
Capital gains
Full value of consideration 4,80,000
Less: Indexed Cost of Acquisition [` 95,000 x
280/184] 1,44,565 3,35,435
Income from Other Sources
Dividend of ` 10,000 on equity shares [Exempt u/s -
10(34)]
Interest on company deposit
[` 3,10,000 x 14% x 4/12] 14,467 14,467
3,49,902
Less: Exemption u/s 10(32) in respect of income of
minor child 1,500
3,48,402
Gross Total Income 7,98,402
Notes:
(1) As per section 64(1A), in computing the total income of an individual, all such
income accruing or arising to a minor child shall be included. However, income of a
minor child suffering from disability specified under section 80U would not be
included in the income of the parent but would be taxable in the hands of the minor
child. Therefore, in this case, interest income of ` 42,500 arising to handicapped
son, Master Tanmay, would not be clubbed with the income of Mr. Mayur.
(2) Income of the other minor child, Master Tejas, is includible in the hands of
Mr. Mayur, assuming that Mr. Mayur’s income is higher than that of his wife.
(3) In the above solution, the indexed cost of acquisition has been computed by taking
into consideration the first year in which Master Tejas held the asset, i.e., F.Y.2011-
12, as per the definition given in clause (iii) of Explanation below section 48.
However, as per the view expressed by Bombay High Court in CIT v. Manjula J.
Shah 16 Taxman 42, in case the cost of acquisition of the capital asset in the hands
of the assessee is taken to be cost of such asset in the hands of the previous
owner, the indexation benefit would be available from the year in which the capital
asset is acquired by the previous owner. If this view is considered, the indexed cost
of acquisition would have to be calculated by considering the Cost Inflation Index of
F.Y.2004-05. The solution based on alternate view is given as under:
Computation of gross total income of Mr. Mayur for the A.Y. 2019-20
Particulars ` ` `
Income from profession 4,50,000
Income of minor son Tejas
Capital gains
Full value of consideration 4,80,000
Less: Indexed Cost of Acquisition [` 95,000 2,35,398 2,44,602
x 280/113]
Income from Other Sources
Dividend on equity shares [Exempt u/s -
10(34)]
Interest on company deposit [` 3,10,000 x 14,467 14,467
14% x 4/12]
2,59,069
Less: Exemption u/s 10(32) in respect of
income of minor child 1,500
2,57,569
9. Computation of Gross total income of Mr. Avinash for the A.Y.2019-20

Particulars ` `
Salaries
Income from Salary 4,18,000
Less: Loss from house property set-off against salary (1,90,000) 2,28,000
[As per section 71(3A), loss from house property to the
extent of ` 2,00,000 can be set-off against any other head
of income. In case of Mr. Avinash, it is more beneficial to
set-off the loss from house property against long-term
capital gains, since LTCG would be taxable @ 20%.
Accordingly, loss to the extent of ` 10,000 is set-off against
LTCG (shown below) and ` 1,90,000 set-off against income
under the head “Salaries”]
Profits and gains of business or profession
Income from trading business 2,80,000
Less: Brought forward loss from trading business of A.Y.

2015-16 can be set off against current year income from
trading business as per section 72(1), since the eight-year
time limit as specified under section 72(3), within which set- (12,000) 2,68,000
off is permitted, has not expired.
Income from speculative business BPO 25,000
Less: Loss from speculative business MNO set-off as per (12,000)
section 73(1)
Loss from speculative business MNO brought forward from
A.Y. 2016-17 as per section 73(2), can be set off to the extent (13,000) -
of
Capital Gains
Long term capital gain on sale of urban land 2,05,000
Less: Long term capital loss on sale of shares (STT not
paid) set-off as per section 74(1) (85,000)
Less: Long-term capital loss on sale of listed equity shares
on which STT is paid can also be set-off as per section
74(1), since long-term capital arising on sale of such shares
is taxable under section 112A (1,10,000)
Less: Loss from house property (10,000) -
Income from owning and maintaining race horses 8,000

Less: Set-off of brought forward losses from owning and
maintaining race horses as per section 74A(3) (8,000) -
Items eligible for carried forward to A.Y.2020-21
Particulars `
Loss from house property 20,000
As per section 71B, balance loss not set-off can be carried forward to
the next year for set-off against income from house property of that year.
It can be carried forward for a maximum of eight assessment years i.e.,
upto A.Y. 2027-28, in this case.
Loss from speculative business MNO 5,000
Loss from speculative business can be set-off only against profits from
any other speculation business. As per section 73(2), balance loss not
set-off can be carried forward to the next year for set-off against
speculative business income of that year. Such loss can be carried
forward for a maximum of four assessment years i.e., upto A.Y. 2020-21,
in this case, as specified under section 73(4).
Loss from specified business under section 35AD 45,000
Loss from specified business under section 35AD can be set-off only
against profits of any other specified business. If loss cannot be so set-
off, the same has to be carried forward to the subsequent year for set off
against income from specified business, if any, in that year. As per
section 73A(2), such loss can be carried forward indefinitely for set-off
against profits of any specified business .
Loss from the activity of owning and maintaining race horses 4,000
Losses from the activity of owning and maintaining race horses (current
year or brought forward) can be set-off only against income from the
activity of owning and maintaining race horses. If it cannot be so set-off,
it has to be carried forward to the next year for set-off against income
from the activity of owning and maintaining race horses, if any, in that
year. It can be carried forward for a maximum of four assessment years,
i.e., upto A.Y.2021-22, in this case, as specified under section 74A(3).
10. (i) Deduction available to Mr. Darshan under Chapter VI -A for A.Y.2019-20
Section Particulars ` `
80C Deposit in public provident fund 1,50,000
Life insurance premium paid ` 62,000 30,000
(deduction restricted to ` 30,000, being 10% of
` 3,00,000, which is the sum assured, since
the policy was taken on or after 01.04.2012)
Five year term deposit with bank 55,000
2,35,000
Restricted to 1,50,000
80CCD(1) Contribution to NPS of the Central Government,
` 1,45,000 [` 1,95,000 – ` 50,000, being
deduction under section 80CCD(1B)], restricted to
10% of salary [` 1,95,000 x 10/15] [See Note 1]
1,30,000
2,80,000
80CCE Aggregate deduction under section 80C and
80CCD(1), ` 2,80,000, but restricted to 1,50,000
80CCD(1B) ` 50,000 would be eligible for deduction in
respect of contribution to NPS of the Central 50,000
Government
80CCD(2) Employer contribution to NPS, restricted to

10% of salary [See Note 2] 1,30,000
80D (i) (a) Medical insurance premium for self 47,000
and his wife, deduction would be
equal to ` 47,000 (` 27,000 +
` 20,000), being 1/4th of lumpsum
premium, since policies would be in
force for four previous years.
(b) Preventive health check up ` 6,000
for wife restricted to ` 3,000
(` 50,000 - ` 47,000, since maximum
allowable deduction is ` 50,000 in
case assessee or one of the family
member is senior citizen) 3,000
50,000
(ii) Medical Expenditure for his father would be
fully allowed as deduction, since no
insurance policy is taken on his name 46,000
Total of (i) and (ii) 96,000
80DD Deduction of ` 1,25,000 in respect of
expenditure on medical treatment of his 1,25,000
mother, being a person with severe disability
would be allowed irrespective of the fact that
amount of expenditure incurred is ` 90,000
80TTB Interest on fixed deposits with bank of 50,000
` 75,000, deduction restricted to
Deduction under Chapter VI-A 6,01,000
Notes:
(1) The deduction under section 80CCD(1B) would not be subject to overall limit of
` 1.50 lakh under section 80CCE. Therefore, it is more beneficial for
Mr. Darshan to claim deduction under section 80CCD(1B) first in respect of
contribution to NPS. Thereafter, the remaining amount of ` 1,45,000 can be
claimed as deduction under section 80CCD(1), subject to a maximum limit of
10% of salary i.e. ` 1,30,000.
(2) The entire employer’s contribution to notified pension scheme has to be first
included under the head “Salaries” while computing gross total income and
thereafter, deduction under section 80CCD(2) would be allowed, subject to a
maximum of 10% of salary. Deduction under section 80CCD(2) is also not
subject to the overall limit of ` 1,50,000 under section 80CCE
(ii) If the contribution towards NPS is ` 1,30,000, here again, it is beneficial for
Mr. Darshan to first claim deduction of ` 50,000 under section 80CCD(1B) and the
balance of ` 80,000 can be claimed under section 80CCD(1), since the deduction
available under section 80CCD(1B) is over and above the aggregate limit of
` 1,50,000 under section 80CCE. In any case, the aggregate deduction of
` 2,30,000 [i.e., ` 1,50,000 under section 80C and ` 80,000 under section
80CCD(1)] cannot exceed the overall limit of ` 1,50,000 under section 80CCE. The
total deduction under Chapter VIA would remain the same i.e., ` 6,01,000.
11. Computation of total income and tax liability of Mr. Krishan for A.Y. 2019-20
Particulars ` ` `
Income from house property
Gross annual value1 (` 35,000 x 12) 4,20,000
Less: Municipal taxes paid by Mr. Krishan 8,200
Net annual value 4,11,800
Less: Deductions under section 24
(a) 30% of Net Annual Value 1,23,540
(b) Interest on house borrowing
(allowed in full in case of let out 2,01,500
property)
86,760
Profits and gains of business or profession
Income from profession
Fees from professional services 49,60,000
Less: Expenses allowable as deduction
- Staff salary, bonus and stipend 17,50,000
- Other general and administrative 22,00,000
expenses
- Office rent 1,48,000
- Motor car maintenance (` 72,000 x 4/5) 57,600
- Car loan interest – not allowable, since
Mr. Krishan follows cash system of
accounting and no interest is paid during - 41,55,600
the previous year)
8,04,400
Less: Depreciation u/s 32
- Motor car ` 9,50,000 x 15% x 50% x 4/5, 57,000
being put to use for less than 180 days
1 Rent receivable has been taken as the gross annual value in the absence of other information
- Books being annual publications 32,000

[` 80,000 x 40%]
- Computer @40% of ` 52,000 x 50%,
since the same is put to use for less than 10,400 99,400
180 days
For the P.Y. 2018-19, the gross receipts of 7,05,000
Mr. Krishan is ` 49,60,000. Since, it does not
exceed ` 50,00,000, he is eligible to opt for
presumptive tax scheme under section 44ADA
In such case, his professional income would
be ` 24,80,000, being 50% of ` 49,60,000
It is more beneficial for Mr. Krishan to declare
profit of ` 7,05,000 as per books of accounts
which is lower than the profits computed on
presumptive basis under section 44ADA.
However, for declaring lower profits, he has to
maintain books of account under section 44AA
and get the same audited under section 44AB
Income from share speculation business 1,20,000
Less: Loss from commodity speculation
business set off against income from share
speculation business. Balance loss of
` 60,000 from commodity speculation 1,20,000 Nil 7,05,000
business to be carried forward to A.Y. 2020-21
Capital Gains
Long-term capital gains on sale of 5800 listed
shares
Sale consideration 5,95,000
Less: Cost of acquisition is higher of 4,35,000 1,60,000
- Cost of acquisition 1,21,800
- Lower of ` 4,35,000 (` 75 x 5800), 4,35,000
being fair market value as on
31.1.2018 and ` 5,95,000, being full
value of consideration on transfer
Income from other sources
Cash Gift of ` 84,000 i.e., ` 21,000 x 4,
received from his four friends is taxable u/s
56(2)(x), since aggregate amount of cash gifts 84,000
exceeds ` 50,000
Less: Deductions under Chapter VI-A

Section 80C
Life insurance premium 49,000
Repayment of housing loan 1,80,000
PPF subscription 1,50,000
3,79,000
Restricted to ` 1,50,000 1,50,000
Section 80G
Contribution to Prime Minister’s Drought Relief 60,500
Fund (50% of ` 1,21,000) by way of bank draft
Section 80GGC
Donation to registered political party made by 3,50,000
way of cheque
5,60,500
Total Income 4,75,260
Tax liability
Tax @ 10% under section 112A on long-term 6,000
capital gains exceeding ` 1,00,000 i.e.,
` 60,000
Tax @5% on ` 65,260 [` 3,15,260 (total
income excluding LTCG u/s 112A) -
` 2,50,000, being basic exemption limit] 3,263
9,263
Add: Health and Education cess@4% 371
Tax liability 9,634
Tax liability (rounded off) 9,630
12. (a) Computation of advance tax liability in the hands of Mr. Narayan opting for
presumptive taxation scheme under section 44AD
Particulars `
As per section 211, an eligible assessee, opting for computation of
profits or gains of business on presumptive basis in respect of an
eligible business referred to in section 44AD, shall be required to
pay advance tax of the whole amount in one instalment on or before
15th March of the financial year. Thus, Mr. Narayan is required to
pay advance tax by 15 th of March 2019.
However, any amount paid by way of advance tax on or before
31st March shall also be treated as advance tax paid during that
financial year on or before 15 th March.
The advance tax liability is computed as follows –

Business Income
8% of ` 35,00,000 2,80,000
6% of ` 1,30,00,000 7,80,000 10,60,000
In respect of the amount of turnover received by
account payee cheque/bank draft or use of ECS
through a bank account, the assessee can declare 6%
(instead of 8%) of such turnover as presumptive
income under section 44AD.
Since Mr. Narayan does not have any other income
during the previous year 2018-19, business income
would be the total income.
Tax liability
Upto `2,50,000 Nil
`2,50,001 to `5,00,000 @5% 12,500
`5,00,001 to `10,00,000 @20% 1,00,000
Above `10,00,001 @30% 18,000 1,30,500
Add: Health and Education cess @ 4% 5,220
Total Tax Payable 1,35,720
Mr. Narayan is required pay ` 1,35,720 as minimum amount of advance tax by
15th March 2019.
(b) As per sixth proviso to section 139(1), every person, being an individual whose total
income without giving effect to the provisions of, inter alia, Chapter VI-A exceeds
the basic exemption limit, is compulsorily required to furnish return of income on or
before the due date.
Therefore, in the present case, Mr. Shivpal, a very senior citizen is required to file
return of income, since his total income of ` 6,60,000 before giving effect to the
deduction of ` 1,70,000 under Chapter VI-A, exceeds the basic exemption limit of
` 5,00,000 applicable in his case.
SECTION B: INDIRECT TAXES
QUESTIONS
(1) All questions should be answered on the basis of the positio n of GST law as
amended up to 31.10.2018.
(2) The GST rates for goods and services mentioned in various questions are
hypothetical and may not necessarily be the actual rates leviable on those goods
and services. Further, GST compensation cess should be ignored in all the
questions, wherever applicable.
1. M/s. Ramchandra Associates has received some taxable services from Mohan Dalal (P)
Ltd. on 12.01.20XX by making a cash payment of ` 5,00,000 on same day. The payment
was entered in the books of account of M/s. Ramchandra Associates on 16.01.20XX and
in the books of account of Mohan Dalal (P) Ltd. on 20.01.20XX. The invoice was issued
by Mohan Dalal (P) Ltd. on 18.01.20XX. Determine the time of supply in the given case.
(a) 12.01.20XX
(b) 16.01.20XX
(c) 18.01.20XX
(d) 20.01.20XX
2. M.H. Husain, a famous painter, Delhi, sends his latest art work to Indian Classic gallery,
Delhi, for exhibition. However, no consideration has flown from Indian Classic gallery to
M. H. Husain when the art work is sent to the gallery for exhibition. M. H. Husain is in
dilemma whether GST is payable on said transfer of art work. What would be your advice
on the same?
(a) GST is payable as the same amounts to taxable supply of goods.
(b) GST is payable as the same amounts to taxable supply of services.
(c) GST is not payable as the same is an exempt supply.
(d) GST is not payable as the same does not amount to supply at all.
3. Kidzee Ltd., a wholesaler of toys registered in Chandigarh, is renowned in the local
market for the varieties of toys and their reasonable prices. Kidzee Ltd. makes supply of
100 pieces of baby’s learning laptops and chat learning phones to Nancy General Store
on 25th September, 20XX by issuing a tax invoice amounting to ` 1,00,000.
However, the said toys were returned by Nancy General Store on 30th September, 20XX.
Which document Kidzee Ltd. is required to issue in such a case?
(a) Debit Note
(b) Refund voucher
(c) Credit note

(d) Payment voucher
4. Which of the following services is exempt from GST?
(a) Bollywood dance performance by a film actor in a film and consideration charged is
` 1,45,000.
(b) Carnatic music performance by a classical singer to promote a brand of readymade
garments and consideration charged is ` 1,30,000.
(c) Carnatic music performance by a classical singer in a music concert and
consideration charged is ` 1,55,000.
(d) Kathak dance performance by a classical dancer in a cultural programme and
consideration charged is ` 1,45,000.
5. Examine whether supply of food and drink in the following independent cases is exempt
from GST :-
(i) “Smart Kids” is a Play School located in Delhi. Smart Kids has outsourced the
catering services for supply of food and drink in the canteen of Play School to BTV
Caterers, Delhi for a consideration of ` 8,00,000 per annum.
(ii) Wellness Hospital, a clinical establishment located in Tirupati, is specialised in
diabetic treatment. The hospital has its own canteen – Tasty Foods. The canteen
serves the food and drink to the in-patients as advised by the doctors/nutritionists of
the hospital. Apart from this, other patients (who are not admitted) or attendants or
visitors of the in-patients also take food and drink from the canteen.
6. Sahil is a supplier of taxable goods in Karnataka. He got registered under GST in the
month of September, 20XX and wishes to pay his IGST liability for the month. Since he’s
making the GST payment for the first time, he is of the view that he needs to mandatorily
have the online banking facility to make payment of GST; offline payment is not permitted
under GST. You are required to apprise Sahil regarding the various modes of deposit in
the electronic cash ledger. Further, advise him with regard to following issues:
(a) Are manual challans allowed under GST?
(b) What is the validity period of the challan?
(c) Is cross utilization among Major and Minor heads of the electronic cash ledger
permitted?
7. M/s Cavenon Enterprises, a registered supplier of designer wedding dresses under
regular scheme, has aggregate annual turnover of ` 30 lakh in the preceding financial
year. It is of the view that in the current financial year, it is permitted to file its monthly
statement of outward supplies – GSTR-1 - on a quarterly basis while its accountant
advises it to file the same on a monthly basis. You are required to advise M/s Cavenon
Enterprises on the same.
During a given tax period in the current financial year, owing to an off-season,
M/s Cavenon Enterprises has not made any taxable supply. Therefore, M/s Cavenon
Enterprises opines that no return under GST is required to be filed for the said period.
You are required to examine the technical veracity of the opinion of M/s Cavenon
Enterprises.
8. Kamal Book Depot, a wholesaler of stationery items, registered in Mumbai, has received
order for supply of stationery items worth ` 2,00,000/- on 12th November, 20XX from
another local registered dealer, Mr. Mehta, Mumbai. Kamal Book Depot charged the
following additional expenses from Mr. Mehta:-
(i) Packing charges 5,000
(ii) Freight & Cartage 2,000
(iii) Transit insurance 1,500
(iv) Extra designing charges 6,000
(v) Taxes by Municipal Authority 500
The goods were delivered to Mr. Mehta on 14 th November, 20XX. Since Mr. Mehta was
satisfied with the quality of the goods, he made the payment of goods the same day and
simultaneously placed another order on Kamal Book Depot of stationery items amounting
to ` 10,00,000 to be delivered in the month of December, 20XX**. On receipt of second
order, Kamal Book Depot allowed a discount of ` 20,000 on the first order placed by Mr.
Mehta.
Compute the GST liability of Kamal Book Depot for the month of November, 20XX
assuming the rates of GST on the goods supplied as under:
CGST 9%
SGST 9%
Would your answer be different if expenses (i) to (v) given in above table are already
included in the price of ` 2,00,000?
Note:-
(i) All the amounts given above are exclusive of GST .
(ii) Kamal Book Depot and Mr. Mehta are not related persons and price is the sole
consideration of the supply.
**Payment and invoice for the second order will also be made in the month of December,
20XX only.
9. Mr. Ekaant, a supplier registered in Delhi, is engaged in the business of sale and
purchase of plastic raincoats. He furnishes the following information pertaining to
inward/outward supply made by him for the month of July, 20XX:
Particulars Amount
(` in lakh)
Value of inter-State outward supply to registered persons 30
Value of intra-State outward supply to registered persons 50
Value of intra-State outward supply to unregistered persons 15
Value of intra-State inward supply from registered persons 10
Value of inter-State inward supply from registered persons 5
Value of intra-State inward supply from unregistered persons 2
Following additional information is also provided by Mr. Ekaant:-
Particulars Amount (` in lakh)
IGST credit on capital goods purchased in the month of July 1.5
CGST/ SGST credit on other inward supplies [including c redit of 0.5
` 5,000 (CGST and SGST each) on account of membership of a (CGST and SGST
club] each)
Availed consultancy services from Mr. Sujit, lawyer located in 1
Delhi [Intra-State services]
The amount of ITC brought forward in the month of July, 20XX is as under:-
CGST: ` 2 lakh
SGST: ` 2 lakh
IGST: ` 5 lakh
Calculate the net GST liability (CGST and SGST or IGST, as the case may be) to be paid
in cash for the month of July, 20XX by assuming the rates of GST as under:
CGST 9%
SGST 9%
IGST 18%
Note:
(i) All the amounts given above are exclusive of taxes.
(ii) All the conditions necessary for availing the ITC have been fulfilled.
10. Le Marc Ltd. of Nashik, Maharashtra, a registered supplier, is engaged in manufacturing
taxable goods. It provides the following details of items purchased and services availed
by it from Gujarat, for the month of March, 20XX:
S. Particulars IGST (`)

No.
1 Motor vehicle purchased for employees to be used for personal as 1,50,000
well as business purposes
2 Motor vehicle purchased for transportation of goods within the 2,00,000
factory
3 Food items for consumption of employees. These items were 2,000
supplied free of cost to the employees in lieu of services rendered
by them to the manufacturer in the course of employment.
4 Rent-a-cab facility availed for employees to fulfill a statutory 36,000
obligation in this regard. The Government has notified such
service under section 17(5)(b)(iii)(A) of the CGST Act, 2017.
Calculate the amount of eligible input tax credit for the month of March, 20XX.
1. (c)
2. (d)
3. (c)
4. (d)
5. (i) Services provided to an educational institution providing services by way of
pre-school education and education up to higher secondary school or equivalent, by
way of catering is exempt from GST vide Notification No. 12/2017 CT (R) dated
28.06.2017 as amended. Thus, in the given case, services provided by BTV
Caterers to Smart Kids are exempt from GST .
(ii) Services by way of health care services provided by a clinical establishment, an
authorised medical practitioner or para-medics are exempt from GST vide
Notification No. 12/2017 CT (R) dated 28.06.2017 as amended.
In this regard, CBIC has clarified that food supplied by the hospital canteen to the
in-patients as advised by the doctor/nutritionists is a part of composite supply of
healthcare services and is not separately taxable. Thus, it is exempt from GST.
However, other supplies of food by a hospital to patients (not admitted) or their
attendants or visitors are taxable.
In view of the same, GST is exempt on the food supplied by Tasty Foods to the in-
patients as advised by doctors/nutritionists while other supplies of food by it to
patients (not admitted) or attendants/visitors of the in-patients is taxable.
6. Section 49(1) of CGST Act, 2017 read with rule 87 of CGST Rules, 2017 provides that
the deposit in electronic cash ledger can be made through any of the following modes,
namely:-
(i) Internet Banking through authorised banks;
(ii) Credit card or Debit card through the authorised bank;
(iii) National Electronic Fund Transfer or Real Time Gross Settlement from any
bank; or
(iv) Over the Counter payment through authorised banks.
Thus, offline mode is also permitted under GST.
(a) Manual or physical Challans are not allowed under the GST regime. It is mandatory
to generate Challans online on the GST Portal.
(b) E-challan is valid for a period of 15 days.
(c) Amount entered under any Minor head (T ax, Interest, Penalty, etc.) and Major Head
(CGST, IGST, SGST/UTGST) of the Electronic Cash Ledger can be utilized only for
that liability. Cross-utilization among Major and Minor heads is not possible.
7. Section 37 of the CGST Act, 2017 stipulates that GSTR-1 for a particular month is
required to be filed on or before the 10 th day of the immediately succeeding month, i.e.
on a monthly basis.
However, presently, as a measure of easing the compliance requirement for small tax
payers, GSTR-1 has been allowed to be filed quarterly by small tax payers with
aggregate annual turnover up to ` 1.5 crore in the preceding financial year or the current
financial year. Tax payers with annual aggregate turnover above ` 1.5 crore will
however continue to file GSTR- 1 on a monthly basis.
In view of the same, M/s Cavenon Enterprises can file its GSTR-1 on quarterly basis as
its aggregate turnover does not excced ` 1.5 crore in the preceding financial year.
Further, GSTR-1 needs to be filed even if there is no business activity in a tax period.
Thus, in the present case, even if no supply has been made by M/s Cavenon Enterprises,
a nil return is required to be filed for the relevant tax period.
8. Computation of value of taxable supply and tax liability
Particulars Amount (` )
Price of the goods [Note-1] 2,00,000
(i) Packing charges [Note-2] 5,000
(ii) Freight & Cartage [Note-3] 2,000
(iii) Transit Insurance [Note-3] 1,500
(iv) Extra Designing charges [Note-4] 6,000
(v) Taxes by Municipal Authority [Note-5] 500

Value of taxable supply 2,15,000
CGST @ 9% 19,350
SGST @ 9% 19,350
Notes:-
1. As per section 15(1) of the CGST Act, 2017, the value of a supply is the transaction
value i.e. the price actually paid or payable for the said supply.
2. All incidental expenses including packing charged by the supplier to the recipient
are includible in the value of supply in terms of section 15(2) of the CGST Act, 2017.
3. The given supply is a composite supply involving supply of goods (stationery items)
and services (transit insurance and freight) where the principal supply is the supply
of goods.
As per section 8(a) of the CGST Act, 2017, a composite supply is treated as a
supply of the principal supply involved therein and charged to tax accordingly.
4. Any amount charged for anything done by the supplier in respect of the supply of
goods or services or both at the time of, or before delivery of goods or supply of
services; is includible in the value of supply vide section 15(2) of the CGST Act,
2017. Thus, extra designing charges are to be included in the value of supply.
5. The taxes by Municipal Authorities are includible in the value of supply in terms of
section 15(2) of the CGST Act, 2017.
6. In the given case, Mr. Mehta is allowed a discount of ` 20,000 on the goods
supplied to him in the month of November, 20XX. Since the said goods have
already been delivered by Kamal Book Depot, this discount will be a post-supply
discount.
Further, value of supply shall not include any discount which is given after the
supply has been effected, if—
(i) such discount is established in terms of an agreement entered into at or before
the time of such supply and specifically linked to relevant invoices; and
(ii) input tax credit as is attributable to the discount on the basis of document
issued by the supplier has been reversed by the recipient of the supply
[Section 15(3) of the CGST Act, 2017].
However, in the given case, post-supply discount given to Mr. Mehta will not be
allowed as a deduction from the value of supply since the discount policy was not
known before the time of such supply although the discount can be specifically
linked to relevant invoice (invoice pertaining to stationery items supplied to
Mr. Mehta in November, 20XX).
In case the expenses (i) to (v) given in above table are already included in the price
of ` 2,00,000: Since these expenses are includible in the value of supply by virtue of the
reasons mentioned in explanatory notes above, no further addition will be required.
Resultantly, the value of taxable supply will be ` 2,00,000 and CGST and SGST will be
` 18,000 and ` 18,000 respectively.
9. Computation of net GST liability of Mr. Ekaant
Particulars Value (`) CGST (`) SGST (` ) IGST (`)
Total tax liability
Value of intra-State legal 1,00,000 9,000 9,000 -
consultancy services i.e. inward
supplies liable to reverse charge
mechanism (to be paid in cash) (A)
[Note-1]
Value of inter-State outward 30,00,000 - - 5,40,000
supplies (B1)
Value of intra-State outward 65,00,000 5,85,000 5,85,000 -
supplies to registered as well as
unregistered persons (B2)
(` 50,00,000+ ` 15,00,000)
Total (B) = (B1) +(B2) 5,85,000 5,85,000 5,40,000
Input tax Credit
Brought forward ITC 2,00,000 2,00,000 5,00,000
Value of intra-State inward 10,00,000 90,000 90,000
supplies from registered person
[Note-2]
Value of inter-State inward 5,00,000 - - 90,000
supplies from registered person
[Note-2]
Value of intra-State inward 2,00,000 - - -
supplies from unregistered person
[Note-3]
IGST credit of capital goods [Note- 1,50,000
2]
Credit on other inward supplies 45,000 45,000 -
purchased in the month of July less
credit on membership of a club
[Note-2 & 4]
Credit of legal consultancy services 9,000 9,000 -

[Note-2]
Total (C) 3,44,000 3,44,000 7,40,000
Net liability (B)-(C) 2,41,000 2,41,000 (2,00,000)
Less: Set off from IGST credit 2,00,000 - -
[Note-5]
Liability after set off (D) 41,000 2,41,000 Nil
Net GST liability to be paid in 50,000 2,50,000 Nil
cash (A) + (D)
Notes:-
1. Services supplied by an individual advocate to any business entity located in the
taxable territory by way of legal services, directly or indirectly are taxable under
reverse charge mechanism. Thus, tax is payable by the recipient (Mr. Ekaant) on
said services to the Government.
Further, as per section 49(4) of the CGST Act, 2017, amount available in the
electronic credit ledger [ITC amount] may be used for making payment towards
output tax. However, tax payable under reverse charge is not an output tax in terms
of section 2(82) of the CGST Act, 2017. Therefore, tax payable under reverse
charge cannot be set off against the input tax credit and thus, will have to be paid in
cash.
2. Every registered person is entitled to take credit of input tax charged on any inward
supply of goods and/or services which are used or intended to be used in the
course or furtherance of his business in terms of section 16 of CGST Act, 2017.
Further “input tax” in relation to a registered person includes the tax payable under
reverse charge mechanism in terms of section 2(62) of the CGST Act, 2017.
3. Intra-State supplies received by a registered person from any unregistered supplier,
are exempt from the whole of the central tax leviable thereon under section 9(4) till
30.09.2019 [Notification No.8/2017 CT (R) dated 28.06.2017]. Since no tax has
been paid, so no credit is available.
4. Input tax credit is not allowed in respect of membership of a club in terms of section
17(5) of CGST Act, 2017.
5. Input tax credit of IGST has been used to pay IGST and CGST in that order.
10. Computation of eligible input tax credit

Particulars Eligible
ITC (`)
Motor vehicle purchased for employees to be used for personal as well -
as business purposes [Note-1]
Motor vehicle purchased for transportation of goods within the factory 2,00,000
[Note-1]
Food items for consumption of employees [Note-2] -
Rent-a-cab facility given to employees [Note-3] 36,000
Total eligible input tax credit 2,36,000
Notes:-
As per section 17(5) of the CGST Act, 2017:
1. ITC on motor vehicles and other conveyances is blocked except when they are
used—
(i) for making the following taxable supplies, namely :—
(A further supply of such vehicles or conveyances; or
(B) transportation of passengers; or
(C) imparting training on driving, flying, navigating such vehicles or
conveyances;
(ii) for transportation of goods.
Thus, in the given case, ITC on motor vehicle purchased for transportation of goods
within the factory will only be allowed
2. ITC in respect of food and beverages is blocked unless the same is used for making
outward taxable supply of the same category or as an element of the taxable
composite or mixed supply. Thus, in the given case, ITC of taxes paid on food for
employees is not allowed.
3. ITC on supply of rent-a cab services is not blocked where the Government notifies
the services which are obligatory for an employer to provide such service to its
employees. Thus, ITC is available on said service.
Note: GST law is in its nascent stage and has been subject to frequent changes.
Although many clarifications are continually being issued by way of FAQs or
otherwise, many issues continue to arise on account of varying interpretations on
several of its provisions. Therefore, alternate answers may be po ssible for the
above questions depending upon the view taken.
PAPER – 5: ADVANCED ACCOUNTING
PART – I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY

For MAY, 2019 EXAMINATION
A. Applicable for May, 2019 Examination

I. Amendments in Schedule III (Division I) to the Companies Act, 2013
In exercise of the powers conferred by sub-section (1) of section 467 of the Companies
Act, 2013), the Central Government made the following amendments in Division I of the
Schedule III with effect from the date of publication of this notification in the Official
Gazette:
(A) under the heading “II Assets”, under sub-heading “Non-current assets”, for the words
“Fixed assets”, the words “Property, Plant and Equipment” shall be substituted;
(B) in the “Notes”, under the heading “General Instructions for preparation of Balance
Sheet”, in paragraph 6,-
(I) under the heading “B. Reserves and Surplus”, in item (i), in sub- item (c), the
word “Reserve” shall be omitted;
(II) in clause W., for the words “fixed assets”, the words “Property, Plant and
Equipment” shall be substituted.
II. Amendment in AS 11 “The Effects of Changes in Foreign Exchange Rates”
In exercise of the powers conferred by clause (a) of sub-section (1) of section 642 of the
Companies Act, 1956, the Central Government, in consultation with National Advisory
Committee on Accounting Standards, hereby made the amendment in the Companies
(Accounting Standards) Rules, 2006, in the "ANNEXURE", under the heading
"ACCOUNTING STANDARDS" under "AS 11 on The Effects of Changes in Foreign
Exchange Rates", for the paragraph 32, the following paragraph shall be substituted,
namely :-
"32. An enterprise may dispose of its interest in a non-integral foreign operation through
sale, liquidation, repayment of share capital, or abandonment of all, or part of, that
operation. The payment of a dividend forms part of a disposal only when it constitutes a
return of the investment. Remittance from a non-integral foreign operation by way of
repatriation of accumulated profits does not form part of a disposal unless it constitutes
return of the investment. In the case of a partial dispo sal, only the proportionate share of
the related accumulated exchange differences is included in the gain or Joss. A write-
down of the carrying amount of a non-integral foreign operation does not constitute a
partial disposal. Accordingly, no part of the deferred foreign exchange gain or loss is
recognised at the time of a write-down".
III. Amendments made by MCA in the Companies (Accounting Standards) Rules, 2006
Amendments made by MCA on 30.3.2016 in the Companies (Accounting Standards)
Rules, 2006 have been made applicable for May, 2019 examination.
MCA has issued Companies (Accounting Standards) Amendment Rules, 2016 to amend
Companies (Accounting Standards) Rules, 2006 by incorporating the references of the
Companies Act, 2013, wherever applicable. Also, the Accounting Standard (AS) 2, AS 4,
AS 10, AS 13, AS 14, AS 21 and AS 29 as specified in these Rules will substitute the
corresponding Accounting Standards with the same number as specified in Companies
(Accounting Standards) Rules, 2006.
Following table summarizes the changes made by the Companies (Accounting Standards)
Amendment Rules, 2016 vis a vis the Companies (Accounting Standards) Rules, 2006 in
the accounting standards relevant for Paper 5:
Name of the Para no. As per the As per the Implication
standard Companies Companies
(Accounting (Accounting
Standards) Rules, Standards)
2006 Amendment
Rules, 2016
AS 4 Footnote Pursuant to AS 29, All paragraphs of Footnote has
to AS 4 Provisions, this Standard that been
Contingent Liabilities deal with modified.
and Contingent contingencies are
Assets, becoming applicable only to
mandatory in respect the extent not
of accounting covered by other
periods commencing Accounting
on or after 1-4-2004, Standards
all paragraphs of this prescribed by the
Standard that deal Central
with contingencies Government. For
(viz. paragraphs example, the
1(a), 2, 3.1, 4 (4.1 to impairment of
4.4), 5 (5.1 to 5.6), 6, financial assets
7 (7.1 to 7.3), 9.1 such as
(relevant portion), impairment of
9.2, 10, 11, 12 and receivables
16) stand withdrawn (commonly known
except to the extent as provision for
they deal with bad and doubtful
impairment of assets debts) is governed
not covered by other by this Standard.
PAPER – 5 : ADVANCED ACCOUNTING 3
Indian Accounting
Standards. For
example, impairment
of receivables
(commonly referred
to as the provision
for bad and doubtful
debts), would
continue to be
covered by AS 4.
8.5 There are events There are events No liability
which, although they which, although for proposed
take place after the take place after the dividends
balance sheet date, balance sheet date, must be
are sometimes are sometimes created now.
reflected in the reflected in the Such
financial statements financial proposed
because of statutory statements dividends are
requirements or because of to be
because of their statutory disclosed in
special nature. Such requirements or the notes.
items include the because of their
amount of dividend special nature. For
proposed or example, if
declared by the dividends are
enterprise after the declared after the
balance sheet date balance sheet date
in respect of the but before the
period covered by financial
the financial statements are
statements. approved for issue,
the dividends are
not recognized as a
liability at the
balance sheet date
because no
obligation exists at
that time unless a
statute requires
otherwise. Such
dividends are
disclosed in the
notes.
14 Dividends stated to If an enterprise No liability

be in respect of the declares dividends for proposed
period covered by to shareholders dividends
the financial after the balance should be
statements, which sheet date, the created now.
are proposed or enterprise should Such
declared by the not recognize proposed
enterprise after the those dividends as dividends are
balance sheet date a liability at the to be
but before approval balance sheet disclosed in
of the financial date unless a the notes.
statements, should statute requires
be adjusted. otherwise. Such
dividends should
be disclosed in
notes.
AS 14 3(a) Amalgamation Amalgamation Definition of
means an means an Amalgamatio
amalgamation amalgamation n has been
pursuant to the pursuant to the made
provisions of the provisions of the broader by
Companies Act, Companies Act, specifically
1956 or any other 2013 or any other including
statute which may be statute which may ‘merger’.
applicable to be applicable to
companies. companies and
includes ‘merger’.
18 and 39 In such cases the In such cases the Correspondi
statutory reserves statutory reserves ng debit on
are recorded in the are recorded in the account of
financial statements financial statutory
of the transferee statements of the reserve in
company by a transferee case of
corresponding debit company by a amalgamatio
to a suitable account corresponding n in the
head (e.g., debit to a suitable nature of
‘Amalgamation account head purchase is
Adjustment (e.g., termed as
Account’) which is ‘Amalgamation ‘Amalgamatio
disclosed as a part of Adjustment n Adjustment
‘miscellaneous Reserve’) which is Reserve’ and
expenditure’ or other presented as a is now to be
similar category in separate line item. presented as

the balance sheet. When the identity a separate
When the identity of of the statutory line item
the statutory reserves is no since there is
reserves is no longer longer required to not sub-
required to be be maintained, heading like
maintained, both the both the reserves ‘miscellaneou
reserves and the and the aforesaid s expenditure’
aforesaid account account are in Schedule
are reversed. reversed. III to the
Companies
Act, 2013
AS 29 35 (An The amount of a The amount of a Now
extract) provision should not provision should discounting
be discounted to its not be discounted of provision
present value. to its present value for
except in case of decommissio
decommissioning, ning,
restoration and restoration
similar liabilities and similar
that are liabilities
recognized as cost should be
of Property, Plant done as per
and Equipment. the pre-tax
The discount rate discount rate
(or rates) should as
be a pre-tax rate mentioned
(or rates) that therein.
reflect(s) current
market
assessments of
the time value of
money and the
risks specific to
the liability. The
discount rate(s)
should not reflect
risks for which
future cash flow
estimates have
been adjusted.
Periodic
unwinding of
discount should be
recognized in the
statement of profit
and loss.
73 Transitional Discounting
Provisions of above
All the existing existing
provisions for provisions
decommissioning, and similar
restoration and liabilities
similar liabilities should be
(see paragraph prospectively,
35) should be with the
discounted correspondin
prospectively, with g effect to the
the corresponding related item
effect to the of property,
related item of plant and
property, plant and equipment.
equipment.
IV. Provisions of the Companies Act, 2013 related with Liquidation of Companies
As per Section 2 (94A) of the Companies Act, 2013, winding up means winding up under
this Act. As per section 270, the provision of Part I should apply to the winding up of a
company by the Tribunal under this Act.
Circumstances in which Company may be wound up by Tribunal [Section 271]
(a) The company has resolved that the company be wound up by the Tribunal.
(b) The company has acted against the interests of the sovereignty and integrity of India, the
security of the State, friendly relations with foreign States, public order, decency or morality
(c) The Registrar or any other person authorized by the Central Government by notification
under this Act can make an application to tribunal. The Tribunal is of the opinion that the
affairs of the company have been conducted in a fraudulent manner or the company was
formed for fraudulent and unlawful purpose or the persons concerned in the formation or
management of its affairs have been guilty of fraud, misfeasance or misconduct in
connection therewith and that it is proper that the company be wound up.
(d) The company has made a default in filing with the Registrar its financial statements or
annual returns for immediately preceding 5 consecutive financial years.
(e) The Tribunal is of the opinion that it is just and equitable that the company should be wound
up.
A company may file petition for winding up under section 272 of the Companies Act, 2013.
Petition for winding up to Tribunal cab neb made by the company, any contributory or
contributories, the registrar, any person authorized by Central Govt. in that behalf or Ii case
affairs of the company have been conducted in a Fraudulent manner, by the Central Government
or a State Government.
Petition by Contributory
A contributory should be entitled to present a petition for the winding up of a company. Shares
in respect of which he is a contributory were either originally allotted to him or have been held
by him for at least 6 months during the 18 months immediately before the commencement of
the winding up and registered in his name or have transferred to him through the death of a
former holder.
Petition by Registrar
The Registrar should be entitled to present a petition for winding up under section 271, except
on the grounds specified in section 271 (a) or (e). The Registrar should obtain the previous
sanction of the Central Government to the presentation of a petition. The Central Government
should not accord its sanction unless the company has been given a reasonable opportunity of
making representations.
Petition by Company
A petition presented by the company for winding up before the Tribunal should be admitted only
if accompanied by a statement of affairs in such form and in such manner as may be prescribed.
A copy of the petition made under this section should also be filed with the Registrar and the
Registrar should, without prejudice to any other provisions, submit his views to the Tribunal
within 60 days of receipt of such petition.
A company may be wound up voluntarily [Section 304 1],:
(a) if the company in general meeting passes a resolution requiring the company to be wound
up voluntarily as a result of the expiry of the period for its duration, if any, fixed by its articles
or on the occurrence of any event in respect of which the articles provide that the company
should be dissolved; or
(b) if the company passes a special resolution that the company be wound up.
Liquidators’ Statement of Account
In case of Compulsory wound-up, the Company Liquidator should keep proper books in such
manner, as may be prescribed, in which he should cause entries or minutes to be made of
proceedings at meetings and of such other matters as may be prescribed.
1 Applicable until 31 March 2017; with effect from 1 April 2017, Section 59 of the Insolvency and Bankruptcy Code,
2016 is applicable.
Any creditor or contributory may, subject to the control of the Tribunal, inspect any such books,
personally or through his agent.
While preparing the liquidator’s statement of account, receipts are shown in the following order:
(a) Amount realized from assets are included in the prescribed order.
(b) In case of assets specifically pledged in favour of creditors, only the surplus from it, if any, is
entered as ‘surplus from securities’.
(c) In case of partly paid up shares, the equity shareholders should be called up to pay
necessary amount (not exceeding the amount of uncalled capital) if creditors’ claims/claims
of preference shareholders can’t be satisfied with the available amount. Preference
shareholders would be called upon to contribute (not exceeding the amount as yet unc alled
on the shares) for paying of creditors.
(d) Amounts received from calls to contributories made at the time of winding up are shown
on the Receipts side.
(e) Receipts per Trading Account are also included on the Receipts side.
(f) Payments made to redeem securities and cost of execution and payments per Trading
Account are deducted from total receipts.
Payments are made and shown in the following order:
(a) Legal charges;
(b) Liquidator’s expenses;
(c) Debenture holders (including interest up to the date of winding up if the company is insolvent
and to the date of payment if it is solvent);
(d) Creditors:
(i) Preferential (in actual practice, preferential creditors are paid before debenture holders
having a floating charge);
(ii) Unsecured creditors;
(e) Preferential shareholders (Arrears of dividends on cumulative preference shares should be
paid up to the date of commencement of winding up); and
(f) Equity shareholders.
Commencement of Winding Up by Tribunal [Section 357]
Where, before the presentation of a petition for the winding up of a company by the Tribunal, a
resolution has been passed by the company for voluntary winding up, the winding up of the
company should be deemed to have commenced at the time of the passing of the resolution,
and unless the Tribunal, on proof of fraud or mistake, thinks fit to direct otherwise, all
proceedings taken in the voluntary winding up should be deemed to have been validly taken.
In any other case, the winding up of a company by the Tribunal should be deemed to commence
at the time of the presentation of the petition for the winding up.
Exclusion of Certain Time in Computing Period of Limitation [Section 358]
Notwithstanding anything in the Limitation Act, 1963, or in any other law for the time being in
force, in computing the period of limitation specified for any suit or application in the name and
on behalf of a company which is being wound up by the Tribunal, the period from the date of
commencement of the winding up of the company to a period of one year immediately following
the date of the winding up order should be excluded.
Statement of Affairs
In case of winding up by Tribunal, Section 272(5) of the Companies Act, 2013 provides that a
petition presented by the company for winding up before the Tribunal shall be admitted only if
accompanied by a statement of affairs in such form and in such manner as may be prescribed.
In accordance with Section 274(1), where a petition for winding up is filed before the Tribunal
by any person other than the company, the Tribunal shall, if satisfied that a prima facie case for
winding up of the company is made out, by an order direct the company to file its objections
along with a statement of its affairs within thirty days of the order in such form and in such
manner as may be prescribed. The Tribunal may allow a further period of thirty days in a
situation of contingency or special circumstances.
The broad lines on which the Statement of Affairs is prepared are the following —
(1) Include assets on which there is no fixed charge at the value they are expected to realize.
Students should note to include calls in arrear but not uncalled capital.
(2) Include assets on which there is a fixed charge. The amount expected to be realized would
be compared with the amount due to the creditor concerned. Any surplus is to be extended
to the other column. A deficit (the amount owed to the creditor exceeding the amount
realizable from the asset) is to be added to unsecured creditors.
(3) The total of assets in point (1) and any surplus from assets mentioned in point (2) is
available for all the creditors (except secured creditors already covered by specifically
mortgaged assets).
(4) From the total assets available, the following should be deducted one by one:-
(i) Preferential creditors,
(ii) Debentures having a floating charge, and
(iii) Unsecured creditors.
If a minus balance emerges, there would be deficiency as regards creditors, otherwise
there would be a surplus.
(5) The amount of total paid-up capital (giving details of each class of shares) should be added
and the figure emerging will be deficiency (or surplus) as regards members.
Note: Statement of affairs should accompany eight lists:

List A Full particulars of every description of property not specifically pledged and included
in any other list are to be set forth in this list.
List B Assets specifically pledged and creditors fully or partly secured.
List C Preferential creditors for rates, taxes, salaries, wages and otherwise.
List D List of debenture holders secured by a floating charge.
List E Unsecured creditors.
List F List of preference shareholders.
List G List of equity shareholders.
List H Deficiency or surplus account.
Deficiency Account
The official liquidator will specify a date for period (minimum three years) beginn ing with the
date on which information is supplied for preparation of an account to explain the deficiency or
surplus. On that date either assets would exceed capital plus liabilities, that is, there would be
a reserve or there would be a deficit or debit balance in the Profit and Loss Account. The
Deficiency account is divided into two parts:
1. The first part starts with the deficit (on the given date) and contains every item that
increases deficiency (or reduces surplus such as losses, dividends etc.).
2. The second part starts with the surplus on the given date and includes all profits.
If the total of the first exceeds that of the second, there would be a deficiency to the extent of
the difference, and if the total of the second part exceeds that of the first, there would be a
surplus.
Overriding Preferential Payments [Section 326]: In the winding up of a company under this
Act, the following debts should be paid in priority to all other debts:
a. workmen’s dues; and
b. where a secured creditor has realized a secured asset, so much of the debts due to such
secured creditor as could not be realized by him or the amount of the workmen’s portion
in his security (if payable under the law), whichever is less, pari- passu with the workmen’s
dues:
Explanation: For the purposes of this section, and section 327 -
a) Workmen, in relation to a company, means the employees of the company, being workmen
within the meaning of Section 2 (s) of the Industrial Disputes Act, 1947;
b) Workmen’s dues, in relation to a company, means the aggregate of the following sums due
from the company to its workmen, namely:
(i) All wages or salary including wages payable;

(ii) all accrued holiday remuneration becoming payable to any workman
(iii) unless the company is being wound up voluntarily merely for the purposes of
reconstruction or amalgamation with another company or unless the company has, at the
commencement of the winding up, under such a contract with insurers as is mentioned in
section 14 of the Workmen's Compensation Act, 1923 (19 of 1923), rights capable of
being transferred to and vested in the workmen, all amount due in respect of any
compensation or liability for compensation under the said Act in respect of the death or
disablement of any workman of the company;
(iv) all sums due to any workman from provident fund, pension fund, gratuity fund or any other
fund maintained by the company.
The following payment should be made in priority to secured creditors:
(i) All wages or salary including wages payable;
(ii) all accrued holiday remuneration becoming payable to any workman
(iii) If the above payments are payable for a period of 2 years preceding the winding up order
then the same shall be paid in priority to all other debts (including debts due to secured
creditors), within a period of 30 days of sale of assets and shall be subject to such charge
over the security of secured creditors.
c) Workmen’s portion, in relation to the security of any secured creditor of a company,
means the amount which bears to the value of the security the same proportion as the
amount of the workmen’s dues bears to the aggregate of the amount of workmen’s dues
and the amount of the debts due to the secured creditors.
Preferential Creditors
In a winding up there should be paid in priority to all other debts subject to the provisions of
section 326.
Preferential Creditors are as follows:
a. Government Taxes: All revenues, taxes, cess and rates due from the company to the
Central Government or a State Government or to a local authority at the relevant date, and
having become due and payable within the twelve months immediately before that date;
b. Salary and Wages: All wages or salary including wages payable for time or piece work and
salary earned wholly or in part by way of commission of any employee in respect of services
rendered to the company and due for a period not exceeding four months within the 12 months
immediately before the relevant date, subject to the condition that the amount payable under
this clause to any workman should not exceed such amount as may be notified;
c. Holiday Remuneration: All accrued holiday remuneration becoming payable to any employee,
or in the case of his death, to any other person claiming under him, on the termination of his
employment before, or by the winding up order, or, as the case may be, the dissolution of the
company;
d. Contribution under ESI Act: Unless the company is being wound up voluntarily merely for the
purposes of reconstruction or amalgamation with another company, all amount due in respect
of contributions payable during the period of twelve months immediately before the relevant
date by the company as the employer of persons under the Employees’ State Insurance Act,
1948 or any other law for the time being in force;
e. Compensation in respect of death of disablement: Unless the company has, at the
commencement of winding up, under such a contract with any insurer as is mentioned in section
14 of the Workmen’s Compensation Act, 1923, rights capable of being transferred to and vested
in the workmen, all amount due in respect of any compensation or liability for compensation
under the said Act in respect of the death or disablement of any employee of the company:
Where any compensation under the said Act is a weekly payment, the amount payable under
this clause should be taken to be the amount of the lump sum for which such weekly payment
could, if redeemable, be redeemed, if the employer has made an application under that Act;
f. PF, Pension Fund or Gratuity Fund: All sums due to any employee from the provident fund,
the pension fund, the gratuity fund or any other fund for the welfare of the employees,
maintained by the company; and
g. Expenses of Investigation: The expenses of any investigation held in pursuance of sections
213 and 216, in so far as they are payable by the company.
Where any advance payment has been made to any employee of a company on account of
wages or salary or accrued holiday remuneration himself by some person for that purpose. The
person by whom the money was advanced should have a right of priority in respect of the money
so advanced and paid-up to the amount. The sum in respect of which the employee or other
person in his right would have been entitled to priority in the winding up has been reduced by
reason of the payment having been made.
The debts enumerated in this section should—
h. rank equally among themselves and be paid in full, unless the assets are insufficient to meet
them, in which case they should abate in equal proportions; and
i. so far as the assets of the company available for payment to general creditors are insufficient
to meet them, have priority over the claims of holders of debentures under any floating charge
created by the company, and be paid accordingly out of any property comprised in or subject
to that charge.
The debts under this section should be discharged forthwith so far as the assets are sufficient
to meet them, subject to the retention of such sums as may be necessary for the costs and
expenses of the winding up.
In the event of a landlord or other person distraining or having distrained on any goods or effects
of the company within three months immediately before the date of a winding up order, the debts
to which priority is given under this section should be a first charge on the goods or effects so
distrained on or the proceeds of the sale thereof: Provided that, in respect of any money paid
under any such charge, the landlord or other person should have the same rights of priority as
the person to whom the payment is made. Any remuneration in respect of a period of holiday or
of absence from work on medical grounds through sickness or other good cause should be
deemed to be wages in respect of services rendered to the company during that period.
Explanations: For the purposes of this section,
• Accrued Holiday Remuneration includes, in relation to any person, all sums which, by
virtue either of his contract of employment or of any enactment including any order made or
direction given thereunder, are payable on account of the remuneration which would, in the
ordinary course, have become payable to him in respect of a period of holiday, had his
employment with the company continued until he became entitled to be allowed the holiday;
• Employee does not include a workman; and
• Relevant Date means in the case of a company being wound up by the Tribunal, the date of
appointment or first appointment of a provisional liquidator, or if no such appointment was
made, the date of the winding up order, unless, in either case, the company had commenced
to be wound up voluntarily before that date under the Insolvency and Bankruptcy Code, 2016.
Effect of Floating Charge [Section 332]
Where a company is being wound up, a floating charge on the undertaking or property of the
company created within the 12 months immediately preceding the commencement of the
winding up, should be invalid unless it is proved that the company immediately after the creation
of the charge was solvent except for the amount of any cash paid to the company at the time of
and in consideration for or subsequent to the creation of the charge together with i nterest on
that amount at the rate of 5 per cent per annum or such other rate as may be notified by the
Central Government in this behalf.
B List Contributories
(a) Persons: Shareholders who had transferred Partly Paid Shares (otherwise than by
operation of law or by death) within one year, prior to the date of winding up may be
called upon to pay an amount to pay off such Creditors as existed on the date of
transfer of shares. These Transferors are called as B List Contributories.
(b) Liability: Their liability is restricted to the amount not called up when the shares were
transferred. They cannot be called upon to pay more than the entire face value of the
share. For example, if Shares having Face Value ` 100 were paid up ` 60, the B List
Contributory can be called up to pay a maximum of ` 40 only.
(c) Conditions: Liability of B List Contributories will crystallize only (a) when the existing
assets available with the liquidator are not sufficient to cover the liabilities; (b) when
the existing shareholders fail to pay the amount due on the shares to the Liquidator.
V. Maintenance of Statutory Liquidity Ratio (SLR)
Section 24 and Section 56 of the Banking Regulation Act, 1949 – Maintenance of SLR
and holdings of SLR in HTM category
It has been decided to reduce the SLR requirement of banks from 20.0 per cent of their Net
Demand and Time Liabilities (NDTL) to 19.5 per cent from the fortnight commencing October
14, 2017 as announced in the Fourth Bi-monthly Monetary Policy Statement, 2017-18 on
October 04, 2017. The related notification is DBR.No.Ret.BC.91/12.02.001/2017-18
dated October 4, 2017.
Currently, the banks are permitted to exceed the limit of 25 per cent of the total investments
under HTM category, provided the excess comprises of SLR securities and total SLR
securities held under HTM category are not more than 20.5 per cent of NDTL. In order to
align this ceiling on the SLR holdings under HTM category with the mandatory SLR, it has
been decided to reduce the ceiling from 20.5 per cent to 19.5 per cent in a phased manner,
i.e. 20 per cent by December 31, 2017 and 19.5 per cent by March 31, 2018.
As per extant instructions, banks may shift investments to/from HTM with the approval of
the Board of Directors once a year, and such shifting will normally be allowed at the
beginning of the accounting year. In order to enable banks to shift their excess SLR
securities from the HTM category to AFS/HFT to comply with instructions as indicated in
paragraph 3 above, it has been decided to allow such shifting of the excess securities and
direct sale from HTM category. This would be in addition to the shifting permitted at the
beginning of the accounting year, i.e., in the month of April. Such transfer to AFS/HFT
category as well as sale of securities from HT M category, to the extent required to reduce
the SLR securities in HTM category in accordance with the regulatory instructions, would
be excluded from the 5 per cent cap prescribed for value of sales and transfers of securities
to/from HTM category under paragraph 2.3 (ii) of the Master Circular on Prudential Norms
for Classification, Valuation and Operation of Investment Portfolio by Banks.
VI. Maintenance of Cash Reserve Ratio (CRR)
Reserve Bank of India has decided to reduce the Cash Reserve Ratio (CRR) of Scheduled
Commercial Banks by 25 basis points from 4.25 per cent to 4.00 per cent of their Net
Demand and Time Liabilities (NDTL) with effect from the fortnight beginning February 09,
2013 vide circular DBOD.No.Ret.BC.76/ 12.01.001/2012-13 dated January 29, 2013. The
Local Area Banks shall also maintain CRR at 3.00 per cent of its net demand and time
liabilities up to February 08, 2013 and 4.00 per cent of its net demand and time liabilities
from the fortnight beginning from February 09, 2013.
VII. Relevant Provisions of the Insurance Act [updated as per the Insurance
(Amendment) Act, 2015]
The provisions of sections 10 and 11 have been modified vide the Insurance Laws
(Amendment) Act, 2015. These amendments have necessitated changes to the IRDA
(Preparation of Financial Statements and Auditors' Report of Insurance Companies)
Regulations 2002. The significant provisions are as follows:
(1) Forms for final accounts [Section 11(1)]. Every insurer, on or after the date of the
commencement of the Insurance Laws (Amendment) Act, 2015, in respect of
insurance business transacted by him and in respect of his shareholders' funds,
should, at the expiration of each financial year, prepare with reference to that year,
balance sheet, a profit and loss account, a separate account of receipts and
payments, a revenue account in accordance with the regulations as may be specified.
(2) Audit [Section 12]: The balance sheet, profit and loss account, revenue account and
profit and loss appropriation account of every insurer, in respect of all insurance
business transacted by him, should, unless they are subject to audit under the
Companies Act, 2013, be audited annually by an auditor, and the auditor should in
the audit of all such accounts have the powers of, exercise the functions vested in,
and discharge the duties and be subject to the liabilities and penalties imposed on,
auditors of companies by Section 147 of the Companies Act, 2013.
(3) Register of policies [Section 14(1)]: Every insurer, in respect of all business
transacted by him, should maintain— (a) a record of policies, in which should be
entered, in respect of every policy issued by the insurer, the name and address of the
policyholder, the date when the policy was effected and a record of any transfer,
assignment or nomination of which the insurer has notice; (b) a record of claims,
every claim made together with the date of the claim, the name and address of the
claimant and the date on which the claim was discharged, or, in the case of a claim
which is rejected, the date of rejection and the grounds thereof; and (c) a record of
policies and claims in accordance with clauses (a) and (b) may be maintained in any
such form, including electronic mode, as may be specified by the regulations made
under this Act.
(4) Approved investments (Section 27B(1)): A company carrying on general insurance
business must invest its funds only in approved securities listed in this section.
(5) Payment of commission to authorized agents (Section 40(1)): As per the Insurance
(Amendment) Act 2015, no person should, pay or contract to pay any remuneration
or reward, whether by way of commission or otherwise for soliciting or procuring
insurance business in India to any person except an insurance agent or an
intermediary or insurance intermediary in such manner as may be specified by the
regulations.
(6) Limit on expenditure (Sections 40B and 40C): As per the Insurance (Amendment) Act
2015 No insurer should, in respect of insurance business transacted by him in India,
spend as expenses of management in any financial year any amount exceeding the
amount as may be specified by the regulations made under this Act and every insurer
transacting insurance business in India should furnish to the Authority, the details of
expenses of management in such manner and form as may be specified by the
regulations made under this Act."
(7) Sufficiency of assets [Section 64VA(1)]: Every insurer and re-insurer should at all
times maintain an excess of value of assets over the amount of liabilities of, not less
than fifty per cent. of the amount of minimum capital as stated under section 6 and
arrived at in the manner specified by the regulations.
(8) Segregation of Policyholders' and Shareholders' Funds by the insurers carrying on
General Insurance, Health Insurance and Reinsurance business: Section 11 (2) of
the Insurance Laws (Amendment) Act, 2015 mandates that every insurer shall keep
separate funds of shareholders and policyholders.
(9) Unearned Premium Reserve (UPR): A Reserve for Unearned Premium shall be
created as the amount representing that part of the premium written which is
attributable to, and is to be allocated to the succeeding accounting periods. Such
Reserves shall be computed as under:
a) Marine Hull: 100 percent of Net Written Premium during the preceding twelve
months;
b) Other Segments: Insurers have an option to create UPR either at 50
percent of Net Written Premium of preceding twelve months or on the basis of
1/365th method on the unexpired period of the respective policies.
The insurers can follow either percentage or 1/365th method for computation of
UPR of the other segments. However, Insurers shall follow the method of
provisioning of UPR in a consistent manner. Any change in the method of
provisioning can be done only with the prior written approval of the Authority.
10. Recoupment of the Deficit: Every Insurer shall ensure that the policyholders' fund is
fully supported by the policyholders' investments shown in Schedule-SA. Therefore,
any deficit/shortfall in policyholders' investments arising out of the loss in the Revenue
Account or otherwise shall be recouped by transfer of securities from the
shareholders' investments to the policyholders' investments on a half yearly basis.
The valuation of such securities shall be in accordance with the valuation norms as
specified in the IRDA (Preparation of Financial Statements and Auditors' Report)
Regulations, 2002.
11. Investment made out of the policyholders' funds: Investment made out of the
policyholders' funds shall be shown in a separate schedule i.e., 8 A. The format of
the same is given as below:
Annexure
SCHEDULE- 8A
INVESTMENTS-POLICYHOLDERS
Particulars Current Year Previous Year

('000) ('000)
LONG TERM INVESTMENTS
1. Government securities and Gove rnm en t
guaranteed bonds including Treasury Bills
2. Other Approved Securities
3. Other Investm ents
(a) Shares - i) Equity; ii) Preference
(b) Mutual Funds
(c) Debentures/ Bonds
(d) Investment Property-Re al Estate
(e) Other Securities (to be specified)
4. Investments in Infrastruc tu re and Housing
Sub-Total
SHORT TERM INVESTMENTS
1. Government securities and Government
guaranteed bonds including Treasury Bills
2. Other Approved Securities
3. Other Investments
(a) Shares- i) Equity ii) Prefere nce
(b) Mutual Funds
(c) Debentures/ Bonds
(d) Other Securities (to be specified)
4. Investments in Infrastructure and Housing
Sub-Total
Total
B. Not applicable for May, 2019 examination
Non-Applicability of Ind AS for May, 2019 Examination
The Ministry of Corporate Affairs has notified Companies (Indian Accounting Standards)
Rules, 2015 on 16th February, 2015, for compliance by certain class of companies. T hese
Ind AS are not applicable for May, 2019 Examination.
PART – II : QUESTIONS AND ANSWERS

QUESTIONS
Dissolution of partnership firm

1. A partnership firm was dissolved on 30 th June, 2018. Its Balance Sheet on the date of
dissolution was as follows:
Capitals: Cash 21,600

A 1,52,000 Sundry Assets 3,78,400
B 96,000
C 72,000 3,20,000
Loan A/c – B 20,000
Sundry Creditors 60,000
4,00,000 4,00,000
The assets were realized in instalments and the payments were made on the proportionate
capital basis. Creditors were paid ` 58,000 in full settlement of their account. Expenses
of realization were estimated to be ` 10,800 but actual amount spent was ` 8,000. This
amount was paid on 15 th September. Draw up a statement showing distribution of cash,
which was realized as follows:
`
On 5 July, 2018
th 50,400
On 30th August, 2018 1,20,000
On 15th September, 2018 1,60,000
The partners shared profits and losses in the ratio of 2 : 2 : 1. Prepare a statement showing
distribution of cash amongst the partners by ‘Highest Relative Capital’ method.
Conversion of Partnership firms into a company
2. Arun and Varun, sharing profits and losses equally, directed to convert their business into
a limited company on 31 st December, 2018 when their balance sheet stood as follows:
Liabilities ` ` Assets `
Sundry creditors 96,000 Sundry debtors 1,20,000
Loan creditors 80,000 Bills receivable 20,000
Bank overdraft 32,000 Stock in trade 72,000
Reserve fund 12,000 Patents 16,000

Capital accounts: Plant and machinery 32,000
Arun 80,000 Land and building 1,20,000
Varun 80,000 1,60,000
3,80,000 3,80,000
(a) The goodwill of the firm was to be valued at two years' purchase of the profits of the
previous three years.
(b) The loan creditors were agreed to accept 7½% redeemable preference shares in
settlement of their claim.
(c) Land and buildings and plant and machinery were to be valued at ` 2,00,000 and
` 48,000 respectively.
(d) The vendors were to be allotted equity shares of the value of ` 2,10,000.
(e) The past working results of the firm showed that they had made profits of ` 60,000 in
2016, ` 72,000 in 2017 and ` 84,000 in 2018 after setting aside ` 4,000 to reserve
fund each year.
You are required to show realisation account and partners’ capital accounts in the books
of the firm assuming that all the transactions are duly completed.
Sale of Partnership firm to Company
3. 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
31.3.2017:
Liabilities XYZ & Co. ABC Ltd. XYZ & Co. ABC Ltd.
` ` ` `
Equity share capital: Plant & machinery 5,00,000 16,00,000
Equity shares of 20,00,000 Furniture & fixture 50,000 2,25,000
` 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
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 ` 10 each at a premium of ` 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 ` 1,00,000 payable to ABC Ltd. An unrecorded
liability of ` 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.
LLP
4. What are circumstances when LLP can be wound up by the Tribunal. Explain in brief.
ESOPs
5. A company has its share capital divided into shares of ` 10 each. On 1-1-20X1, it granted
7,500 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 7,200 shares only; remaining options lapsed. Pass the necessary journal entries
for the year ended 31-3-20X2, with regard to employees’ stock options.
Buy Back of Securities
6. Alpha Limited furnishes the following summarized Balance Sheet as at 31 st March, 2017:
Liabilities (` in lakhs) Assets (` in lakhs)
Equity share capital 2,400 Machinery 3,600
(fully paid up shares of ` 10 each) Furniture 450
Securities premium 350 Investment 148
General reserve 530 Inventory 1,200
Capital redemption reserve 400 Trade receivables 500
Profit & loss A/c 340 Cash at bank 1,500
12% Debentures 1,500
Trade payables 1,400
Other current liabilities 478
7,398 7,398
On 1st April, 2017, the company announced the buy back of 25% of its equity shares
@ ` 15 per share. For this purpose, it sold all of its investments for ` 150 lakhs.
On 5th April, 2017, the company achieved the target of buy back.
(1) Pass necessary journal entries for the buy-back.
(2) Prepare Balance Sheet of Alpha Limited after buy-back of the shares.
Redemption of Debentures
7. On 1st January, 2008 Raman Ltd. allotted 20,000 9% Debentures of ` 100 each at par, the
total amount having been received along with applications.
(i) On 1st January, 2010 the Company purchased in the open market 2,000 of its own
debentures @ ` 101 each and cancelled them immediately.
(ii) On 1st January, 2013 the company redeemed at par debentures for ` 6,00,000 by
draw of a lot.
(iii) On 1st January, 2014 the company purchased debentures of the face value of
` 4,00,000 for 3,95,600 in the open market, held them as investments for one year
and then cancelled them.
(iv) Finally, as per resolution of the board of directors, the remaining debentures were
redeemed at a premium of 2% on 1 st January, 2018 when Securities Premium Account
in the company's ledger showed a balance of ` 60,000.
Pass journal entries for the above mentioned transactions ignoring debenture redemption
reserve, debenture - interest and interest on own' debentures.
Underwriting of Shares
8. A joint stock company resolved to issue 10 lakh equity shares of ` 10 each at a premium
of ` 1 per share. One lakh of these shares were taken up by the directors of the company,
their relatives, associates and friends, the entire amount being received forthwith. The
remaining shares were offered to the public, the entire amount being asked for with
applications.
The issue was underwritten by X, Y and Z for a commission @2% of the issue price, 65%
of the issue was underwritten by X, while Y’s and Z’s shares were 25% and 10%
respectively. Their firm underwriting was as follows :
X 30,000 shares, Y 20,000 shares and Z 10,000 shares. The underwriters were to submit
unmarked applications for shares underwritten firm with full application money along with
members of the general public.
Marked applications were as follows:
X 1,19,500 shares, Y 57,500 shares and Z 10,500 shares.
Unmarked applications totaled 7,00,000 shares.

Accounts with the underwriters were promptly settled.
You are required to prepare a statement calculating underwriters’ liability for shares other
than shares underwritten firm.
Amalgamation of Companies
9. P Ltd. and Q Ltd. decided to amalgamate as on 01.04.2018 Their summarized Balance
Sheets as on 31.03.2018 were as follows: (ìn ‘000)
Particulars P Ltd. Q Ltd.
Source of Funds:
Equity share capital (`10 each) 300 280
9% preference share Capital (`100 each) 60 40
Investment allowance Reserve 10 4
Profit and Loss Account 68 68
10 % Debentures 100 60
Trade Payables 50 30
Tax provision 14 8
Total 602 490
Application of Funds:
Building 120 100
Plant and Machinery 160 140
Investments 80 50
Trade receivables 90 70
Inventories 72 80
Cash and Bank 80 50
Total 602 490
From the following information, you are required to prepare the Balance Sheet as on
01.04.2018 of a new company, R Ltd., which was formed to take over the business of both
the companies and took over all the assets and liabilities:
(i) 50 % Debenture are to be converted into Equity Shares of the New Company.
(ii) Investments are non- current in nature.
(iii) Fixed Assets of P Ltd. were valued at 10% above cost and that of Q Ltd. at 5% above
cost.
(iv) 10 % of trade receivables were doubtful for both the companies. Inventories to be
carried at cost.
(v) Preference shareholders were discharged by issuing equal number of 9% preference
shares at par.
(vi) Equity shareholders of both the transferor companies are to be discharged by issuing
Equity shares of `10 each of the new company at a premium of ` 5 per share.
Give your answer on the basis that amalgamation is in the nature of purchase.
Internal Reconstruction of a Company
10. The Balance Sheet of Lion Limited as on 31-03-2018 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
Tangible Assets 6 750
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
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.
(a) Pass Journal Entries for all the transactions related to internal reconstruction;
(b) Prepare Reconstruction Account; and
(c) Prepare notes on Share Capital and Tangible Assets to Balance Sheet, immediately
after the implementation of scheme of internal reconstruction.
Liquidation of Company
11. The following is the summarized Balance Sheet of Shah Ltd. Co. which is in the hands of
the liquidator:
Balance Sheet as at 31.3.2017
Share Capital: Fixed assets 2,00,000
1,000, 6% Preference Shares of Inventory 1,20,000
` 100 each, fully paid 1,00,000 Book debts 2,40,000
2,000 Equity shares of ` 100 each, Cash in hand 40,000
fully paid 2,00,000 Profit and loss A/c 3,00,000
2,000 Equity shares of ` 100 each
` 75 paid up 1,50,000
Loan from bank (on security of stock) 1,00,000

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 ` 5,000 paid out of cash in hand).
`
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.
You are required to prepare Liquidator’s Final Statement of Receipts and Payments.
Financial Statements of Insurance Companies
12. From the following balances extracted from the books of REAL General Insurance
Company Ltd. as on 31 st March, 2017, you are required to prepare Revenue Accounts in
respect of Fire and Marine Insurance Business for the year ended 31 st March, 2017.
Particulars Fire Marine
` `
Outstanding Claim as on 1 st April, 2016 28,000 7,000
Claims Paid 1,00,000 80,000
Reserved for unexpired Risk as on 1 st April 2016 2,00,000 1,40,000
Premium 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 consideration:
(1) Claims outstanding as on 31 st March 2017 were as follows:
(a) Fire Insurance - ` 10,000
(b) Marine Insurance - ` 15,000
(2) Premium outstanding as on 31st March, 2017 were as follows:
(a) Fire Insurance - ` 30,000
(b) Marine Insurance - ` 20,000
(3) Reserve for unexpired risk to be maintained at 50% and 100% of net premiums in
respect of Fire & Marine Insurance respectively.
(4) Expenses of management due on 31 st March, 2017 were ` 10,000 for Fire Insurance
and ` 5,000 in respect of Marine Insurance.
Financial Statements of Banking Companies
13. From the following information of Wealth Bank Limited, Prepare Profit and Loss Account
for the year ended 31 st March, 2018:
Particulars ` in lakhs Particulars ` in lakhs
Interest on Cash Credit 364 Interest paid on Recurring 17
Deposits
Interest on Overdraft 150 Interest paid on Savings Bank 12
Deposits
Interest on Term Loans 308 Auditor’s Fees and Allowances 24
Income on Investments 168 Directors’ Fees and Allowance 50
Interest on Balance with 30 Advertisement 36
RBI
Commission on 15 Salaries, allowances and 248
remittances and transfer bonus to employees
Commission on Letters of 24 Payment to Provident Fund 56
Credit
Commission on 16 Printing & Stationery 28
Government Business
Profit on Sale of Land & 5 Repairs & Maintenance 10
Building
Loss on exchange 10 Postage, courier & telephones 16
transactions
Interest paid on Fixed 25
Deposits
Other Information:
` in lakhs
Earned Collected
(i) Interest on NPA is as follows:
Cash Credit 164 80
Term Loans 90 20
Overdraft 150 50
(ii) Classification of Non-performing Advances:

Standard 60
Sub-standard-fully secured 22
Doubtful assets-fully unsecured 40
Doubtful assets covered fully by security:
Less than 1 year 6
More than 1 year upto 3 years 3
More than 3 years 2
Loss Assets 38
(iii) Provide 35% of the profits towards provision for taxation.
(iv) Transfer 25% of the profit to Statutory Reserves.
Departmental Accounts
14. 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
31st December, 2018 after adjusting the unrealized department profits if any.
Deptt. A Deptt. B
` `
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 ` 1,25,000 and you are also
supplied with the following information: (a) Closing stock of Department A
` 1,00,000 including goods from Department B for ` 20,000 at cost of Department A. (b)
Closing stock of Department B ` 2,00,000 including goods from Department A for
` 30,000 at cost to Department B. (c) Opening stock of Department A and Department B
include goods of the value of ` 10,000 and ` 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.
Branch Accounting
15. M/s ABC & Co. has head office at New York (U.S.A.) and branch in Bangalore (India).
Bangalore branch is an integral foreign operation of ABC & Co.
Bangalore branch furnishes you with its trial balanc e as on 31st March, 2018 and the
additional information given thereafter:
Dr. Cr.
(Rupees in thousands)
Stock on 1st April, 2017 300
Purchases and Sales 800 1,200
Sundry Debtors & Creditors 400 300
Bills of Exchange 120 240
Wages & Salaries 560 -
Rent, Rates & Taxes 360 -
Sundry Charges 160 -
Computers 240 -
Bank Balance 420 -
New York Office A/c - 1,620
3,360 3,360
Additional Information:
(a) Computers were acquired from a remittance of US $ 6,000 received from New York
head office and paid to the suppliers. Depreciate computers at 60% for the year.
(b) Unsold stock of Bangalore branch was worth ` 4,20,000 on 31st March, 2018.
(c) The rates of exchange may be taken as follows:
- On 01.04.2017 @ ` 55 per US $
- On 31.03.2018 @ ` 60 per US $
- Average exchange rate for the year @ ` 58 per US $
- Conversion in $ shall be made up to two decimal accuracy.
You are asked to prepare in US dollars the revenue statement for the year ended
31st March, 2018 and the balance sheet as on that date of Bangalore branch as would
appear in the books of New York head office of ABC & Co. You are informed that Bangalore
branch account showed a debit balance of US $ 29845.35 on 31.3.2018 in New York books
and there were no items pending reconciliation.
Framework for Preparation and Presentation of Financial Statements
16. (a) With regard to financial statements name any four
(1) Users
(2) Qualitative characteristics
(3) Elements.
(b) What are fundamental accounting assumptions?
Accounting Standards
AS 4 Contingencies and Events Occurring after the Balance Sheet Date
17. (a) The Board of Directors of New Graphics Ltd. in its Board Meeting held on
18th April, 2017, considered and approved the Audited Financial results along with
Auditors Report for the Financial Year ended 31st 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 ended31st March, 2017 and if approved by the members at the
forthcoming Annual General Meeting of the company on 18th 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.
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Polices
(b) Goods of ` 5,00,000 were destroyed due to flood in September, 2015. A claim was
lodged with insurance company, but no entry was passed in the books for insurance
claim.
In March, 2018, the claim was passed and the company received a payment of
` 3,50,000 against the claim. Explain the treatment of such receipt in final accounts
for the year ended 31st March, 2018.
AS 12 Accounting for Government Grants
18. (a) Viva Ltd. received a specific grant of ` 30 lakhs for acquiring the plant of ` 150 lakhs
during 2014- 15 having useful life of 10 years. The grant received was credited to
deferred income in the balance sheet and was not deducted from the cost of plant.
During 2017-18, 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 ` 21 lakhs and written down value of plant was ` 105 lakhs.
What should be the treatment of the refund of the grant and the effect on cost of the
fixed asset and the amount of depreciation to be charged during the year 2017-18 in
profit and loss account?
AS 16 Borrowing Costs
(b) Zen Bridge Construction Limited obtained a loan of ` 64 crores to be utilized as under:
(i) Construction of Hill link road in Kedarnath ` 50 crores
(ii) Purchase of Equipment and Machineries ` 6 crores
(iii) Working Capital ` 4 crores
(iv) Purchase of Vehicles ` 1crore
(v) Advances for tools/cranes etc. ` 1crore

(vi) Purchase of Technical Know how ` 2 crores
(vii) Total Interest charged by the Bank for the year ending ` 1.6 crores
31st March, 2018
Show the treatment of Interest according to Accounting Standard by Zen Bridge
Construction Limited.
AS 19 Leases
19. (a) Aksat 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 ` 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` 50,000. IRR of investment is 10% and present value of annuity
factor of ` 1 due at the end of 3 years at 10% IRR is 2.4868 and present value of ` 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. If it is finance lease, calculate unearned finance income.
AS 20 Earnings Per Share
(b) “While calculating diluted EPS, effect is given to all dilutive potential equity shares that
were outstanding during the period.” Explain this statement in the light of relevant AS.
Also calculate the diluted EPS from the following information:
Net Profit for the current year (After Tax) ` 1,00,00,000
No. of Equity shares outstanding 10,00,000
No. of 10% Fully Convertible Debentures of ` 100 each 1,00,000
(Each Debenture is compulsorily & fully convertible into 10
equity shares)- issued at the mid of the year
Debenture interest expense for the current year ` 5,00,000
Assume applicable Income Tax rate @ 30%
AS 26 Intangible Assets
20 (a) A Company with a turnover of ` 375 crores and an annual advertising budget of ` 3
crores had taken up the marketing of a new product. It was estimated that the
company would have a turnover of ` 37.5 crores from the new product. The company
had debited to its Profit and Loss account the total expenditure of ` 3 crores incurred
on extensive special initial advertisement campaign for the new product.
Is the procedure adopted by the Company correct?
AS 29 Provisions, Contingent Liabilities and Contingent Assets

(b) M/s. XYZ Ltd. is in a dispute with a competitor company. The dispute is regarding
alleged infringement of Copyrights. The competitor has filed a suit in the court of law
seeking damages of ` 200 lacs.
The Directors are of the view that the claim can be successfully resisted by the Company.
How would the matter be dealt in the annual accounts of the Company in the light of
AS 29? Explain in brief giving reasons for your answer.
1. Statement showing distribution of cash amongst the partners

Creditors B’s loan A B C
2018 ` ` ` ` `
Jun-30
Balance b/d 60,000 20,000 1,52,000 96,000 72,000
Cash balance less Provision for
expenses (` 21,600– ` 10,800) 10,800 - - - -
Balances unpaid 49,200 20,000 1,52,000 96,000 72,000
Jul-05
1st Instalment of ` 50,400 47,200 3,200 - - -
Discount received on full settlement 2,000 16,800 1,52,000 96,000 72,000
Less: Transferred to Realisation A/c 2,000
Aug-30
2nd instalment of ` 1,20,000 (W.N. 2) 16,800 65,280 9,280 28,640
Balance unpaid 86,720 86,720 43,360
Sep-15
Amount realised ` 1,60,000
Add: Balance out of the Provision for
Expenses A/c 2,800
1,62,800 65,120 65,120 32,560
Amount unpaid being loss on
21,600 21,600 10,800
Realisation in the ratio of 2 : 2 : 1
Working Notes:
1. Highest relative capital basis
A B C
` ` `
1. Present Capitals 1,52,000 96,000 72,000
2. Profit-sharing ratio 2 2 1
3 Capital per unit of Profit share (1 ÷ 2) 76,000 48,000 72,000
4. Proportionate capitals taking B, whose 96,000 96,000 48,000
capital is the least, as the basis
5. Excess capital (1-4) 56,000 Nil 24,000
6. Profit-sharing ratio 2 - 1
7. Excess capital per unit of Profit share (5 ÷ 6) 28,000 24,000
8. Proportionate capitals as between A and C 48,000 - 24,000
taking C capital as the basis
9. Excess of A’s Capital over C’s Excess capital 8,000 - -
(5-8)
10. Balance of Excess capital (5-9) 48,000 24,000
11. Distribution sequence:
First ` 8,000 (2 : 0 : 0) 8,000 - -
Next ` 72,000 (2 : 0 : 1) 48,000 - 24,000
Over ` 80,000 (2 : 2 : 1)
2. Distribution of Second instalment
Creditors A B C
First ` 16,800 16,800 - - -
Next ` 8,000 (2 : 0 : 0) 8,000 - -
Next ` 72,000 (2 : 0 : 1) 48,000 - 24,000
Balance ` 23,200 (2 : 2 : 1) 9,280 9,280 4,640
1,20,000 16,800 65,280 9,280 28,640
2. Books of Arun and Varun
Realisation Account
` ` `
To Sundry debtors 1,20,000 By Sundry creditors 96,000
To Bills receivable 20,000 By Loan creditors 80,000

To Stock in trade 72,000 By Bank overdraft 32,000
To Patents 16,000 By Purchasing Company 4,20,000
To Plant and Machinery 32,000 (W.N. 2)
To Land and Building 1,20,000
To Capital A/c (Profit)
Arun 1,24,000
Varun 1,24,000 2,48,000
6,28,000 6,28,000
Arun Varun Arun Varun
` ` ` `
To Shares in Purchasing Co. 2,10,000 2,10,000 By Balance b/d 80,000 80,000
By Reserves 6,000 6,000
By Realization A/c 1,24,000 1,24,000
2,10,000 2,10,000 2,10,000 2,10,000
Working Notes
1. Goodwill = (60,000 + 72,000 + 84,000 + 12,000*)/3 x 2 Years = 1,52,000
* Profit transferred to reserve @ `4,000 for 3 years.
2. Purchase Consideration
` `
Assets taken over:
Goodwill (W.N.1) 1,52,000
Land and Buildings 2,00,000
Plant and Machinery 48,000
Sundry Debtors 1,20,000
Bills Receivable 20,000
Stock in trade 72,000
Patents 16,000
6,28,000
Less: Liabilities taken over:
Creditors 96,000
Loan Creditors 80,000
Bank Overdraft 32,000 2,08,000

Purchase Consideration 4,20,000
3. (i) In the books of XYZ & Co.
Realisation Account
` `
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 Inventories 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
X Y Z X Y Z
` ` ` ` ` `
To Realisation A/c 20,000 10,000 By Balance 2,00,000 3,00,000 1,00,000
20,000
b/d
To Shares in ABC 2,40,000 2,40,000 1,20,000 By General 40,000 40,000 20,000
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
` ` ` `
To Balance b/d 40,000 10,000 By Cash A/c 10,000
(Contra)
To Bank A/c (Contra)* 10,000 By Y 80,000
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 ` 80,000 to partner Y. However, payment
to Y of ` 80,000 can also be made by cash ` 70,000 & by cheque ` 10,000.
(ii) In the Books of ABC Ltd.

Journal Entries
Dr. (` ) Cr. (` )
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 ` 10 each issued at a
premium of ` 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 31.3.2017
Note No. `
Shareholders funds
Share capital 1 25,00,000
Reserve and Surplus 2 8,25,000
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
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
`
1. Share Capital
2,50,000, Equity shares of ` 10 each fully paid 25,00,000
up
(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
Working Note:
Computation of purchase consideration:
50,000, Equity shares of ` 12 (10+2) each = ` 6,00,000
Equity shares distributed among partners:
Partner X = 20,000 shares @ ` 12 = ` 2,40,000

Partner Y = 20,000 shares @ ` 12 = ` 2,40,000
Partner Z = 10,000 shares @ ` 12 = ` 1,20,000
` 6,00,000
4. Under section 64 of the LLP Act, 2008, an LLP may be wound up by the Tribunal:
• If the LLP decides that it should be wound up by the Tribunal;
• If for a period of more than six months, the number of partners of the LLP is reduced
below two;
• If the LLP is unable to pay its debts;
• If the LLP has acted against the interests of the integrity and sovereignty of India, the
security of the state or public order;
• If the LLP has defaulted in the filing of the Statement of Account and Solvency with
the Registrar for five consecutive financial years;
• If the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.
5. In the books of Company
Journal Entries
Date Particulars Dr. ` Cr. `
1-3-X2 to Bank A/c (7,200 x 50) Dr. 3,60,000
31-3-X2 Employees compensation expenses A/c Dr. 6,48,000
To Equity Share Capital A/c (7,200 x 10) 72,000
To Securities Premium A/c (7,200 x Rs.130) 9,36,000
(Being allotment to employees 7,200 shares of
` 10 each at a premium of ` 130 at an exercise price
of ` 50 each)
31-3-X2 Profit and Loss account Dr. 6,48,000
To Employees compensation expenses A/c 6,48,000
(Being transfer of employees compensation
expenses)
Working Note:
1. Employee Compensation Expenses = Discount between Market Price and option
price = ` 140 – ` 50 = ` 90 per share = ` 90 x 7,200 = ` 6,48,000 in total.
2. 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
7,200= ` 9,36,000 in total.
6. In the books of Alpha Limited

Journal Entries
Date Particulars Dr. Cr.
2017 (` in lakhs)
April 1 Bank A/c Dr. 150
To Investment A/c 148
To Profit on sale of investment 2
(Being investment sold on profit)
April 5 Equity share capital A/c Dr. 600
Securities premium A/c Dr. 300
To Equity shares buy back A/c 900
(Being the amount due to equity
shareholders on buy back)
Equity shares buy back A/c Dr. 900
To Bank A/c 900
(Being the payment made on account of buy
back of 60 Lakh Equity Shares)
April 5 General reserve A/c Dr. 530
Profit and Loss A/c Dr. 70
To Capital redemption reserve A/c 600
(Being amount equal to nominal value of
bought back shares from free reserves
transferred to capital redemption reserve
account as per the law)
Balance Sheet (After buy back)
Particulars Note No Amount
(` in Lakhs)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 1,800
(b) Reserves and Surplus 2 1,322
(2) Non-Current Liabilities
(a) Long-term borrowings - 12% Debentures 1,500
(3) Current Liabilities
(a) Trade payables 1,400
(b) Other current liabilities 478
Total 6,500
II. Assets
(1) Non-current assets
(a) Property, Plant & Equipment
(i) Tangible assets 3 4,050
(2) Current assets
(a) Current investments
(b) Inventory 1,200
(c) Trade receivables 5,00
(d) Cash and cash equivalents (W.N.) 750
Total 6,500
Notes to Accounts
` (` in
Lakhs)
1. Share Capital
Equity share capital (Fully paid up shares of `10 each) 1800
General Reserve 530
Less: Transfer to CRR (530) -
Capital Redemption Reserve 400
Add: Transfer due to buy-back of shares from P/L 70
Transfer due to buy-back of shares from Gen. res.530 1,000
Securities premium 350
Less: Adjustment for premium paid on buy back (300) 50
Profit & Loss A/c 340
Add: Profit on sale of investment 2
Less: Transfer to CRR (70) 272 1,322
3. Tangible assets
Machinery 3,600
Furniture 450 4,050
Working Note:
Cash at bank after buy-back
` in lakhs
Cash balance as on 1 st April, 2017 1,500
Add: Sale of investments 150
1,650
Less: Payment for buy back of shares (900)
750
7. Journal
(` ) Dr. (` ) Cr.
2008 Jan 1 Bank Dr. 20,00,000
To 9% Debenture Applications & Allotment 20,00,000
Account
(Being application money on 20,000 debentur es
@ ` 100 per debenture received)
9% Debentures Applications & Allotment Account Dr. 10,00,000
To 9% Debentures Account 20,00,000
(Being allotment of 20,000 9% Debentures of `100
each at par)
(i) 9% Debenture Account Dr. 2,00,000
2010 Jan. 1 Loss on Redemption of Debentures Account Dr. 2,000
To Bank 2,02,000
(Being redemption of 2,000 9% Debentures of `100
each by purchase in the open market @ `101 each)
” ” Profit & Loss Account/Securities Premium 2,000
Account Dr. 2,000
To Loss on Redemption of Debentures Account
(Being loss on redemption of debentures being written
off by transfer to Profit and Loss Account or Securitie s
Premium Account)
(ii) 2013 9% Debentures Account Dr. 6,00,000
Jan. 1 To Sundry Debentureholders 6,00,000
(Being Amount payable to debentureholders on
redemption debentures for `6,00,000 at par by draw of
a lot)
” ” Sundry Debentureholder s Dr. 6,00,000
To Bank 6,00,000
(Being Payment made to sundry debentureholders for
redeeming debentures of `6,00,000 at par)
(iii) 2014 Own Debentures Dr. 3,95,600

Jan. 1 To Bank 3,95,600
(Being purchase of own debentures of the face value of
`4,00,000 for `3,95,600)
2015 ” 9% Debentures Dr. 4,00,000
To Own Debentures 3,95,600
To Profit on Cancellation of Own Debentur es 4,400
Account
(Being Cancellation of own debentures of the face
value of `4,00,000 purchased last year for `3,95,600)
” ” Profit on Cancellation of Own Debentures 4,400
Account Dr. 4,400
To Capital Reserve Account
(Being transfer of profit on cancellation of own
debentures to capital reserve)
(iv) 2018 9% Debentures Account Dr. 8,00,000
Jan. Premium on Redemption of Debentures Account Dr. 16,000
To Sundry Debentureholders 8,16,000
(Being amount payable to holders of debentures of the
face value of ` 8,00,000 on redemption at a premium
of 2% as per resolution of the board of directors)
” ” Sundry Debentureholder s Dr. 8,16,000
To Bank Account
(Being payment to sundry debentureholder s) 8,16,000
” ” Securities Premium Account Dr. 16,000
To Premium on Redemption of Debentur es 16,000
Account
(Being utilisation of a part of the balance in Securitie s
Premium Account to write off premium paid on
redemption of debentures)
8. Statement showing underwriters’ liability for shares other

than shares underwritten firm
X Y Z Total
Gross liability (Issued shares –
purchased by promoters, directors etc.) 5,85,000 2,25,000 90,000 9,00,000
(9,00,000 shares in the ratio of
65 : 25 : 10)
Less: Marked applications (1,19,500) (57,500) (10,500) (1,87,500)
4,65,500 1,67,500 79,500 7,12,500
Less: Allocation of unmarked

applications (including firm underwriting
i.e. 7,00,000) in the ratio 65 : 25 : 10 (4,55,000) (1,75,000) (70,000) (7,00,000)
10,500 (7,500) 9,500 12,500
Surplus of Y allocated to X and Z in the
ratio 65 : 10 (6,500) 7,500 (1,000) –
Additional shares to be purchased by 4,000 – 8,500 12,500
X&Z
X` Y` Z`
Additional Liability for additional shares @ `11 44,000 – 93,500
Underwriting commission payable on Gross Liability
(Shares underwritten as Gross liability × `11 × 2%) (1,28,700) (49,500) (19,800)
Net Amount payable (84,700) (49,500) -
Net Amount receivable - - 73,700
9. M/s R Ltd.
Balance Sheet as at 1.4.2018
Particulars Notes ` in'000
1 Shareholders' funds
a Share capital 1 6,55,980
b Reserves and Surplus 2 2,77,990
2 Non-current liabilities
a Long-term borrowings 3 80,000
3 Current liabilities
a Trade Payables 4 80,000
b Short term provision 5 22,000
Total 11,15,970
Assets
1 Non-current assets
a Property, Plant & Equipment
b Non-current investments 7 1,30,000
2 Current assets
a Inventory 8 1,52,000
b Trade receivables 9 1,44,000
c Cash and cash equivalents 10 1,29,970
Total 11,15,970
Notes to accounts
ìn'000
1. Share Capital
Equity share capital
55,598 Equity shares of `10 each, fully paid up (W.N.2) 5,55,980
Preference share capital
9% Preference share capital (Share of `100 each) (W.N.2) 1,00,000
6,55,980
Securities premium (W.N.2) 2,77,990
Investment allowance reserve
14,000
(`10,000+ `4,000)
Amalgamation adjustment reserve (14,000)
2,77,990
3. Long-term borrowings
Secured
10% Debentures (50% of `1,60,000) 80,000
4. Trade Payables (`50,000+ `30,000) 80,000
5. Short term provisions

Provision for tax (`14,000+ `8,000) 22,000
6. Tangible assets
Building (`1,32,000+`1,05,000) 2,37,000
Plant and machinery (`1,76,000+`1,47,000) 3,23,000
5,60,000
7. Non – current Investments (`80,000+ `50,000) 1,30,000

8. Inventory
Stock (` 72,000+ ` 80,000) 1,52,000
9. Trade receivables
Trade receivables (90% of (`90,000+ `70,000) 1,44,000
10. Cash and cash equivalents
Cash and Bank (` 80,000+ ` 50,000 – ` 30) 1,29,970
Working Notes:
1. Calculation of value of equity shares issued to transferor companies
P Ltd. Q Ltd.
(` ) (` )
Assets taken over:
Building 1,32,000 1,05,000
Plant and machinery 1,76,000 1,47,000
Investments 80,000 50,000
Inventories 72,000 80,000
Trade receivables 81,000 63,000
Cash & Bank 80,000 50,000
6,21,000 4,95,000
Less: Liabilities:
10% Debentures 1,00,000 60,000
Trade payables 50,000 30,000
Tax Provision 14,000 1,64,000 8,000 98,000
4,57,000 3,97,000
Less: Preference Share 60,000 40,000
Capital
3,97,000 3,57,000
2. Number of shares issued to equity shareholders, debenture holders and
preference shareholders
P Ltd. Q Ltd. Total
Equity shares issued@ `15 per
share (including ` 5 premium)
`3,97,000/15 26,466 shares2
2 Cash paid for fraction of shares = ` 3,97,000 less ` 3,96,990 = `10

`3,57,000/15 23,800 50,266 shares

shares
Equity share capital @ `10 `2,64,660 `2,38,000 `5,02,660
Securities premium @ `5 `1,32,330 `1,19,000 `2,51,330
`3,96,990 `3,57,000 `7,53,990
50% of Debentures are converted into equity shares @ ` 15 per share
1,00,000/2 = 50,000/15 3,332 shares3
60,000/2 = 30,000/15 2,000 5,332 shares
shares
Equity share capital @ `10 `33,320 `20,000 `53,320
Security premium@ `5 `16,660 `10,000 `26,660
`49,980 `30,000 ` 79,980
9% Preference share capital `60,000 `40,000 `1,00,000
issued
10. (a) Journal Entries in the books of Lion Ltd.

Particulars Debit Credit
(` in lakhs) (` in lakhs)
(i) 8% Preference share capital A/c (`100 Dr. 400
each)
To 8% Preference share capital A/c 320
(` 80 each)
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
(Being the equity shares of `10 each
reduced to `2 each)
(iii) Capital Reduction A/c Dr. 32
3 Cash paid for fraction of shares = ` 50,000 less ` 49,980 = `20

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
16 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
(Being appreciation in the value of
freehold property)
(vii) Bank A/c Dr. 250
To Investments A/c 200
(Being investment sold at profit)
(viii) Director’s loan A/c Dr. 300
To Equity share capital A/c (` 2 each) 90
(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 240
(300x 80%)
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)
(b) Capital Reduction Account

Dr. Cr.
To Equity Share Capital 32 By Preference Share 80
Capital
To Trade receivables 180 By Equity Share 800
Capital
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
(c) Notes to Balance Sheet
1. Share Capital
Authorised:
200 lakhs Equity shares of ` 2 each 400
8 lakhs 8% Preference shares of ` 80 640
each
1,040
Issued:
161 lakhs equity shares of `2 each 322
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
11. Liquidator’s Final Statement of Receipts and Payments A/c

` ` `
To Cash in hand 40,000 By Liquidator’s remunerati on 5,000
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 ` 10 on 2,000 shares 20,000
To Cash - proceeds of
call on 1,800 equity
shares @ ` 15* 27,000
4,75,000 4,75,000
Working Note:
Return per equity share
`
Cash available before paying preference shareholders
(` 4,48,000 – ` 3,55,000) 93,000
Add: Notional calls 1,800 shares (2,000-200) × ` 25 45,000
1,38,000
Less: Preference share capital (1,00,000)
Available for equity shareholders 38,000
` 38,000
Return per share=  ` 10
3,800 (4,000  200)
and Loss per Equity Share ` (100-10) = ` 90
*Calls to be made @ ` 15 per share (` 90-75) on 1,800 shares.
12. Form B – RA (Prescribed by IRDA)
Real General Insurance Co. Ltd
Revenue Account for the year ended 31 st March, 2017
Fire and Marine Insurance Business
Schedule Fire Marine
Current Year Current Year
` `
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 4 70,000 50,000
Insurance business
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

Fire Marine
` `
Schedule -1
Premium earned (net)
Premium received during the year 4,50,000 3,30,000
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
Less: Adjustment for change in provision for (27,500) (1,95,000)
unexpired risk
4,27,500 1,40,000
Schedule – 2
Claims incurred (net)
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
Schedule – 3
Commission paid 40,000 20,000
Schedule – 4
Operating expenses
Expenses of M anagement
Expenses paid during the year 60,000 45,000
Add: Outstanding on 31st M arch,2017 10,000 5,000
70,000 50,000
Working note for changes in unexpired Risk Reserve

Reserve for unexpired Risk (Fire Insurance @50%)
Opening Reserve (1) ` 2,00,000
Closing Reserve (` 4,55,000 X 50/100) (2) ` 2,27,500
Additional Transfer to Reserve (2 – 1) ` 27,500
Reserve for unexpired Risk (Marine Insurance @100%)

Opening Reserve (1) `1,40,000
Closing Reserve (` 3,35,000 X 100/100) (2) `3,35,000
Additional Transfer to Reserve (2 – 1) `1,95,000
13. Wealth Bank Limited

Profit and Loss Account
For the year ended 31st March, 2018
` in lakhs
Particulars Schedule Year ended
31-3-2018
I Income
Interest earned 13 766
Other income 14 50
816
II Expenditure
Interest expended 15 54
Operating expenses 16 468
Provisions and Contingencies (Refer W.N.) 158.96

680.96
III Profit/Loss
Net Profit/(Loss) for the year 135.04
Net Profit/(Loss) brought forward Nil
135.04
IV Appropriations:
Transfer to Statutory reserve (25% of the profits) 33.76
Balance carried to the balance sheet 101.28
Total 135.04
Schedule 13 - Interest Earned
Year ended 31-3-2018
(` in lakhs)
I Interest/discount on advances/bills
Interest on cash credit (364-84) 280
Interest on overdraft (150-100) 50
Interest on term loans (308-70) 238 568
II Income on investments 168
III Interest on Balance with RBI 30
766
Interest on NPA is recognized on cash basis, hence difference of accrued interest not
received have been reduced from the total accrued interest.
Schedule 14 - Other Income
(` in lakhs)
I Commission, Exchange and Brokerage:
Commission on remittances and transfer 15
Commission on letter of credit 24
Commission on Government business 16 55
II Profit on sale of Land and Building 5
III Loss on Exchange Transactions (10)
50
Schedule 15 - Interest Expended

(` in lakhs)
I Interest on Deposits
Fixed deposits 25
Recurring deposits 17
Saving bank deposits 12 54
Schedule 16 - Operating Expenses
Year Ended 31-3-2018
(` in lakhs)
I Payment to and provision for employees
Salaries, allowances and bonus 248
Provident Fund Contribution 56 304
II Printing and Stationery 28
III Advertisement and publicity 36
IV Directors’ fees, allowances and expenses 50
V Auditors’ fees and expenses 24
VI Postage, telegrams, telephones etc. 16
VII Repairs and maintenance 10
468
Working Note:
Provisions and contingencies (` in lakhs)
Provision for Advances:
Standard 60 × 0.40% 0.24
Sub-standard 22 × 15% 3.3
Doubtful not covered by 40× 100% 40
security
Doubtful covered by security:
Less than 1 year 6 x 25% 1.5 4.7
More than 1 year but less 3 x 40% 1.2
than 3 years 2 x 100% 2.0
More than 3 years
Loss Assets (38 × 100%) 38
86.24
Provision for tax 35% of (Total Income –

Total Expenditure)
35% of [816-
(54+468+86.24)]
35% of 207.76 72.72
158.96
14. Departmental Trading and Loss Account of M/s Division
For the year ended 31 st December, 2018
Deptt. A Deptt. B Deptt. A Deptt. B
` ` ` `
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 Expenses By Gross 4,00,000 7,50,000
profit
(in ratio of sales) 50,000 75,000
To Profit ts/f to general
profit and loss
account 3,50,000 6,75,000
4,00,000 7,50,000 4,00,000 7,50,000
General Profit and Loss Account

` `
To Stock reserve required (additional: By Profit from:
Stock in Deptt. A Deptt. A 3,50,000
50% of (` 20,000 - ` 10,000) (W.N.1) 5,000 Deptt. B 6,75,000
Stock in Deptt. B
40% of (` 30,000 - ` 15,000) (W.N.2) 6,000
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%
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%
15. M/s ABC & Co.
Bangalore Branch Trial Balance in (US $)
as on 31st March, 2018
Conversion Dr. Cr.
rate per US $ US $ US $
(` )
Stock on 1.4.17 55 5,454.55 –
Purchases and sales 58 13,793.10 20,689.66
Sundry debtors and creditors 60 6,666.67 5,000.00
Bills of exchange 60 2,000.00 4,000.00
Wages and salaries 58 9,655.17 –
Rent, rates and taxes 58 6,206.90 –
Sundry charges 58 2,758.62 –
Computers – 6,000.00 –
Bank balance 60 7,000.00 –
New York office A/c – – 29,845.35
59,535.01 59,535.01
Trading and Profit & Loss Account
for the year ended 31 st March, 2018
US $ US $
To Opening Stock 5,454.55 By Sales 20,689.66
To Purchases 13,793.10 By Closing stock 7,000.00
To Wages and salaries 9,655.17 (` 4,20,000/60)
By Gross Loss c/d 1,213.16
28,902.82 28,902.82
To Gross Loss b/d 1,213.16 By Net Loss 13,778.68
To Rent, rates and taxes 6,206.90
To Sundry charges 2,758.62
To Depreciation on 3,600.00
computers
(US $ 6,000 × 0.6)
13,778.68 13,778.68
Balance Sheet of Bangalore Branch

as on 31st March, 2018
Liabilities US $ Assets US $ US $
New York Office 29,845.35 Computers 6,000.00
A/c
Less: Net Loss (13,778.68) 16,066.67 Less: Depreciation (3,600.00) 2,400.00
Sundry creditors 5,000.00 Closing stock 7,000.00
Bills payable 4,000.00 Sundry debtors 6,666.67
Bills receivable Bank 2,000.00
balance 7,000.00
25,066.67 25,066.67
16. (a) (1) Users of financial statements:
Investors, Employees, Lenders, Supplies/Creditors, Customers, Government &
Public
(2) Qualitative Characteristics of Financial Statements:
Understandability, Relevance, Comparability, Reliability & Faithful Representation
(3) Elements of Financial Statements:
Asset, Liability, Equity, Income/Gain and Expense/Loss
(b) Fundamental Accounting Assumptions:
Accrual, Going Concern and Consistency
17. (a) As per the amendment in AS 4 “Contingencies and Events Occurring After the
Balance Sheet Date” vide Companies (Accounting Standards) Amendments Rules,
2016 dated 30th 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 nature.
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.
No, provision for proposed dividends is not required to be made. 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
18th 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.
(b) As per the provisions of AS 5 “Net Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies”, prior period items are income or expenses,
which arise, in the current period as a result of error or omissions in the preparation
of financial statements of one or more prior periods. Further, the nature and amount
of prior period items should be separately disclosed in the statement of profit and loss
in a manner that their impact on current profit or loss can be perceived.
In the given instance, it is clearly a case of error in preparation of financial statements
for the year 2015-16. Hence, claim received in the financial year 2017-18 is a prior
period item and should be separately disclosed in the statement of Profit and Loss.
18. (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.
In this case the grant refunded is ` 30 lakhs and balance in deferred income is ` 21
lakhs, ` 9 lakhs shall be charged to the profit and loss account for the year 2017-18.
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.
(b) 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
` in crores Profit & Loss
A/c ` 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.
19. (a) Determination of Nature of Lease
Present value of unguaranteed residual value at the end of 3 rd year
= ` 50,000 x 0.7513
= ` 37,565
Present value of lease payments = ` 5,00,000 – ` 37,565
= ` 4,62,435
The percentage of present value of lease payments to fair value of the equipment is
(` 4,62,435/ ` 5,00,000) x 100 = 92.487%.
Since, lease payments substantially covers the major portion of the fair value; the
lease constitutes a finance lease.
Calculation of Unearned Finance Income
Annual lease payment = ` 4,62,435/ 2.4868 =` 1,85,956 (approx.)
Gross investment in the lease = Total minimum lease payments + unguaranteed
residual value
= (` 1,85,956 × 3) + ` 50,000
= ` 5,57,868 + ` 50,000 = ` 6,07,868
Unearned finance income = Gross investment - Present value of minimum lease
payments and unguaranteed residual value
= ` 6,07,868 – ` 5,00,000 = ` 1,07,868
(b) As per AS 20 ‘Earnings per Share’, the net profit or loss for the period attributable to
equity shareholders and the weighted average number of shares outstanding during
the period should be adjusted for the effects of all dilutive potential equity shares for
calculation of diluted earnings per share. Hence, “in calculating diluted earnings per
share, effect is given to all dilutive potential equity shares that were outstanding
during the period.”
Adjusted net profit for the current year
Computation of diluted earnings per share=
Weighted average number of equity shares
Adjusted net profit for the current year

`
Net profit for the current year (after tax) 1,00,00,000
Add: Interest expense for the current year 5,00,000
Less: Tax relating to interest expense (30% of ` 5,00,000) (1,50,000)

Adjusted net profit for the current year 1,03,50,000
Weighted average number of equity shares
Number of equity shares resulting from conversion of debentures
1,00,000  100
= = 10,00,000 Equity shares
10
Weighted average number of equity shares used to compute diluted earnings per
share
= [(10,00,000 x 12) + (10,00,000 x 6)]/12 = 15,00,000 equity shares
Diluted earnings per share = ` 1,03,50,000 / 15,00,000 shares = ` 6.90 per share
20. (a) According to AS 26 ‘Intangible Assets’, “expenditure on an intangible item should be
recognized as an expense when it is incurred unless it forms part of the cost of an
intangible asset”.
In the given case, advertisement expenditure of ` 3 crores had been taken up for the
marketing of a new product which may provide future economic benefits to an
enterprise by having a turnover of ` 37.5 crores. Here, no intangible asset or another
asset is acquired or created that can be recognized.
Therefore, the accounting treatment by the company of debiting the entire advertising
expenditure of ` 3 crores to the Profit and Loss account of the year is correct.
(b) As per AS 29, 'Provisions, Contingent Liabilities and Contingent Assets’, a provision
should be recognized when
(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognized.
In the given situation, since, the directors of the company are of the opinion that the
claim can be successfully resisted by the company, therefore there will be no outflow
of the resources. Hence, no provision is required. The company will disclose the same
as contingent liability by way of the following note:
“Litigation is in process against the company relating to a dispute with a competitor
who alleges that the company has infringed copyrights and is seeking damages of
` 200 lakhs. However, the directors are of the opinion that the claim can be
successfully resisted by the company.”
PAPER – 6: AUDITING AND ASSURANCE
PART – I : ACADEMIC UPDATE

(Legislative Amendments / Notifications / Circulars / Rules / Guidelines issued by
Regulating Authority)
Revised Chapter 7-Company Audit-I is given hereunder:

1 Eligibility, Qualifications and Disqualifications of an Auditor
The provisions relating to eligibility, qualifications and
disqualifications of an auditor are governed by
section 141 of the Companies Act, 2013 (hereinafter
referred as the Act). The main provisions are stated
below:
(1) A person shall be eligible for appointment as
an auditor of a company only if he is a chartered
accountant.
It may be noted that a firm whereof majority of
partners practising in India are qualified for
appointment as aforesaid may be appointed by its
firm name to be auditor of a company.
Fig.: Is the person eligible for appointment as auditor? 1
(2) Where a firm including a limited liability partnership 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) Under sub-section (3) of section 141 along with Rule 10 of the Companies (Audit and
Auditors) Rules, 2014 (hereinafter referred as CAAR), the following persons shall not be
eligible for appointment as an auditor of a company, namely-
(a) a body corporate other than a limited liability partnership registered under the Limited
Liability Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of
the company;
(d) a person who, or his relative or partner -
(i) 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;
1 Source of image: http://y ourfinancebook.com

It may be noted that the relative may hold security or interest in the company of
face value not exceeding ` 1,00,000.
It may also be noted that the condition of ` 1,00,000 shall, wherever relevant,
be also applicable in the case of a company not having share capital or other
securities.
Students may also note that in the event of acquiring any security or interest by
a relative, above the threshold prescribed, the corrective action to maintain the
limits as specified above shall be taken by the auditor within 60 days of such
acquisition or interest.
The following points merit consideration in this regard:
(i) The value of shares of ` 1,00,000 that can be hold by relative is the face
value not the market value.
(ii) The limit of ` 1,00,000 would be applicable where the securities are held
by the relative of an auditor and not where the securities are held by an
auditor himself or his partner. In case of an auditor or his partner, securities
of even small value shall be a disqualification.
(iii) Grace period of 60 days for corrective action shall apply only in respect of
securities held by relatives. This would not apply to auditor or his partner.
[The term “relative”, as defined under the Companies Act, 2013, means anyone
who is related to another as members of a Hindu Undivided Family; husband
and wife; Father (including step- father), Mother (including step-mother), Son
(including step- son), Son’s wife, Daughter, Daughter’s husband, Brother
(including step- brother), Sister (including step- sister).]
EXAMPLES
Ex 1: Mr. A, a practicing Chartered Accountant, is holding securities of XYZ
Ltd. having face value of ` 900. Whether Mr. A is qualified for appointment as
an auditor of XYZ Ltd.?
As per section 141(3)(d)(i), an auditor is disqualified to be appointed as an
auditor if he, or his relative or partner 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.
In the present case, Mr. A is holding security of ` 900 in XYZ Ltd. Therefore,
he is not eligible for appointment as an auditor of XYZ Ltd.
Ex 2: Mr. P is a practicing Chartered Accountant and Mr. Q, the relative of Mr.
P, is holding securities of ABC Ltd. having face value of ` 90,000. Whether Mr.
P is qualified from being appointed as an auditor of ABC Ltd.?
As per section 141(3)(d)(i), a person is disqualified to be appointed as an
auditor if he, or his relative or partner is holding any security of or interest in
PAPER – 6: AUDITING AND ASSURANCE 3
the company or its subsidiary, or of its holding or associate company or a

subsidiary of such holding company. Further, as per proviso to this section,
the relative of the person may hold the securities or interest in the company of
face value not exceeding of ` 1,00,000.
In the present case, Mr. Q. (relative of Mr. P), is having securities of
` 90,000 face value in ABC Ltd., which is as per requirement of proviso to
section 141(3)(d)(i). Therefore, Mr. P will not be disqualified to be appointed
as an auditor of ABC Ltd.
Ex 3: M/s BC & Co. is an Audit Firm having partners Mr. B and Mr. C, and Mr.
A the relative of Mr. C, is holding securities of MWF Ltd. having face value of
` 1,01,000. Whether M/s BC & Co. is qualified from being appointed as an
auditor of MWF Ltd.?
As per section 141(3)(d)(i), a person is disqualified to be appointed as an
auditor if he, 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. Further as per proviso to this section, the
relative of the person may hold the securities or interest in the company of face
value not exceeding of ` 1,00,000.
In the instant case, M/s BC & Co, will be disqualified for appointment as an
auditor of MWF Ltd. as the relative of Mr. C (i.e. partner of M/s BC & Co.) is
holding the securities in MWF Ltd. which is exceeding the limit mentioned in
proviso to section 141(3)(d)(i).
Ex 4: M/s RM & Co. is an audit firm having partners CA. R and CA. M. The firm
has been offered the appointment as an auditor of Enn Ltd. for the Financial
Year 2016-17. Mr. Bee, the relative of CA. R, is holding 5,000 shares (face value
of ` 10 each) in Enn Ltd. having market value of ` 1,50,000. Whether M/s RM &
Co. is disqualified to be appointed as auditors of Enn Ltd.?
As per section 141(3)(d)(i), a person shall not be eligible for appointment as an
auditor of a company, 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. However, as per proviso to this section, the
relative of the person may hold the securities or interest in the company of face
value not exceeding of ` 1,00,000.
In the instant case, M/s RM & Co. is an audit firm having partners CA. R and CA.
M. Mr. Bee is a relative of CA. R and he is holding shares of Enn Ltd. of face
value of ` 50,000 only (5,000 shares x ` 10 per share).
Therefore, M/s RM & Co. is not disqualified for appointment as an auditors of
Enn Ltd. as the relative of CA. R (i.e. partner of M/s RM & Co.) is holding the
securities in Enn Ltd. which is within the limit mentioned in proviso to section
141(3)(d)(i) of the Companies Act, 2013.
(ii) is indebted to the company, or its subsidiary, or its holding or associate company
or a subsidiary of such holding company, in excess of ` 5,00,000; or
(iii) has given a guarantee or provided any security in connection with the
indebtedness of any third person to the Company or its Subsidiary, or its Holding
or Associate Company or a Subsidiary of such Holding Company, in excess of
` 1,00,000.
(e) a person or a firm who, whether directly or indirectly has business relationship with
the Company, or its Subsidiary, or its Holding or Associate Company or Subsidiary of
such holding company or associate company, of such nature as may be prescribed;
Students may note that for the purpose of clause (e) above, the term “business
relationship” shall be construed as any transaction entered into for a commercial
purpose, except –
(i) commercial transactions which are in the nature of professional services
permitted to be rendered by an auditor or audit firm under the Act and the Chartered
Accountants Act, 1949 and the rules or the regulations made under those Acts;
(ii) commercial transactions which are in the ordinary course of business of the
company at arm’s length price - like sale of products or services to the auditor, as
customer, in the ordinary course of business, by companies engaged in the business
of telecommunications, airlines, hospitals, hotels and such other similar businesses.
(f) a person whose relative is a Director or is in the employment of the Company as a
director or key Managerial Personnel.
(g) a person who is in full time employment elsewhere or a person or a partner of a firm
holding appointment as its auditor, if such person or partner is at the date of such
appointment or reappointment holding appointment as auditor of more than twenty
companies other than one person companies, dormant companies, small companies
and private companies having paid-up share capital less than ` 100 crore.
(h) a person who has been convicted by a Court of an offence involving fraud and a
period of ten years has not elapsed from the date of such conviction.
(i) a person who, directly or indirectly, renders any service referred to in section
144 to the company or its holding company or its subsidiary company.
It may be noted that, for the purposes of this clause, the term "directly or
indirectly" shall have the same meaning as assigned to it in the Explanation to
section 144, i.e.
In case of auditor being an individual, either himself or through his relative or any
other person connected or associated with such individual or through any other
entity, whatsoever, in which such individual has significant influence or control, or
whose name or trade mark or brand is used by such individual, shall be termed as
rendering of services directly or indirectly by the auditor; and
In case of auditor being a firm , either itself or through any of its partners or through
its parent, subsidiary or associate entity or through any other entity, whatsoever,
in which the firm or any partner of the firm has significant influence or control, or
whose name or trade mark or brand is used by the firm or any of its partners, shall
be termed as rendering of services directly or indirectly by the auditor.
Section 144 of the Companies Act, 2013 prescribes certain services not to be
rendered by the auditor. An auditor appointed under this Act shall provide to the
company only such other services as are approved by the Board of Direc tors or the
audit committee, as the case may be, but which shall not include any of the following
services (whether such services are rendered directly or indirectly to the company or
its holding company or subsidiary company), namely:
(i) accounting and book keeping services;
(ii) internal audit;
(iii) design and implementation of any financial
information system;
(iv) actuarial services;
(v) investment advisory services;
(vi) investment banking services;
Fig.: Auditor restrained from entering into certain services 2
(vii) rendering of outsourced financial services;
(viii) management services; and
(ix) any other kind of services as may be prescribed.
It may be noted that an auditor or audit firm who or which has been performing any non-
audit services on or before the commencement of this Act shall comply with the provisions
of this section before the closure of the first financial year after the date of such
commencement.
Example: CA. Poshin is providing the services of investment banking to C Ltd. Later
on, he was also offered to be appointed as an auditor of the company for the current
financial year. Advise.
Section 141(3)(i) of the Companies Act, 2013 disqualifies a person for appointment
as an auditor of a company who, directly or indirectly, renders any service
referred to in section 144 to the company or its holding company or its
subsidiary company. Section 144 of the Companies Act, 2013 prescribes certain
2 Source of image: w ebuildbuzz.com

services not to be rendered by the auditor which includes investment banking

services.
Therefore, CA. Poshin is advised not to accept the assignment of auditing as the
investment banking service is specifically notified in the list of services not to be
rendered by him as per section 141(3)(i) read with section 144 of the Companies
Act, 2013.
(4) 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.
CASE STUDY
Facts of the Case: Mr. A, a chartered accountant, has been appointed as an auditor of
Laxman Ltd. in the Annual General Meeting of the company held in September, 2016,
which assignment he accepted. Subsequently in January, 2017 he joined Mr. B, another
chartered accountant, who is the Manager Finance of Laxman Ltd., as partner.
Provisions and Explanation: Section 141(3)(c) of the Companies Act, 2013 prescribes
that any person who is a partner or in employment of an officer or employee of the
company will be disqualified to act as an auditor of a company. Sub-section (4) of Section
141 provides that an auditor who becomes subject, after his appointment, to any of the
disqualifications specified in sub-sections (3) of Section 141, he shall be deemed to have
vacated his office as an auditor.
Conclusion: In the present case, Mr. A, an auditor of Laxman Ltd., joined as partner with
Mr. B, who is Manager Finance of Laxman Limited. The given situation has attracted sub-
section (3)(c) of Section 141 and, therefore, he shall be deemed to have vacated office
of the auditor of Laxman Limited in accordance with sub-section (4) of section 141.
2 Appointment of Auditor
Section 139 of the Companies Act, 2013 contains provisions
regarding Appointment of Auditors. Discussion on appointment
of auditors may be grouped under two broad headings-
I Appointment of First Auditors.
II Appointment of Subsequent Auditors.
Fig: Meeting for appointment of Auditor 3
3 Source of image: http://new hav enscience.org

Appointment of Auditor
(Section 139)
First Auditor Subsequent Auditor
Other than Goverment Company Other than Goverment Company

Government Company defined u/s 2(45) Government Company defined u/s 2(45)
[Section 139(6)] [Section 139(7)] [Section 139(1)] [Section 139(5)]
Appointment by C&AG
Appointment by BOD - within 60 days from the
within 30 days from DOR Appointment Appointment by C&
DOR by Members AG within 180 days
in AGM from the
in case of failure commencement of
in case of failure: year
BOD within 30 days
Members in EGM
within 90 days.
in case of failure Hold the office from
1st AGM to 6th
Members in EGM within AGM
60 days subject to Hold the
Hold the fulfillment of certain office till the
office till the conditions conclusion of
conclusion of the AGM
the first AGM Hold the
office till the
conclusion of
the first AGM
2.1 Appointment of First Auditor

2.1.1 Appointment of First Auditors in the case of a company, other than a Government
Company: As per Section 139(6), the first auditor of a company, other than a Government
company, shall be appointed by the Board of Directors within 30 days from the date of
registration of the company.
In the case of failure of the Board to appoint the auditor, it shall inform the memb ers of the
company.
The members of the company shall within 90 days at an extraordinary general meeting appoint
the auditor. Appointed auditor shall hold office till the conclusion of the first annual general
meeting.
CASE STUDY
Facts of the Case: Managing Director of Pigeon Ltd. himself wants to appoint CA. Champ, a
practicing Chartered Accountant, as first auditor of the company.
Provisions and Explanation: Section 139(6) of the Companies Act, 2013 lays down that the
first auditor of a company shall be appointed by the Board of Directors within 30 days from the
date of registration of the company. In the instant case, the proposed appointment of CA.
Champ, a practicing Chartered Accountant, as first auditor by the Managing Director of Pigeon
Ltd. by himself is in violation of Section 139(6) of the Companies Act, 2013, which authorizes
the Board of Directors to appoint the first auditor of the company.
Conclusion: In view of the above, the Managing Director of Pigeon Ltd. should be advised not
to appoint the first auditor of the company.
2.1.2 Appointment of First Auditors in the case of Government Company: A “Government

company” is a company in which not less than 51% of the paid-up share capital is held 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, and includes a company which is a
subsidiary company of such a Government company.
Section 139(7) 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 within 60 days
at an extraordinary general meeting. Auditors shall hold office till the conclusion of the first
annual general meeting.
CASE STUDY
Facts of the Case: The first auditor of Bhartiya Petrol Ltd., a Government company, was
appointed by the Board of Directors.
Provisions and Explanation: In the case of a Government Company, the appointment of first
auditor is governed by the provisions of Section 139(7) of the Companies Act, 2013 which
states that 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. Hence, in the case of Bhartiya Petrol Ltd., being a government company, the first
auditor shall be appointed by the Comptroller and Auditor General of India.
Conclusion: Thus, the appointment of first auditor made by the Board of Directors of Bhartiya
Petrol Ltd., is null and void.
2.2 Appointment of Subsequent Auditor/Reappointment of Auditor
2.2.1 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 offi ce 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) 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.
(ii) The certificate shall also indicate whether the auditor satisfies the criteria provided in
section 141.
(iii) 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.
2.2.2 Appointment of Subsequent Auditors in case of Government Companies: As per
section 139(5), 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 Comptroller and Auditor-General of India shall, in respect of a financial year,
appoint an auditor duly qualified to be appointed as an auditor of companies under this Act,
within a period of 180 days from the commencement of the financial year, who shall hold office
till the conclusion of the annual general meeting.
2.3 Filling of a Casual Vacancy
As per Section 139(8), 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 three months
of the recommendation of the Board and he shall hold the office till the conclusion of the
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 the said period the Board of Directors shall fill the vacancy within next 30
days.
Filling of casual vacancy {u/s 139 (8)}
Other Companies Govt Companies
To be filled by BOD within 30

days
To be filled by C&AG within 30 days
In case of resignation, appointment by In case of failure BOD shall fill

BOD should be approved by Co. at within 30 days
AGM
2.3.1 Casual Vacancy by Resignation: As per section 140(2) the auditor who has
resigned from the company shall file within a period of 30 days from the date of resignation, a
statement in the prescribed Form ADT–3 (as per Rule 8 of CAAR) with the company and the
Registrar, and in case of the companies referred to in section 139(5) i.e. Government company,
the auditor shall also file such statement with the Comptroller and Auditor-General of India,
indicating the reasons and other facts as may be relevant with regard to his resignation. In case
of failure the auditor shall be punishable with fine which shall not be less than fifty thousand
rupees or the remuneration of the auditor, whichever is less but which may extend to five
lakh rupees as per section 140(3).
CASE STUDY
Facts of the Case: CA. Donald was appointed as the auditor of PS Ltd. at the
remuneration of ` 30,000. However, after 4 months of continuing his services, he could
not continue to hold his office of the auditor as his wife got a government job at a distant
place and he needs to shift along with her to the new place. Thus, he resigned from the
company and did not perform his responsibilities relating to filing of statement to the
company and the registrar indicating the reasons and other facts as may be relevant
with regard to his resignation.
How much fine may he be punishable with under section 140(3) for non-compliance of
section 140(2) of the Companies Act, 2013?
Provisions and Explanation: For non-compliance of sub-section (2) of section 140 of the
Companies Act, 2013, the auditor shall be punishable with fine, which shall not be less
than fifty thousand rupees or the remuneration of the auditor, whichever is less but
which may extend to five lakh rupees, under section 140(3) of the said Act.
Conclusion: Thus, the fine under section 140(3) of the Companies Act, 2013 shall n ot be
less than ` 30,000 but which may extend to ` 5,00,000.
Other Important Provisions Regarding Appointment of Audito rs

(1) A retiring auditor may be re-appointed at an annual general meeting, if-
(a) he is not disqualified for re-appointment;
(b) he has not given the company a notice in writing of his unwillingness to be re-
appointed; and
(c) a special resolution has not been passed at that meeting appointing some other
auditor or providing expressly that he shall not be re-appointed.
(2) Where at any annual general meeting, no auditor is appointed or re-appointed, the existing
auditor shall continue to be the auditor of the company.
3 Rotation of Auditor
3.1 Applicability of Section 139(2) Rotation
of Auditor: 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-
Fig: Rotation of Auditors4
Class of Companies for Rotation of Auditor

↓
including Listed Companies
+
excluding OPC (One Person Company) and Small Companies
All companies having paid up

share capital of below
All unlisted public companies All private limited companies threshold limit mentioned,
having having
but
paid up share capital  ` 10 paid up share capital  ` 50
crore crore having public borrowings from
financial institutions, banks or
public deposits  ` 50 crore
(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 above, but
4 Source of image: thehindubusinessline.com

having public borrowings from financial institutions, banks or public deposits of rupees fifty
crores or more.
Example: Rano Pvt. Ltd. is a private limited Company, having paid up share capital of ` 42
crore but having public borrowing from nationalized banks and financial institutions of ` 72
crore, manner of rotation of auditor will be applicable.
As per section 139(2), no listed company or a company belonging to such class or classes of
companies as mentioned above, shall appoint or re-appoint-
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years. Provided that -
(i) an individual auditor who has completed his term under clause (a) shall not be eligible
for re-appointment as auditor in the same company for five years from the completion
of his term;
(ii) an audit firm which has completed its term under clause (b), shall not be eligible for
re-appointment as auditor in the same company for five years from the completion of
such term.
Example: Jolly Ltd., a listed company, appointed M/s Polly & Co., a Chartered Accountant
firm, as the statutory auditor in its AGM held at the end of September, 2016 for 11 years. Here,
the appointment of M/s Polly & Co. is not valid as the appointment can be made only for one
term of five consecutive years and then another one more term of five consecutive years. It
can’t be appointed for two terms in one AGM only. Further, a cooling period of five years from
the completion of term is required i.e. the firm can’t be re-appointed for further 5 years after
completion of two terms of five consecutive years.
The following points merit consideration in this regard-

(1) As on the date of appointment, no audit firm having a common partner or partners to the
other audit firm, whose tenure has expired in a company immediately preceding the
financial year, shall be appointed as auditor of the same company for a period of five years.
Example: M/s XYZ & Co., is an audit firm having partner Mrs. X, Mr. Y and Mr. Z, whose
tenure has expired in the company immediately preceding the financial year. M/s ABZ &
Co., another audit firm in which Mr. Z is a common partner, will also be disqualified for the
same company along with M/S XYZ & Co. for the period of five years.
(2) Every company, existing on or before the commencement of this Act which is required to
comply with provisions of this sub-section, shall comply with the requirements of this sub-
section within a period which shall not be later than the date of the first annual general
meeting of the company held, within the period specified under sub-section (1) of section
96, after three years from the date of commencement of this Act.
EXAMPLES
Ex 1: Mr. Raj, a Chartered Accountant, is an individual auditor of Binaca Limited for last 5
years as on March, 2013 (i.e. existing on or before the date of Commencement of
Companies Act, 2013). Keeping in view the transition period as stated in the Companies
Act, 2013, Mr. Raj can continue the audit of Binaca Ltd. upto the first annual general
meeting to be held after three years from the date of commencement of the Act.
Ex 2: M/s Raj & Associates, a Chartered Accountants Audit Firm, is doing audit of Binaca
Limited for last 11 years as on March, 2013 (i.e. existing on or before the date of
Commencement of Companies Act, 2013). Keeping in view the transition period as stated
in the Companies Act, 2013, M/s Raj Associates can continue the audit of Binaca Ltd. upto
the first annual general meeting to be held after three years from the date of
commencement of the Act.
Students may interlink the above example with Illustrative table explaining rotation
in case of individual auditor as well as audit firm which has been given after the 3.2
i.e. Manner of rotation of Auditors by the Companies on Expiry of their Term.*
(3) It has also been provided that right of the company to remove an auditor or the right of the
auditor to resign from such office of the company shall not be prejudiced.
(4) Subject to the provisions of this Act, members of a company may resolve to provide that-
(a) in the audit firm appointed by it, the auditing partner and his team shall be rotated at
such intervals as may be resolved by members; or
(b) the audit shall be conducted by more than one auditor.
(5) The Central Government may, by rules, prescribe the manner in which the companies shall
rotate their auditors.
3.2 Manner of Rotation of Auditors by the Companies on Expiry of their Term: Rule 6 of
the Companies (Audit and Auditors) Rules, 2014 prescribes the manner of rotation of auditors
on expiry of their term which 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.
Explanation I - For the purposes of these rules the term “same network” includes the
firms operating or functioning, hitherto or in future, under the same brand name, trade
name or common control.
Explanation II - 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.
*Illustration explaining rotation in case of individual auditor
Number of consecutive years Maximum number of Aggregate period
for which an individual auditor consecutive years which the auditor
has been functioning as for which he may be would complete in
auditor in the same company appointed in the the same company
[in the first AGM held after the same company in view of column I
commencement of provisions (including and II
of section 139(2)] transitional period)
I II III
5 Years (or more than 5 3 years 8 years or more
years)
4 years 3 years 7 years
1 year 4 years 5 years
Note:
(1) Individual auditor shall include other individuals or firms whose name or trade mark
or brand is used by such individual, if any.
(2) Consecutive years shall mean all the preceding financial years for which the individual
auditor has been the auditor until there has been a break by five years or more.
*Illustration explaining rotation in case of audit firm
Number of consecutive years for Maximum number of Aggregate period
which an audit firm has been consecutive years for which the firm would
functioning as auditor in the which the firm may be complete in the same
same company [in the first AGM appointed in the same company in view of
held after the commencement of company (including column I and II
provisions of section 139(2)] transitional period)
I II III
10 Years (or more than 10 years) 3 years 13 years or more
Note:
1. Audit Firm shall include other firms whose name or trade mark or brand is used by
the firm or any of its partners.
2. Consecutive years shall mean all the preceding financial years for which the firm has
been the auditor until there has been a break by five years or more.
(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.
4 Provisions relating to Audit Committee
4.1 Applicability of section 177 i.e. Constitution of Audit Committee: Where a company is
required to constitute an Audit Committee under section 177, all appointments, including the
filling of a casual vacancy of an auditor under this section shall be made after taking into account
the recommendations of such committee.
all public
companies with a
paid up capital 
` 10 crore
Class of
Companies to
constitute Audit
Committee
[including Listed
all public Public
companies, having Companies]
in aggregate, all public
outstanding loans companies having
or borrowings or turnover  ` 100
debentures or crore
deposits >` 50
crore
Diagram showing class of companies to constitute Audit Committee

It is important to know that in addition to listed public companies, following classes of
companies shall constitute an Audit Committee -
(i) all public companies with a paid up capital of ten crore rupees or more;
(ii) all public companies having turnover of one hundred crore rupees or more;
(iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures
or deposits exceeding fifty crore rupees or more.
Explanation- The paid up share capital or turnover or outstanding loans, or borrowings or
debentures or deposits, as the case may be, as existing on the date of last audited Financial
Statements shall be taken into account for the purposes of this rule.
Example: XYZ Ltd., a public company having paid up capital of ` 9 crore but having turnover
of ` 150 crore, will be required to constitute an Audit Committee under section 177 because the
requirement for constitution of Audit Committee arises if the company falls into any of the
prescribed category.
4.2 Manner and procedure of selection and appointment of auditors- Rule 3 of CAAR, 2014
prescribes the following manner and procedure of selection and appointment of auditors-
(1) In case of a company that is required to constitute an Audit Committee under section 177,
the committee, and, in cases where such a committee is not required to be constituted, the
Board, shall take into consideration the qualifications and experience of the individual or
the firm proposed to be considered for appointment as auditor and whether such
qualifications and experience are commensurate with the size and requirements of the
company.
It may be noted that while considering the appointment, the Audit Committee or the Board,
as the case may be, shall have regard to any order or pending proceeding relating to
professional matters of conduct against the proposed auditor before the Institute of
Chartered Accountants of India or any competent authority or any Court.
(2) The Audit Committee or the Board, as the case may be, may call for such other information
from the proposed auditor as it may deem fit.
(3) Subject to the provisions of sub-rule (1), where a company is required to constitute the
Audit Committee, the committee shall recommend the name of an individual or a firm as
auditor to the Board for consideration and in other cases, the Board shall consider and
recommend an individual or a firm as auditor to the members in the annual general meeting
for appointment.
(4) If the Board agrees with the recommendation of the Audit Committee, it shall further
recommend the appointment of an individual or a firm as auditor to the members in the
annual general meeting.
(5) If the Board disagrees with the recommendation of the Audit Committee, it shall refer back
the recommendation to the committee for reconsideration citing reasons for such
disagreement.
(6) If the Audit Committee, after considering the reasons given by the Board, decides not to
reconsider its original recommendation, the Board shall record reasons for its
disagreement with the committee and send its own recommendation for consideration of
the members in the annual general meeting; and if the Board agrees with the
recommendations of the Audit Committee, it shall place the matter for consideration by
members in the annual general meeting.
(7) The auditor appointed in the annual general meeting shall hold office from the conclusion
of that meeting till the conclusion of the sixth annual general meeting, with the meeting
wherein such appointment has been made being counted as the first meeting.
5. Auditor’s Remuneration
As per section 142 of the Act, the remuneration of the auditor of a company shall be fixed in its
general meeting or in such manner as may be determined therein. However, board may fix
remuneration of the first auditor appointed by it.
Further, the remuneration, in addition to the fee payable to an auditor, include the expenses, if
any, incurred by the auditor in connection with the audit of the company and any facility extended
to him but does not include any remuneration paid to him for any other service rendered by him
at the request of the company. Therefore, it has been clarified that the remuneration to Auditor
shall also include any facility provided to him.
6. Removal of Auditors
6.1 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 in that behalf as per
Rule 7 of CAAR, 2014-
Fig: Auditor leaving office of the auditor 5
(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 30 days of the resolution
passed by the Board.
(3) 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.
Direction by Tribunal in case Auditor acted in a Fraudulent Manner:
As per sub-section (5) of the section 140, the Tribunal either suo motu or on an application made
to it by the Central Government or by any person concerned, if it is satisfied that the auditor of
a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or
colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by
order, direct the company to change its auditors.
However, if the application is made by the Central Government and the Tribunal is satisfied that
any change of the auditor is required, it shall within fifteen days of receipt of such application,
make an order that he shall not function as an auditor and the Central Government may appoint
another auditor in his place.
It may be noted that an auditor, whether individual or firm, against whom final ord er has been
passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of
any company for a period of five years from the date of passing of the order and the auditor
shall also be liable for action under section 447.
It is hereby clarified that in the case of a firm, the liability shall be of the firm and that of every
partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or
in relation to, the company or its director or officers.
5 Source of image: w w w.123rf.com

6.2 Appointment of Auditor Other Than Retiring Auditor: Section 140(4) lays down
procedure to appoint an auditor other than retiring auditor who was removed-
(1) Special notice shall be required for a resolution at an annual general meeting appointing as
auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall
not be re-appointed, except where the retiring auditor has completed a consecutive tenure of
five years or as the case may be, ten years, as provided under sub-section (2) of section 139.
(2) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof
to the retiring auditor.
(3) Where notice is given of such a resolution and the retiring auditor makes with respect
thereto representation in writing to the company (not exceeding a reasonable length) and
requests its notification to members of the company, the company shall, unless the
representation is received by it too late for it to do so,-
(a) in any notice of the resolution given to members of the company, state the fact of the
representation having been made; and
(b) send a copy of the representation to every member of the company to whom notice
of the meeting is sent, whether before or after the receipt of the representation by the
company. and if a copy of the representation is not sent as aforesaid because it was
received too late or because of the company's default, the auditor may (without
prejudice to his right to be heard orally) require that the representation shall be read
out at the meeting.
Students may note that if a copy of representation is not sent as aforesaid, a copy thereof shall
be field with the Registrar.
Curtailing right of the auditor regarding circulation of copy of representation in the case
of appointment of auditor other than retiring auditor under section 140(4) of the
companies act, 2013:
If the Tribunal is satisfied on an application either of the company or of any other aggrieved
person that the rights conferred by section 140(4) of the Companies Act, 2013 are being abused
by the auditor, then, the copy of the representation may not be sent and the representation need
not be read out at the meeting.
7. Ceiling on Number of Audits
It has been mentioned earlier that before appointment is given to any auditor, the company must
obtain a certificate from him to the effect that the appointment, if made, will not result in an
excess holding of company audit by the auditor concerned over the limit laid down in section
141(3)(g) of the Companies Act, 2013 which prescribes that a person who is in full time
employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if
such person or partner is at the date of such appointment or reappointment holding appointment
as auditor of more than twenty companies other than one person companies, dormant
companies, small companies and private companies having paid-up share capital less than `
100 crore, shall not be eligible for appointment as an Auditor of a Company.
In the case of a firm of auditors, it has been further provided that ‘specified number of
companies’ shall be construed as the number of companies specified for every partner of the
firm who is not in full time employment elsewhere.
This limit of 20 company audits is per person. In the case of an audit firm having 3 partners, the
overall ceiling will be 3 × 20 = 60 company audits. Sometimes, a chartered accountant is a
partner in a number of auditing firms. In such a case, all the firms in which he is partner or
proprietor will be together entitled to 20 company audits on his account. Subject to the overall
ceiling of company audits, how they allocate the 20 audits between them selves is their affairs.
CASE STUDY
“ABC & Co.” is an Audit Firm having partners “Mr. A”, “Mr. B” and “Mr. C”, Chartered
Accountants. “Mr. A”, “Mr. B” and “Mr. C” are holding appointment as an Auditor in 4, 6 and 10
Companies respectively.
(i) Provide the maximum number of Audits remaining in the name of “ABC & Co.”
(ii) Provide the maximum number of Audits remaining in the name of individual partner i.e. Mr.
A, Mr. B and Mr. C.
(iii) Can ABC & Co. accept the appointment as an auditor in 60 private companies having paid-
up share capital less than ` 100 crore, 2 small companies and 1 dormant company?
(iv) Would your answer be different, if out of those 60 private companies, 45 companies are
having paid-up share capital of ` 110 crore each?
Fact of the Case: In the instant case, Mr. A is holding appointment in 4 companies, whereas
Mr. B is having appointment in 6 Companies and Mr. C is having appointment in 10 Companies.
In aggregate all three partners are having 20 audits.
Provisions and Explanations: Section 141(3)(g) of the Companies Act, 2013 states that the
following persons shall not be eligible for appointment as an auditor of a company i.e. a person
who is in full time employment elsewhere; or a person, or a partner of a firm holding appointment
as its auditor, if such person, or partner is at the date of such appointment, or reappointment
holding appointment as auditor of more than twenty companies other than one person
companies, dormant companies, small companies and private companies having paid-up share
capital less than ` 100 crore.
As per section 141(3)(g), this limit of 20 company audits is per person. In the case of an audit
firm having 3 partners, the overall ceiling will be 3 × 20 = 60 company audits. Some times, a
chartered accountant is a partner in a number of auditing firms. In such a case, all the firms in
which he is partner or proprietor will be together entitled to 20 company audits on his account.
Conclusion:
(i) Therefore, ABC & Co. can hold appointment as an auditor of 40 more companies:
Total Number of Audits available to the Firm = 20*3 = 60

Number of Audits already taken by all the partners
In their individual capacity = 4+6+10 = 20
Remaining number of Audits available to the Firm =40
(ii) With reference to above provisions an auditor can hold more appointment as auditor =
ceiling limit as per section 141(3)(g)- already holding appointments as an auditor. Hence
(1) Mr. A can hold: 20 - 4 = 16 more audits. (2) Mr. B can hold 20-6 = 14 more audits and
(3) Mr. C can hold 20-10 = 10 more audits.
(iii) In view of above discussed provisions, ABC & Co. can hold appointment as an auditor in
all the 60 private companies having paid-up share capital less than
` 100 crore, 2 small companies and 1 dormant company as these are excluded from the
ceiling limit of company audits given under section 141(3)(g) of the Companies Act, 2013.
(iv) As per fact of the case, ABC & Co. is already having 20 company audits and they can also
accept 40 more company audits. In addition they can also conduct the audit of one person
companies, small companies, dormant companies and private companies having paid up
share capital less than ` 100 crores. In the given case, out of the 60 private companies,
ABC & Co. is offered 45 companies having paid-up share capital of ` 110 crore each.
Therefore, ABC & Co. can also accept the appointment as an auditor for 2 small
companies, 1 dormant company, 15 private companies having paid-up share capital less
than ` 100 crore and 40 private companies having paid-up share capital of ` 110 crore
each in addition to above 20 company audits already holding.
Council General Guidelines, 2008 (Chapter VIII): In exercise of the powers conferred by clause
(ii) of Part II of the Second Schedule to the Chartered Accountants Act, 1949, the Council of the
Institute of Chartered Accountants of India hereby specifies that a member of the Institute in
practice shall be deemed to be guilty of professional misconduct, if he holds at any time
appointment of more than the “specified number of audit assignments of the companies under
Section 224 and /or Section 226 of the Companies Act, 1956 (now section 141(3)(g) of the
Companies Act, 2013).
It may be noted that in the case of a firm of chartered accountants in practice, the specified
number of audit assignments shall be construed as the specified number of audit assignments
for every partner of the firm.
It may also be noted that where any partner of the firm of chartered accountants in practice is
also a partner of any other firm or firms of chartered accountants in practice, the number of audit
assignments which may be taken for all the firms together in relation to such partner shall not
exceed the specified number of audit assignments in the aggregate.
It is further provided that where any partner of a firm or firms of chartered accountants in practice
accepts one or more audit assignments in his individual capacity, or in the name of his
proprietary firm, the total number of such assignment which may be accepted by all firms in
relation to such chartered accountant and by him shall not exceed the specified number of audit
assignments in the aggregate.
(1) In computing the specified number of audit assignments-
(a) the number of such assignments, which he or any partner of his firm has accepted
whether singly or in combination with any other chartered accountant in practice or
firm of such chartered accountants, shall be taken into account.
(b) the number of partners of a firm on the date of acceptance of audit assignment shall
be taken into account.
(c) a chartered accountant in full time employment elsewhere shall not be taken into
account.
(2) A chartered accountant in practice as well as firm of chartered accountants in practice shall
maintain a record of the audit assignments accepted by him or by the firm of chartered
accountants, or by any of the partner of the firm in his individual name or as a partner of
any other firm as far as possible, in the prescribed manner.
Ceiling on Tax Audit Assignments: The specified number of tax audit assignments that an
auditor, as an individual or as a partner of a firm, can accept is 60 numbers. ICAI has notified
that a chartered accountant in practice shall be deemed to be guilty of professional misconduct,
if he accepts in a financial year, more than the specified number of tax audit assignments u/s
44AB.
8. Powers/Rights of Auditors
The auditor has the following powers/rights while conducting an audit:
(a) Right of access to books, etc. – Section 143(1) of the Act provides that the auditor of a
company, at all times, shall have a right of access to the books of account and vouchers of the
company, whether kept at the registered offic e of the company or at any other place and he is
entitled to require from the officers of the company such information and explanation as he may
consider necessary for the performance of his duties as auditor.
It may be noted that according to section 2(59) of the Act, the term ‘officer’ includes any director,
manager or key managerial personnel or any person in accordance with whose directions or
instructions the Board of Directors or any one or more of the directors is or are accustomed to
act;
The phrase ‘books, accounts and vouchers’ includes all books which have any bearing, or are
likely to have any bearing on the accounts, whether these be the usual financial books or the
statutory or statistical books; memoranda books, e.g., inventory books, costing records and the
like may also be inspected by the auditor. Similarly the term ‘voucher’ includes all or any of the
correspondence which may in any way serve to vouch for the accuracy of the accounts. Thus,
the right of access is not restricted to books of account alone and it is for the auditor to determine
what record or document is necessary for the purpose of the audit.
The right of access is not limited to those books and records maintained at the registered or
head office so that in the case of a company with branches, the right also extends to the branch
records, if the auditor considers it necessary to have access thereto as per Section143(8).
Example: X Ltd. restrains its company auditor from visiting another branch at different location
and having access to the inventory records maintained at that branch because the branch is
already audited by another auditor and the report has been received. Here, it may be noted that
the company auditor has right to visit the branch, even if the branch accounts are audited by
another auditor, if he considers it necessary to do so for the performance of his duties as auditor.
(b) Right to obtain information and explanation from offi cers - This right of the auditor to
obtain from the officers of the company such information and explanations as he may think
necessary for the performance of his duties as auditor is a wide and important power. In the
absence of such power, the auditor would not be able to obtain details of amount collected by
the directors, etc. from any other company, firm or person as well as of any benefits in kind
derived by the directors from the company, which may not be known from an examination of the
books. It is for the auditor to decide the matters in respect of which information and explanations
are required by him. When the auditor is not provided the information required by him or is
denied access to books, etc., his only remedy would be to report to the members that he could
not obtain all the information and explanations he had required or considered necessary for the
performance of his duties as auditors.
(c) Right to receive notices and to attend general meeting – The auditors of a company
are entitled to attend any general meeting of the company (the right is not restricted to those at
which the accounts audited by them are to be discussed); also to receive all the notices and
other communications relating to the general meetings, which members are entitled to receive
and to be heard at any general meeting in any part of the business of the meeting which
concerns them as auditors.
Section 146 of the Companies Act, 2013 discusses right as well as duty of the auditor.
According to the section 146:
“all notices of, and other communications relating to, any general meeting shall be forwarded to
the auditor of the company, and the auditor shall, unless otherwise exempted by the company,
attend either by himself or through his authorised representative, who shall also be qualified to
be an auditor, any general meeting and shall have right to be heard at such meeting on any part
of the business which concerns him as the auditor.”
Thus, it is right of the auditor to receive notices and other communications relating to any general
meeting and to be heard at such meeting, relating to the matter of his concern, however, it is duty of
the auditor to attend the same or through his authorised representative unless otherwise exempted.
(d) Right to report to the members of the company on the accounts examined by him –
The auditor shall make a report to the members of the company on the accounts examined by
him and on every financial statements which are required by or under this Act to be laid before
the company in general meeting and the report shall after taking into account the provisions of
this Act, the accounting and auditing standards and matters which are required to be included
in the audit report under the provisions of this Act or any rules made there under or under any
order made under this section and to the best of his information and knowledge, the said
accounts, financial statements give a true and fair view of the state of the company’s affairs as
at the end of its financial year and profit or loss and cash flow for the year and such other matters
as may be prescribed.
(e) Right to Lien – In terms of the general principles of law, any person having the lawful
possession of somebody else’s property, on which he has worked, may retain the property for
non-payment of his dues on account of the work done on the property. On this premise, auditor
can exercise lien on books and documents placed at his possession by the client for non
payment of fees, for work done on the books and documents. The Institute of Chartered
Accountants in England and Wales has expressed a similar view on the following conditions:
(i) Documents retained must belong to the client who owes the money.
(ii) Documents must have come into possession of the auditor on the authority of the client.
They must not have been received through irregular or illegal means. In case of a company
client, they must be received on the authority of the Board of Directors.
(iii) The auditor can retain the documents only if he has done work on the documents assigned
to him.
(iv) Such of the documents can be retained which are connected with the work on which fees
have not been paid.
Under section 128 of the Act, books of account of a company must be kept at the registered
office. These provisions ordinarily make it impracticable for the auditor to have possession of
the books and documents. The company provides reasonable facility to auditor for inspection of
the books of account by directors and others authorised to inspect under the Act. Taking an
overall view of the matter, it seems that though legally, auditor may exercise right of lien in cases
of companies, it is mostly impracticable for legal and practicable constraints. His working papers
being his own property, the question of lien, on them does not arise.
SA 230 issued by ICAI on Audit Documentation (explanatory text, A- 25), “Standard on Quality
Control (SQC) 1, “Quality Control for Firms that Perform Audits and Reviews of Historical
Financial Information, and Other Assurance and Related Services Engagements”, issued by the
Institute, provides that, unless otherwise specified by law or regulation, audit documentation is
the property of the auditor. He may at his discretion, make portions of, or extracts from, audit
documentation available to clients, provided such disclosure does not undermine the validity of
the work performed, or, in the case of assurance engagements, the independence of the auditor
or of his personnel.”
9. Duties of Auditors
Sections 143 of the Companies Act, 2013 specifies the duties of an auditor of a company in a
quite comprehensive manner. It is noteworthy that scope of duties of an auditor has generally
been extending over all these years.
(1) Duty of Auditor to Inquire on certain matters: It is the duty of auditor to inquire into the
following matters-
(a) whether loans and advances made by the company on the basis of security have
been properly secured and whether the terms on which they have been made are
prejudicial to the interests of the company or its members;
(b) whether transactions of the company which are represented merely by book entries
are prejudicial to the interests of the company;
(c) where the company not being an investment company or a banking company, whether
so much of the assets of the company as consist of shares, debentures and other
securities have been sold at a price less than that at which they were purchased by
the company;
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and documents of the c ompany that any shares have
been allotted for cash, whether cash has actually been received in respect of such
allotment, and if no cash has actually been so received, whether the position as stated
in the account books and the balance sheet is correct, regular and not misleading.
The opinion of the Research Committee of the Institute of Chartered Accountants of India
on section 143(1) is reproduced below:
“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 he is satisfied
as a result of the inquiries, he has no further duty to report that he is so satisfied. In such
a case, the content of the Auditor’s Report will remain exactly the same as the auditor has
to inquire and apply his mind to the information elicited by the enquiry, in deciding whether
or not any reference needs to be made in his report. In our opinion, it is in this light that
the auditor has to consider his duties under section 143(1).”
Therefore, it could be said that the auditor should make a report to the members in case
he finds answer to any of these matters in adverse.
(2) Duty to Sign the Audit Report: As per section 145 of the Companies Act, 2013, the person
appointed as an auditor of the company shall sign the auditor's report or sign or certify any
other document of the company, in accordance with the provisions of section 141(2).
Section 141(2) of the Companies Act, 2013 states that where a firm including a limited
liability partnership 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.
The qualifications, observations or comments on financial transactions or matters, which
have any adverse effect on the functioning of the company mentioned in the auditor's report
shall be read before the company in general meeting.
(3) Duty to comply with Auditing Standards: As per section 143(9) of the Companies Act, 2013,
every auditor shall comply with the auditing standards. Further, as per section 143(10) of the
Act, the Central Government may prescribe the standards of auditing as recommended by the
Institute of Chartered Accountants of India, in consultation with and after examination of the
recommendations made by the National Financial Reporting Authority.
(4) Duty to report: As per section 143(3), the auditor’s report shall also state –
(a) whether he has sought and obtained all the information and explanations which to the
best of his knowledge and belief were necessary for the purpose of his audit and if
not, the details thereof and the effect of such information on the financial statements;
(b) whether, in his opinion, proper books of account as required by law have been kept
by the company so far as appears from his examination of those books and proper
returns adequate for the purposes of his audit have been received from branches not
visited by him;
(c) whether the report on the accounts of any branch office of the company audited under
sub-section (8) by a person other than the company’s auditors has been sent to him
under the proviso to that sub-section and the manner in which he has dealt with it in
preparing his report;
(d) whether the company’s balance sheet and profit and loss account dealt with in the
report are in agreement with the books of account and returns;
(e) whether, in his opinion, the financial statements comply with the accounting
standards;
(f) the observations or comments of the auditors on financial transactions or matters
which have any adverse effect on the functioning of the company;
(g) whether any director is disqualified from being appointed as a director under sub-
section (2) of the section 164;
(h) any qualification, reservation or adverse remark relating to the maintenance of
accounts and other matters connected therewith;
(i) whether the company has adequate internal financial controls with reference to
financial statements in place and the operating effectiveness of such controls;
However, it may be noted that the reporting requirement on adequacy of internal
financial controls (IFCs) with reference to financial statements shall not be
applicable to a private company which is a–
(I) One person company; or
(II) Small company; or
(III) Company having turnover less than ` 50 crore as per latest audited
financial statement and having aggregate borrowings from banks or
financial institutions or any body corporate at any point of time during the
financial year less than ` 25 crore.
One Person Company

Private
Exemption from Company
reporting on Small Company
adequacy of IFCs
Having turnover <` 50 crore
and Borrowings < ` 25 crore
(j) such other matters as may be prescribed. Rule 11 of the Companies (Audit and
Auditors) Rules, 2014 prescribes the other matters to be included in auditor’s report.
The auditor’s report shall also include their views and comments on the following
matters, namely:-
(i) whether the company has disclosed the impact, if any, of pending litigations on
its financial position in its financial statement;
(ii) whether the company has made provision, as required under any law or
accounting standards, for material foreseeable losses, if any, on long term
contracts including derivative contracts;
(iii) whether there has been any delay in transferring amounts, required to be
transferred, to the Investor Education and Protection Fund by the company.
[Notes: (1) Students may note that the auditor is also required to report on certain
additional matters specified under CARO, 2016 which is discussed later under
Para 10 Reporting under Companies (Auditor’s Report) Order, 2016.
(2) Students are also required to refer Guidance note on Reporting under
section 143(3)(f) and (h) of the Companies Act, 2013.]
(5) Duty to report on frauds:
A. Reporting to the Central Government- As per section 143(12) of the Companies
Act, 2013 read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014, if an
auditor of a company in the course of the performance of his duties as auditor, has reason
to believe that an offence of fraud, which involves or
is expected to involve individually an amount of ` 1
crore or above, is being or has been committed in the
company by its officers or employees, the auditor
shall report the matter to the Central Government
within such time and in such manner as prescribed.
Fig: Reporting of fraud 6
6 Source of image: w w w.oig.lsc.gov
© The Institute of Chartered Accountants of India

B. Reporting to the Audit Committee or Board- In case of a fraud involving lesser

than the specified amount [i.e. less than ` 1 crore], the auditor shall report the matter to
the audit committee constituted under section 177 or to the Board in other cases within
such time and in such manner as prescribed.
C. Disclosure in the Board's Report: The companies, whose auditors have reported
frauds under this sub-section (12) to the audit committee or the Board, but not reported to
the Central Government, shall disclose the details about such frauds in the Board's report
in such manner as prescribed.
Sub-section (13) of section 143 of the Companies Act, 2013 safeguards the act of fraud
reporting by the auditor if it is done in good faith. It states that no duty to which an auditor
of a company may be subject to shall be regarded as having been contravened by reason
of his reporting the matter above if it is done in good faith.
It is very important to note that the provisions regarding fraud reporting shall also apply,
mutatis mutandis, to a cost auditor and a secretarial auditor during the performance of his
duties under section 148 and section 204 respectively. If any auditor, cost accountant or
company secretary in practice do not comply with the provisions of sub-section (12) of
section 143, he shall be punishable with fine which shall not be less than ` 1 lakh but which
may extend to ` 25 lakh.
The auditor is also required to report under clause (x) of paragraph 3 of Companies
(Auditor’s Report) Order, 2016 [CARO, 2016], whether any fraud by the company or any
fraud on the Company by its officers or employees has been noticed or reported during the
year. If yes, the nature and the amount involved is to be indicated.
[Notes: For detailed provisions of CARO, 2016, students may refer Para 10 Reporting
under Companies (Auditor’s Report) Order, 2016]
Example: The head accountant of a company entered fake invoices of credit purchases
in the books of account aggregate of ` 50 lakh and cleared all the payments to such bogus
creditor. Here, the auditor of the company is required to report the fraudulent activity to
the Board or Audit Committee (as the case may be) within 2 days of his knowledge of
fraud. Further, the company is also required to disclose the same in Board’s Report.
It may be noted that the auditor need not to report the central government as the amount
of fraud involved is less than ` 1 crore, however, reporting under CARO, 2016 is required.
(6) Duty to report on any other matter specified by Central Government: The Central
Government may, in consultation with the National Financial Reporting Authority (NFRA),
by general or special order, direct, in respect of such class or description of companies, as
may be specified in the order, that the auditor's report shall also include a statement on
such matters as may be specified therein.
However, as per the notification dated 29.03.2016, till the time NFRA is constituted, the
Central Government may hold consultation required under this sub-section with the
Committee chaired by an officer of the rank of Joint Secretary or equivalent in the MCA
and the Committee shall have the representatives from the ICAI and Industry Chambers
and also special invitees from the National Advisory Committee on Accounting Standards
(NACAS) and the office of the C&AG.
[Note: Students may note that Companies (Auditor’s Report) Order, 2016 has been
notified in this perspective which is discussed later under Para 10 Reporting under
Companies (Auditor’s Report) Order, 2016]
(7) Duties and powers of the company’s auditor with reference to the audit of the branch
and the branch auditor are discussed separately in the chapter under heading 13
branch audit.
(8) Duty to state the reason for qualification or negative report: As per section 143(4),
where any of the matters required to be included in the audit report is answered in the
negative or with a qualification, the report shall state the reasons there for.
10. Reporting under Companies (Auditor’s Report) Order, 2016 [CARO, 2016]
The Central Government, after consultation with the committee constituted under proviso to
section 143(11) of the Companies Act, 2013, and in supersession of the Companies (Auditor's
Report) Order, 2015 dated the 10th April, 2015, has issued the Companies (Auditor’s Report)
Order, 2016, (CARO, 2016) under section 143(11) of the Companies Act, 2013, dated 29th
March, 2016. The requirements of the Order are supplemental to the existing provisions of
section 143 of the Act regarding the auditor’s report.
The Order is not intended to limit the duties and responsibilities of auditors but only requires a
statement to be included in the audit report in respect of the matters specified therein.
Applicability of the Order: 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.
Banking company
Private limited
company subject to
Insurance company
fulfilment of
specified conditions
Exempted
Class of
Companies
Company licensed
to operate under
Small Company
section 8 of the
Companies Act
One Person
Company
EXAMPLES
Ex. 1: ‘Educating Child’ is a limited company registered under section 8 of the Companies
Act, 2013.
In the given case, ‘Educating Child’ is licensed to operate under section 8 of the Companies
Act, 2013. Therefore, CARO, 2016 shall not be applicable to ‘Educating Child’ accordingly.
Ex. 2: Ashu Pvt. Ltd. has fully paid capital and reserves of ` 50 lakh. During the year, the
company had borrowed ` 70 lakh each from a bank and a financial institution independently.
It has the turnover of ` 900 lakh.
In the given case of Ashu Pvt. Ltd., it has paid capital and reserves of ` 50 lakh i.e. less than
` 1 crore, turnover of ` 9 crore i.e. less than ` 10 crore. However, it has maximum outstanding
borrowings of ` 1.40 crore (` 70 lakh + ` 70 lakh) collectively from bank and financial
institution.
Therefore, it fails to fulfill the condition relating to borrowings. Thus, CARO, 2016 shall be
applicable to Ashu Pvt. Ltd. accordingly.
Matters to be included in the Auditor’s Report: Paragraph 3 of the Order requires the
auditor to include a statement in the auditor’s report on the following matters, namely-
(i) (a) whether the company is maintaining proper records showing full particulars, including
quantitative details and situation of fixed assets;
(b) 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;
(c) whether the title deeds of immovable properties are held in the name of the company.
If not, provide the details thereof;
(ii) whether physical verification of inventory has been conducted at reasonable intervals by
the management and whether any material discrepancies were noticed and if so, whether
they have been properly dealt with in the books of account;
(iii) whether the company has granted any loans, secured or unsecured to companies, firms,
Limited Liability Partnerships or other parties covered in the register maintained under
section 189 of the Companies Act, 2013. If so,
(a) whether the terms and conditions of the grant of such loans are not prejudicial to the
company’s interest;
(b) whether the schedule of repayment of principal and payment of interest has been
stipulated and whether the repayments or receipts are regular;
(c) if the amount is overdue, state the total amount overdue for more than ninety days,
and whether reasonable steps have been taken by the company for recovery of the
principal and interest;
(iv) in respect of loans, investments, guarantees, and security whether provisions of section
185 and 186 of the Companies Act, 2013 have been complied with. If not, provide the
details thereof.
(v) in case the company has accepted deposits, whether the directives issued by the Reserve
Bank of India and the provisions of sections 73 to 76 or any other relevant provi sions of
the Companies Act, 2013 and the rules framed there under, where applicable, have been
complied with? If not, the nature of such contraventions be stated; If an order has been
passed by Company Law Board or National Company Law Tribunal or Reserve Bank of
India or any court or any other tribunal, whether the same has been complied with or not?
(vi) where maintenance of cost records has been specified by the Central Government under
sub-section (1) of section 148 of the Companies Act, 2013 and whether such accounts and
records have been so made and maintained.
(vii) (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 with the
appropriate authorities and if not, the extent of the arrears of outstanding statutory
dues as at 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 constitute a dispute).
(viii) whether the company has defaulted in repayment of loans or borrowing to a financial
institution, bank, Government or dues to debenture holders? If yes, the period and the
amount of default to be reported (in case of defaults to banks, financial institutions, and
Government, lender wise details to be provided).
(ix) whether moneys raised by way of initial public offer or further public offer (including debt
instruments) and term loans were applied for the purposes for which those are raised. If
not, the details together with delays or default and subsequent rectification, if any, as may
be applicable, be reported;
(x) whether any fraud by the company or any fraud on the Company by its officers or
employees has been noticed or reported during the year; If yes, the nature and the amount
involved is to be indicated;
(xi) whether managerial remuneration has been paid or provided in accordance with the
requisite approvals mandated by the provisions of section 197 read with Schedule V to the
Companies Act, 2013? If not, state the amount involved and steps taken by the company
for securing refund of the same;
(xii) whether the Nidhi Company has complied with the Net Owned Funds to Deposits in the
ratio of 1:20 to meet out the liability and whether the Nidhi Company is maintaining ten per
cent unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the
liability;
(xiii) whether all transactions with the related parties are in compliance with sections 177 and
188 of Companies Act, 2013 where applicable and the details have been disclosed in the
Financial Statements etc., as required by the applicable accounting standards;
(xiv) whether the company has made any preferential allotment or private placement of shares
or fully or partly convertible debentures during the year under review and if so, as to
whether the requirement of section 42 of the Companies Act, 2013 have been complied
with and the amount raised have been used for the purposes for which the funds were
raised. If not, provide the details in respect of the amount involved and nature of non -
compliance;
(xv) whether the company has entered into any non-cash transactions with directors or persons
connected with him and if so, whether the provisions of section 192 of Companies Act,
2013 have been complied with;
(xvi) whether the company is required to be registered under section 45-IA of the Reserve Bank
of India Act, 1934 and if so, whether the registration has been obtained.
Reasons to be Stated for Unfavourable or Qualified Answers: Where the answer to any of
the questions referred to in paragraph 3 of the Order is unfavourable or qualified, in the
auditor's report, the auditor shall also state the basis for such unfavourable or qualified answer,
as the case may be.
Further, where the auditor is unable to express any opinion on any specified matter, his report
shall indicate such fact together with the reasons why it is not possible for him to give his opinion
on the same.
Example: The company has dispensed with the practice of taking inventory of their
inventories at the year-end as in their opinion the exercise is redundant, time consuming and
intrusion to normal functioning of the operations. Explain reporting requirement under CARO,
2016.
Reporting for Physical Verification of Inventory: Clause (ii) of Para 3 of CARO, 2016,
requires the auditor to report whether physical verification of inventory has been conducted
at reasonable intervals by the management and whether any material discrepancies were
noticed and if so, whether they have been properly dealt with in the books of account.
The physical verification of inventory is the responsibility of the management of the company
which should verify all material items at least once in a year and more often in appropriate
cases.
In the given case, the above requirement of physical verification of inventory by the
management has not been taken place and therefore the auditor should point out the same
under CARO, 2016. He may consider the impact on financial statement and report
accordingly.
11. Disclosure in the Auditor’s Report
The following paragraphs deal with the manner of qualification and the manner of disclosure, if
any, to be made in the auditor’s report.
AS-1 – Disclosure of Accounting Policies
In the case of a company, members should quality their audit reports in case –
(a) accounting policies required to be disclosed under Schedule III or any other provisions of
the Companies Act, 2013 have not been disclosed, or
(b) accounts have not been prepared on accrual basis, or
(c) the fundamental accounting assumption of going conc ern has not been followed and this
fact has not been disclosed in the financial statements, or
(d) proper disclosures regarding changes in the accounting policies have not been made.
Where a company has been given a specific exemption regarding any of the matters stated
above but the fact of such exemption has not been adequately disclosed in the accounts, the
member should mention the fact of exemption in his audit report without necessarily making it a
subject matter of audit qualification.
In view of the above, the auditor will have to consider different circumstances whether the audit
report has to be qualified or only disclosures have to be given.
In the case of enterprises not governed by the Companies Act, the member should examine the
relevant statute and make suitable qualification in his audit report in case adequate disclosures
regarding accounting policies have not been made as per the statutory requirements. Similarly,
the member should examine if the fundamental accounting assumptions have been followed in
preparing the financial statements or not. In appropriate cases, he should consider whether,
keeping in view the requirements of the applicable laws, a qualification in his report is necessary.
In the event of non-compliance by enterprises not governed by the Companies Act, in situations
where the relevant statute does not require such disclosures to be made, the member should
make adequate disclosure in his audit report without necessarily making it a subject matter of
audit qualification.
In making a qualification / disclosure in the audit report, the auditor should consider the
materiality of the relevant item. Thus, the auditor need not make qualification / disclosure in
respect of items which, in his judgement, are not material.
A disclosure, which is not a subject matter of audit qualification, should be made in the auditor
’s report in a manner that it is clear to the reader that the disclosure does not constitute an
audit qualification. The paragraph containing the auditor’s opinion on true and fair view should
not include a reference to the paragraph containing the aforesaid disclosure.
12. Joint Audit
The practice of appointing Chartered Accountants as joint auditors is quite widespread in big
companies and corporations. Joint audit basic ally implies pooling together the resources and
expertise of more than one firm of auditors to render an expert job in a given time period which
may be difficult to accomplish acting individually. It essentially involves sharing of the total work.
This is by itself a great advantage.
In specific terms the advantages that flow may be the following:
(i) Sharing of expertise.
(ii) Advantage of mutual consultation.
(iii) Lower workload.
(iv) Better quality of performance.
(v) Improved service to the client.
(vi) Displacement of the auditor of the company taken over in a take - over often obviated.
(vii) In respect of multi-national companies, the work can be spread using the expertise of the
local firms which are in a better position to deal with detailed work and the local laws and
regulations.
(viii) Lower staff development costs.

(ix) Lower costs to carry out the work.
(x) A sense of healthy competition towards a better performance.
The general disadvantages may be the following:
(i) The fees being shared.
(ii) Psychological problem where firms of different standing are associated in the joint audit.
(iii) General superiority complexes of some auditors.
(iv) Problems of co-ordination of the work.
(v) Areas of work of common concern being neglected.
(vi) Uncertainty about the liability for the work done.
The Institute of Chartered Accountants of India has issued Standard on Auditing (SA) 299
(Revised), “Joint Audit of Financial Statements” which lays down the principles for
effective conduct of joint audit to achieve the overall objectives of the auditor as laid
down in SA 200 “Overall Objectives of the Independent Auditor and the conduct of an
audit in accordance with Standards on Auditing”. This Standard deals with the special
considerations in carrying out audit by joint auditors. It requires that–
(i) the engagement partner and other key members of the engagement team from each
of the joint auditors should be involved in planning the audit.
(ii) the joint auditors should jointly establish an overall audit strategy which sets the
scope, timing and direction of the audit, and also guides the development of the
audit plan.
(iii) before the commencement of the audit, the joint auditors should discuss and develop a
joint audit plan. In developing the joint audit plan, the joint auditors should:
(1) identify division of audit areas and common audit areas;
(2) ascertain the reporting objectives of the engagement;
(3) consider and communicate among all joint auditors the factors that are significant
in directing the engagement team’s efforts;
(4) consider the results of preliminary engagement activities, or similar engagements
performed earlier.
(5) ascertain the nature, timing and extent of resources necessary to accomplish the
engagement.
(iv) each of the joint auditors should consider and assess the risks of material
misstatement and communicate to other joint auditors.
(v) the joint auditors should discuss and document the nature, timing, and the extent of
the audit procedures for (I) common and (II) specific allotted areas of audit to be
performed.
(vi) the joint auditors should obtain common engagement letter and common
management representation letter.
(vii) the work allocation document should be signed by all the joint auditors and
communicated to those charged with governance.
It further states that, in respect of audit work divided among the joint auditors, each joint
auditor shall be responsible only for the work allocated to such joint auditor including
proper execution of the audit procedures. On the other hand, all the joint auditors shall be
jointly and severally responsible for:
(i) the audit work which is not divided among the joint auditors and is carried out by all joint
auditors;
(ii) decisions taken by all the joint auditors under audit planning in respect of common audit
areas;
(iii) matters which are brought to the notice of the joint auditors by any one of them and there
is an agreement among the joint auditors on such matters;
(iv) examining that the financial statements of the entity comply with the requirements of the
relevant statutes;
(v) presentation and disclosure of the financial statements as required by the applicable
financial reporting framework;
(vi) ensuring that the audit report complies with the requirements of the relevant statutes,
applicable Standards on Auditing and other relevant pronouncements issued by ICAI.
In case a joint auditor comes across matters which are relevant to the areas of
responsibility of other joint auditors and which deserve their attention, or which require
disclosure or require discussion with, or application of judgment by other joint auditors,
the said joint auditor shall communicate the same to all the other joint auditors in writing
prior to the completion of the audit.
It may be noted that the joint auditors are required to issue common audit report.
However, where the joint auditors are in disagreement with regard to the opinion or any
matters to be covered by the audit report, they shall express their opinion in a separate
audit report. In such circumstances, the audit report(s) issued by the joint auditor(s) shall
make a reference to each other’s audit report(s).
[Note: Student may refer SA 299 (revised) “Joint Audit of Financial Statements”
reproduced in “Auditing Pronouncements” for comprehensive knowledge.]
13. Audit of Branch Office Accounts
As per section 128(1) of the Companies Act, 2013, every company shall prepare and keep at
its registered office books of account and other relevant books and papers and financial
statement for every financial year which give a true and fair view of the state of the affairs of the
company, including that of its branch office or offices, if any, and explain the transactions
effected both at the registered office and its branches and such books shall be kept on accrual
basis and according to the double entry system of accounting.
It may be noted that all or any of the books of account aforesaid and other relevant papers may
be kept at such other place in India as the Board of Directors may decide and where such a
decision is taken, the company shall, within 7 days thereof, file with the Registrar a notice in
writing giving the full address of that other place.
Students may also note that the company may keep such books of account or other relevan t
papers in electronic mode in such manner as may be prescribed.
Sub-section (2) provides that where a company has a branch office in India or outside India, it
shall be deemed to have complied with the provisions of sub-section (1), if proper books of
account relating to the transactions effected at the branch office are kept at that office and
proper summarised returns periodically are sent by the branch office to the company at its
registered office or the other place referred in (1).
Further, sub-section (8) of section 143 of the Companies Act, 2013, prescribes the duties
and powers of the company’s auditor with reference to the audit of the branch and the branch
auditor. Where a company has a branch office, the accounts of that office shall be audited either
by the auditor appointed for the company (herein referred to as the company's auditor) under
this Act or by any other person qualified for appointment as an auditor of the company under
this Act and appointed as such under section 139, or where the branch office is situated in a
country outside India, the accounts of the branch office shall be audited either by the company's
auditor or by an accountant or by any other person duly qualified to act as an auditor of the
accounts of the branch office in accordance with the laws of that country and the duties and
powers of the company' s auditor with reference to the audit of the branch and the branch
auditor, if any, shall be such as may be prescribed:
It may be noted that the branch auditor shall prepare a report on the accounts of the branch
examined by him and send it to the auditor of the company who shall deal with it in his report in
such manner as he considers necessary.
Further as per rule 12 of the Companies (Audit and Auditors) Rules, 2014, the branch auditor
shall submit his report to the company’s auditor and reporting of fraud by the auditor shall also
extend to such branch auditor to the extent it relates to the concerned branch.
Using the Work of another Auditor: When the accounts of the branch are audited by a person
other than the company’s auditor, there is need for a clear understanding of the role of such
auditor and the company’s auditor in relation to the audit of the accounts of the branch and the
audit of the company as a whole; also, there is great necessity for a proper rapport between
these two auditors for the purpose of an effective audit. In recognition of these needs, the
Council of the Institute of Chartered Accountants of India has dealt with these issues in SA 600,
“Using the Work of another Auditor”. It makes clear that in certain situations, the statute
governing the entity may confer a right on the principal auditor to visit a component and examine
the books of account and other records of the said component, if he thinks it necessary to do
so. Where another auditor has been appointed for the component, the principal auditor would
normally be entitled to rely upon the work of such auditor unless there are special circumstances
to make it essential for him to visit the component and/or to examine the books of account and
other records of the said component. Further, it requires that the principal auditor should
perform procedures to obtain sufficient appropriate audit evidence, that the work of the other
auditor is adequate for the principal auditor's purposes, in the context of the specific assignment.
When using the work of another auditor, the principal auditor should ordinarily perform the
following procedures:
(a) advise the other auditor of the use that is to be made of the other auditor's work and report
and make sufficient arrangements for co-ordination of their efforts at the planning stage of
the audit. The principal auditor would inform the other auditor of matters such as areas
requiring special consideration, procedures for the identification of inter-component
transactions that may require disclosure and the time-table for completion of audit; and
(b) advise the other auditor of the significant accounting, auditing and reporting requirements
and obtain representation as to compliance with them.
The principal auditor might discuss with the other auditor the audit procedures applied or review
a written summary of the other auditor’s procedures and findings which may be in the form of a
completed questionnaire or check-list. The principal auditor may also wish to visit the other
auditor. The nature, timing and extent of procedures will depend on the circumstances of the
engagement and the principal auditor's knowledge of the professional competence of the other
auditor. This knowledge may have been enhanced from the review of the previous audit work of
the other auditor.
14. Cost Audit
Cost Audit is an audit process for verifying the cost of manufacture or production of any article,
on the basis of accounts as regards utilisation of material or labour or other items of costs,
maintained by the company.
It is covered by Section 148 of the Companies Act, 2013. The audit conducted under this section
shall be in addition to the audit conducted under section 143.
As per section 148 the Central Government may by order specify audit of items of cost in respect
of certain companies.
Further, the Central Government may, by order, in respect of such class of companies engaged
in the production of such goods or providing such services as may be prescribed, direct that
particulars relating to the utilisation of material or labour or to other items of cost as may be
prescribed shall also be included in the books of account kept by that class of companies.
In this regard, the Central Government has notified the Companies (Cost Records and Audit)
Rules, 2014 which prescribes the classes of companies required to include cost records in their
books of account, applicability of cost audit, maintenance of records etc.
Applicability for Maintenance of Cost Records: Rule 3 of the Companies (Cost Records and
Audit) Rules, 2014 provides the classes of companies, engaged in the production of goods or
providing services, having an overall turnover from all its products and services of ` 35 crore or
more during the immediately preceding financial year, required to include cost records in their
books of account. These companies include Foreign Companies defined in sub-section (42) of
section 2 of the Act, but exclude a company classified as a Micro enterprise or a Small enterprise
including as per the turnover criteria provided under Micro, Small and Medium Enterprises
Development Act, 2006. The said rule has divided the list of companies into (A) Regulated
sectors and (B) Non-regulated sectors.
Maintenance of Cost Records: As per Rule 5 of the Companies (Cost Records and Audit)
Rules, 2014, every company under these rules including all units and branches thereof, shall,
in respect of each of its financial year, is required to maintain cost records in Form CRA-1. The
cost records shall be maintained on regular basis in such manner as to facilitate calculation of
per unit cost of production or cost of operations, cost of sales and margin for each of its products
and activities for every financial year on monthly or quarterly or half-yearly or annual basis.
Additionally, as per clause (vi) to Paragraph 3 of the CARO, 2016, the auditor has to report
whether maintenance of cost records has been specified by the Central Government under
section 148(1) of the Companies Act, 2013 and whether such accounts and records have been
so made and maintained.
Applicability of Cost Audit: Rule 4 of the Companies (Cost Records and Audit) Rules, 2014
states the provisions related to the applicability of cost audit depending on the turnover of the
company as follows-
(i) Classes of companies specified under item (A) “Regulated Sectors” are required to get its
cost records audited if the overall annual turnover of the company from all its products and
services during the immediately preceding financial year is ` 50 crore or more and the
aggregate turnover of the individual product(s) or service(s) for which cost records are
required to be maintained under rule 3 is ` 25 crore or more.
(ii) Classes of companies specified under item (B) “Non-Regulated Sectors” are required to
get its cost records audited if the overall annual turnover of the company from all its
products and services during the immediately preceding financial year is ` 100 crore or
more and the aggregate turnover of the individual product(s) or service(s) for which cost
records are required to be maintained under rule 3 is ` 35 crore or more.
Who can be Cost Auditor: The audit shall be conducted by a Cost Accountant who shall be
appointed by the Board of such remuneration as may be determined by the members in such
manner as may be prescribed.
It may be noted that no person appointed under section 139 as an auditor of the company shall
be appointed for conducting the audit of cost records.
It may also be noted that the auditor conducting the cost audit shall comply with the cost auditing
standards ("cost auditing standards" mean such standards as are issued by the Institute of Cost
Accountants of India, constituted under the Cost and Works Accountants Act, 1959, with the
approval of the Central Government).
Appointment of Cost Auditor: Rule 6 of the Companies (Cost Records and Audit) Rules, 2014
requires the companies prescribed under the said Rules to appoint an Auditor within 180 days
of the commencement of every financial year. However, before such appointment is made, the
written consent of the cost auditor to such appointment and a certificate from him or it shall be
obtained.
The certificate to be obtained from the cost auditor shall certify that the-
(a) the individual or the firm, as the case may be, is eligible for appointment and is not
disqualified for appointment under the Companies Act, 2013, the Cost and Works
Accountants Act, 1959 and the rules or regulations made thereunder;
(b) the individual or the firm, as the case may be, satisfies the criteria provided in section 141
of the Companies Act, 2013 so far as may be applicable;
(c) the proposed appointment is within the limits laid down by or under the authority of the
Companies Act, 2013; and
(d) the list of proceedings against the cost auditor or audit firm or any partner of the audit firm
pending with respect to professional matters of conduct, as disclosed in the certificate, is
true and correct.
Every referred company shall inform the cost auditor concerned of his or its appointment as
such and file a notice of such appointment with the Central Government within a period of 30
days of the Board meeting in which such appointment is made or within a period of 180 days of
the commencement of the financial year, whichever is earlier, through electronic mode, in Form
CRA-2, along with the fee as specified in Companies (Registration Offices and Fees) Rules,
2014.
The cost auditor appointed as such shall continue in such capacity till the expiry of 180 days
from the closure of the financial year or till he submits the cost audit report, for the financial year
for which he has been appointed.
Removal of Cost Auditor: The cost auditor may be removed from his office before the expiry
of his term, through a board resolution after giving a reasonable opportunity of being heard to
the cost auditor and recording the reasons for such removal in writing.
It may be noted that the Form CRA-2 to be filed with the Central Government for intimating
appointment of another cost auditor shall enclose the relevant Board Resolution to the effect.
It may further be noted that the above provisions shall not prejudice the right of the cost auditor
to resign from such office of the company.
Casual Vacancy in the Office of a Cost Auditor: Any casual vacancy in the office of a Cost
Auditor, whether due to resignation, death or removal, shall be filled by the Board of Directors
within 30 days of occurrence of such vacancy and the company shall inform the central
government in Form CRA-2 within 30 days of such appointment of cost auditor.
Remuneration of Cost Auditor: As per rule 14 of the Companies (Audit and Auditors) Rules,
2014-
(a) in the case of companies which are required to constitute an audit committee-
(i) the Board shall appoint an individual, who is a cost accountant, or a firm of cost
accountants in practice, as cost auditor on the recommendations of the Audit
committee, which shall also recommend remuneration for such cost auditor;
(ii) the remuneration recommended by the Audit Committee under (i) shall be considered
and approved by the Board of Directors and ratified subsequently by the
shareholders;
(b) in the case of other companies which are not required to constitute an audit committee,
the Board shall appoint an individual who is a cost accountant or a firm of cost accountants
in practice as cost auditor and the remuneration of such cost auditor shall be ratified by
shareholders subsequently.
Qualification, Disqualification, Rights, Duties and Obligations of Cost Auditor: The
qualifications, disqualifications, rights, duties and obligations applicable to auditors under this
Chapter shall, so far as may be applicable, apply to a cost auditor appointed under this section
and it shall be the duty of the company to give all assistance and facilities to the cost auditor
appointed under this section for auditing the cost records of the company.
Submission of Cost Audit Report:
(i) To the Board of Directors of the Company- The cost auditor shall submit the cost audit
report along with his reservations or qualifications or observations or suggestions, if any, in
Form CRA-3. He shall forward his report to the Board of Directors of the company within a period
of 180 days from the closure of the financial year to which the report relates and the Board of
Directors shall consider and examine such report particularly any reservation or qualification
contained therein.
(ii) To the Central Government- The company shall within 30 days from the date of receipt
of a copy of the cost audit report prepared (in pursuance of a direction issued by Central
Government) furnish the Central Government with such report along with full information and
explanation on every reservation or qualification contained therein in Form CRA-4 in Extensible
Business Reporting Language (XBRL) format in the manner as specified in the Companies
(Filing of Documents and Forms in Extensible Business Reporting language) Rules, 2015 along
with fees specified in the Companies (Registration Offices and Fees) Rules, 2014. If, after
considering the cost audit report and the, information and explanation furnished by the company
as above, the Central Government is of the opinion, that any further information or explanation
is necessary, it may call for such further information and explanation and the company shall
furnish the same within such time as may be specified by that Government.
Duty to Report on Fraud: The provisions of section 143(12) of the Companies Act, 2013 and
the relevant rules on duty to report on fraud shall apply mutatis mutandis to a cost auditor during
performance of his functions under section 148 of the Act and these rules.
Cost Audit Rules Not to Apply in Certain Cases: T he requirement for cost audit under these
rules shall not be applicable to a company which is covered under Rule 3, and,
(i) whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue; or
(ii) which is operating from a special economic zone.
(iii) which is engaged in generation of electricity for captive consumption through Captive
Generating Plant.
Penal Provisions in Case of Default: If any default is made in complying with the provisions
of this section,
(a) the company and every officer of the company who is in default shall be punishable in the
manner as provided in sub-section (1) of section 147;
(b) the cost auditor of the company who is in default shall be punishable in the manner as
provided in sub-sections (2) to (4) of section 147.
15. Punishment for non-compliance
Section 147 of the Companies Act, 2013 prescribes following punishments for contravention:
(1) If any of the provisions of sections 139 to 146 (both inclusive) is contravened, the
company shall be punishable with fine which shall not be less than twenty-five thousand rupees
but which may extend to five lakh rupees and every officer of the company who is in default
shall be punishable with imprisonment for a term which may extend to one year or with fine
which shall not be less than ten thousand rupees but which may extend to one lakh rupees, or
with both.
(2) If an auditor of a company contravenes any of the provisions of section 139 section 143,
section 144 or section 145, the auditor shall be punishable with fine which shall not be less than
twenty-five thousand rupees but which may extend to five lakh rupees or four times the
remuneration of the auditor, whichever is less.
It may be noted that if an auditor has contravened such provisions knowingly or willfully with the
intention to deceive the company or its shareholders or creditors or tax authorities, he shall be
punishable with imprisonment for a term which may extend to one year and with fine which shall
not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees or
eight times the remuneration of the auditor, whichever is less.
(3) Where an auditor has been convicted under sub-section (2), he shall be liable to-
(i) refund the remuneration received by him to the company;
(ii) and pay for damages to the company statutory bodies or authorities or to members or
creditors of the company for loss arising out of incorrect or misleading statements of
particulars made in his audit report.
(4) The Central Government shall, by notification, specify any statutory body or authority of
an officer for ensuring prompt payment of damages to the company or the persons under clause
(ii) of sub-section (3) and such body, authority or officer shall after payment of damages the
such company or persons file a report with the Central Government in respect of making such
damages in such manner as may be specified in the said notification.
(5) Where, in case of audit of a company being conduc ted by an audit firm, it is proved that
the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or
colluded in an fraud by, or in relation to or by, the company or its directors or officers, the
liability, whether civil or criminal as provided in this Act or in any other law for the time being in
force, for such act shall be of the partner or partners concerned of the audit firm and of the firm
jointly and severally.
It may be noted that in case of criminal liability of an audit firm, in respect of liability other
than fine, the concerned partner(s), who acted in a fraudulent manner or abetted or, as
the case may be, colluded in any fraud shall only be liable.
16. Audit report
Management is responsible for the preparation of the financial statements. Management also
accepts responsibility for necessary internal controls to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error.
The purpose of an audit is to enhance the degree of confidence of intended users of the financial
statements. The aforesaid purpose is achieved by the expression of an independent reporting
by the auditor as to whether the financial statements exhibit a true and fair view of the affairs of
the entity.
Thus, an Audit report is an opinion drawn on the entity’s financial statements to make sure that
the records are true and fair representation of the transactions they claim to represent. This
involves considering whether the financial statements have been prepared in accordance with
an acceptable financial reporting framework applicable to the entity under audit. It is also
necessary to consider whether the financial statements comply with the relevant statutory
requirements. The main users of audit report are shareholders, members and all other
stakeholders of the company.
17. Forming an Opinion on the Financial Statements- Objective of the Auditor
17.1 The objectives of the auditor as per SA 700 (Revised), “Forming An Opinion And
Reporting On Financial Statements” are:
(a) To form an opinion on the financial statements based on an evaluation of the conclusions
drawn from the audit evidence obtained; and
(b) To express clearly that opinion through a written report.
The auditor shall form an opinion on whether the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting framework.
17.2 To form opinion - Auditor to obtain Reasonable assurance
In order to form that opinion, the auditor shall conclude as to whether the auditor has obtained
reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error.
That conclusion shall take into account:
(a) whether sufficient appropriate audit evidence has been obtained;
(b) whether uncorrected misstatements are material, individually or in aggregate;
(c) The evaluations
17.3 Evaluations by the Auditor
The auditor shall evaluate whether the financial statements are prepared in accordance with the
requirements of the applicable financial reporting framework.
This evaluation shall include consideration of the qualitative aspects of the entity’s accounting
practices, including indicators of possible bias in management’s judgments.
17.3.1 Qualitative Aspects of the Entity’s Accounting Practices
1. Management makes a number of judgments about the amounts and disclosures in the
2. SA 260 (Revised) contains a discussion of the qualitative aspects of accounting practices.
3. In considering the qualitative aspects of the entity’s accounting practices, the auditor may
become aware of possible bias in management’s judgments. The auditor may conclude that lack
of neutrality together with uncorrected misstatements causes the financial statements to be
materially misstated. Indicators of a lack of neutrality include the following:
(i) The selective correction of misstatements brought to management’s attention during the
audit
Example
Correcting misstatements with the effect of increasing reported earnings, but
not correcting misstatements that have the effect of decreasing reported
earnings.

The combination of several deficiencies affecting the same significant acc ount
or disclosure (or the same internal control component) could amount to a
significant deficiency (or material weakness if required to be communicated in
the jurisdiction). This evaluation requires judgment and involvement of audit
executives.
(ii) Possible management bias in the making of accounting estimates.
4. SA 540 addresses possible management bias in making accounting estimates.
Indicators of possible management bias do not constitute misstatements for purposes of drawing
conclusions on the reasonableness of individual accounting estimates. They may, however,
affect the auditor’s evaluation of whether the financial statements as a whole are free from
material misstatement.
17.4 Specific Evaluations by the auditor
In particular, the auditor shall evaluate whether :
(a) The financial statements adequately disclose the significant accounting policies selected
and applied;
(b) The accounting policies selected and applied are consistent with the applicable financial
reporting framework and are appropriate;
(c) The accounting estimates made by management are reasonable;
(d) The information presented in the financial statements is relevant, reliable, comparable, and
understandable;
(e) The financial statements provide adequate disclosures to enable the intended users to
understand the effect of material transactions and events on the information conveyed in
the financial statements; and
(f) The terminology used in the financial statements, including the title of each financial
statement, is appropriate.
Example:
If an amount or disclosure in the financial statements is under greater scrutiny
by users of the financial statements, then a smaller misstatement may be
considered more significant.
A misstatement may be objectively determinable or may involve a degree of
subjectivity through estimation, allocation or uncertainty.

17.5 Form of Opinion

Unmodified Opinion: The auditor shall express an unmodified opinion when the auditor
concludes that the financial statements are prepared, in all m aterial respects, in accordance
with the applicable financial reporting framework.
Modified Opinion: If the auditor:
(a) concludes that, based on the audit (b) is unable to obtain sufficient appropriate
evidence obtained, the financial statements audit evidence to conclude that the financial
as a whole are not free from material statements as a whole are free from material
misstatement; or misstatement,
the auditor shall modify the opinion in the auditor’s report in accordance with SA 705.
17.6 Auditor’s Report

The auditor’s report shall be in writing. A written report encompasses reports issued in hard
copy and those using an electronic medium.
This SA-700 requires the use of specific headings, which are intended to assist in making
auditor’s reports that refer to audits that have been conducted in accordance with SAs more
recognizable.
17.6.1 Auditor’s Report for Audits Conducted in Accordance with Standards on Auditing
Basic Elements of an Audit Report are given below:
1 Title: The auditor’s report shall have a title that clearly indicates that it is the report of an
independent auditor.
For example, “Independent Auditor’s Report,” distinguishes the independent auditor’s report
from reports issued by others.
2. Addressee: The auditor’s report shall be addressed, as appropriate, based on the
circumstances of the engagement. Law, regulation or the terms of the engagement may specify
to whom the auditor’s report is to be addressed.
The auditor’s report is normally addressed to those for whom the report is prepared, often either
to the shareholders or to those charged with governance of the entity whose financial statements
are being audited.
3. Auditor’s Opinion: The first section of the auditor’s report shall include the auditor’s
opinion, and shall have the heading “Opinion.”
The Opinion section of the auditor’s report shall also:
(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;

(c) Identify the title of each statement comprising the financial statements;
(d) Refer to the notes, including the summary of significant accounting policies; and
(e) Specify the date of, or period covered by, each financial statement comprising the financial
statements.
Expressing an unmodified opinion on financial statements
When expressing an unmodified opinion on financial statements, the auditor’s opinion shall,
unless otherwise required by law or regulation, use one of the following phrases, which are
regarded as being equivalent:
(a) In our opinion, the accompanying financial statements present fairly, in all material
respects, […] in accordance with [the applicable financial reporting framework]; or
(b) In our opinion, the accompanying financial statements give a true and fair view of […] in
accordance with [the applicable financial reporting framework].
“Present fairly, in all material respects” or “give a true and fair view”
The phrases “present fairly, in all material respects,” and “give a true and fair view” are regarded
as being equivalent
When the auditor expresses an unmodified opinion, it is not appropriate to use phrases such as
“with the foregoing explanation” or “subject to” in relation to the opinion, as these suggest a
conditional opinion or a weakening or modification of opinion.
4. Basis for Opinion:
The auditor’s report shall include a section, directly following the Opinion section, with the
heading “Basis for Opinion”, that:
(a) States that the audit was conducted in accordance with Standards on Auditing;
(b) Refers to the section of the auditor’s report that describes the auditor’s responsibilities
under the SAs;
(c) Includes a statement that the auditor is independent of the entity in accordance with the
relevant ethical requirements relating to the audit and has fulfilled the auditor’s other ethical
responsibilities in accordance with these requirements.
(d) States whether the auditor believes that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion.
5. Going Concern: Where applicable, the auditor shall report in accordance with SA 570
(Revised).
6. Key Audit Matters: For audits of complete sets of general purpose financial statements
of listed entities, the auditor shall communicate key audit matters in the auditor’s report in
accordance with SA 701.
When the auditor is otherwise required by law or regulation or decides to communicate key audit
matters in the auditor’s report, the auditor shall do so in accordance with SA 701.
Law or regulation may require communication of key audit matters for audits of entities other
than listed entities,
For example, entities characterized in such law or regulation as public interest entities.
The auditor may also decide to communicate key audit matters for other entities, including those
that may be of significant public interest, for example because they have a large number and
wide range of stakeholders and considering the nature and size of the business.
Examples of such entities may include financial institutions (such as banks, insurance
companies, and pension funds), and other entities such as charities.
7. Responsibilities for the Financial Statements: The auditor’s report shall include a
section with a heading “Responsibilities of Managem ent for the Financial Statements.”
SA 200 explains the premise, relating to the responsibilities of management and, where
appropriate, those charged with governance, on which an audit in accordance with SAs is
conducted. Management and, where appropriate, those charged with governance accept
responsibility for the preparation of the financial statements. Management also accepts
responsibility for such internal control as it determines is necessary to enable the preparation
of financial statements that are free from material misstatement, whether due to fraud or error.
The description of management’s responsibilities in the auditor’s report includes reference to
both responsibilities as it helps to explain to users the premise on which an audit is conducted.
This section of the auditor’s report shall describe management’s responsibility for:
(a) Preparing the financial statements in accordance with the applicable financial reporting
framework, and for such internal control as management determines is necessary to
enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error;[because of the possible effects of fraud on other aspects of
the audit, materiality does not apply to management’s acknowledgement regarding its
responsibility for the design, implementation, and maintenance of internal control (or for
establishing and maintaining effective internal control over financial reporting) to prevent
and detect fraud.] and
(b) Assessing the entity’s ability to continue as a going concern and whether the use of
the going concern basis of accounting is appropriate as well as disclosing, if applicable,
matters relating to going concern. The explanation of management’s responsibility for this
assessment shall include a description of when the use of the going concern basis of
accounting is appropriate.
❖ Auditor cannot conclude that management has provided with all relevant information
agreed in the terms of the audit engagement agreement without confirming with
management whether such information has been provided.
❖ When those individuals who have signed the engagement agreement at the start of
the audit have left the entity, the auditor would request those who are giving the
representations to acknowledge their responsibilities within the letter of
representations.
❖ A management representation as to the amount required for a particular provision is
not a substitute for the audit procedures regarding the provision that the auditor would
expect to perform.
Periods covered by the letter: The auditor to obtain representations for all financial
statements and periods referred to in our auditor’s report. Auditor would obtain a specific
representation if a restatement is made to correct a material misstatement in the prior period
financial statements that affects the comparative information in the financial statements. If
current management was not present during all periods covered by auditor’s report, he still
would obtain written representations from current management on all such periods.
SA 210 requires the auditor to agree management’s responsibilities in an engagement
letter or other suitable form of written agreement.
Oversight of the financial reporting process: This section of the auditor’s report shall also
identify those responsible for the oversight of the financial reporting process, when those
responsible for such oversight are different from Management. In this case, the heading of this
section shall also refer to “Those Charged with Governance”
8. Auditor’s Responsibilities for the Audit of the Financial Statements:
The auditor’s report shall include a section with the heading “Auditor’s Responsibilities for
the Audit of the Financial Statements.”
This section of the auditor’s report shall:
(a) State that the objectives of the auditor are to:
(i) Obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error; and
(ii) Issue an auditor’s report that includes the auditor’s opinion.
(b) State that reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with SAs will always detect a material misstatement
when it exists; and
(c) State that misstatements can arise from fraud or error, and either:
(i) Describe that they are considered material if, individually or in the aggregate, they
could reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements; or
(ii) Provide a definition or description of materiality in accordance with the applicable
financial reporting framework.
The Auditor’s Responsibilities for the Audit of the Financial Statements section of the
auditor’s report shall further:
(a) State that, as part of an audit in accordance with SAs, the auditor exercises professional
judgment and maintains professional skepticism throughout the audit; and
(b) Describe an audit by stating that the auditor’s responsibilities are:
(i) To identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error; to design and perform audit procedures responsive to
those risks; and to obtain audit evidence that is sufficient and appropriate to provide
a basis for the auditor’s opinion. The risk of not detecting a material misstatement
resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of
internal control.
1. To identify and assess the risks of material misstatement of the financial
statements.
2. to design and perform audit procedures in response to those risks
3. to obtain sufficient and appropriate audit evidence.
(ii) To obtain an understanding of internal control relevant to the audit in order to design
audit procedures that are appropriate in the circumstances.
(iii) To evaluate the appropriateness of accounting policies used and the reasonableness
of accounting estimates and related disclosures made by management.
(iv) To conclude on the appropriateness of management’s use of the going concern basis
of accounting and, based on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that may cast significant doubt on
the entity’s ability to continue as a going concern.
The Auditor’s Responsibilities for the Audit of the Financial Statements section of the
auditor’s report also shall:
(a) State that the auditor communicates with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that the auditor identifies
during the audit;
(b) For audits of financial statements of listed entities, state that the auditor provides those
charged with governance with a statement that the auditor has complied with relevant
ethical requirements regarding independence and communicate with them all relationships
and other matters that may reasonably be thought to bear on the auditor’s independence,
and where applicable, related safeguards; and
(c) For audits of financial statements of listed entities and any other entities for which key audit
matters are communicated in accordance with SA 701, state that, from the matters
communicated with those charged with governance, the auditor determines those matters
that were of most significance in the audit of the financial statements of the current period
and are therefore the key audit matters. The auditor describes these matters in the
auditor’s report unless law or regulation precludes public disclosure.
9. Location of the description of the auditor’s responsibilities for the audit of the
financial statements: The description of the auditor’s responsibilities for the audit of the
financial statements shall be included:
(a) Within the body of the auditor’s report;
(b) Within an appendix to the auditor’s report, in which case the auditor’s report shall include
a reference to the location of the appendix; or
(c) By a specific reference within the auditor’s report to the location of such a description on
a website of an appropriate authority, where law, regulation or national auditing standards
expressly permit the auditor to do so.
ILLUSTRATION
The following is an illustration of how such a reference to an appendix could be made in the
auditor’s report:
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an
auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with SAs will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is included
in appendix X of this auditor’s report. This description, which is located at [indicate page number
or other specific reference to the location of the description], forms part of our auditor’s report.
10. Other Reporting Responsibilities: If the auditor addresses other reporting
responsibilities in the auditor’s report on the financial statements that are in addition to the
auditor’s responsibilities under the SAs, these other reporting responsibilities shall be addressed
in a separate section in the auditor’s report with a heading titled-
“Report on Other Legal and Regulatory Requirements” or otherwise as appropriate to the
content of the section, unless these other reporting responsibilities address the same topics as
those presented under the reporting responsibilities required by the SAs in which case the other
reporting responsibilities may be presented in the same section as the related report elements
required by the SAs.
If other reporting responsibilities are presented in the same section as the related report
elements required by the SAs, the auditor’s report shall clearly differentiate the other reporting
responsibilities from the reporting that is required by the SAs.
If the auditor’s report contains a separate section that addresses other reporting responsibiliti es,
the requirements stated above shall be included under a section with a heading “Report on the
Audit of the Financial Statements.” The “Report on Other Legal and Regulatory Requirements”
shall follow the “Report on the Audit of the Financial Statements.”
11. Signature of the Auditor: The auditor’s report shall be signed. The report is signed by the
auditor (i.e. the engagement partner) in his personal name. Where the firm is appointed as the
auditor, the report is signed in the personal name of the auditor and in the name of the audit
firm.
The partner/proprietor signing the audit report also needs to mention the membership number
assigned by the Institute of Chartered Accountants of India. They also include the registration
number of the firm, wherever applicable, as allotted by ICAI, in the audit reports signed by them
12. Auditor’s Address: The auditor’s report shall name specific location, which is ordinarily
the city where the audit report is signed.
13 Date of the Auditor’s Report: The auditor’s report shall be dated no earlier than the
date on which the auditor has obtained sufficient appropriate audit evidence on which to base
the auditor’s opinion on the financial statements, including evidence that:
(a) All the statements that comprise the financial statements, including the related notes, have
been prepared; and
(b) Those with the recognized authority have asserted that they have taken responsibility for
those financial statements.
The date of the auditor’s report informs the user of the auditor’s report that the auditor has
considered the effect of events and transactions of which the auditor became aware and that
occurred up to that date. The auditor’s responsibility for events and transactions after the date
of the auditor’s report is addressed in SA 560.
18 Modifications To The Opinion In The Independent Auditor’s Report
Standard on Auditing (SA) 705 “Modifications To The Opinion In The Independent Auditor’s
Report” deals with the auditor’s responsibility to issue an appropriate report in circumstances
when, in forming an opinion in accordance with SA 700 (Revised) “Forming An Opinion And
Reporting On Financial Statements”, the auditor concludes that a modification to the auditor’s
opinion on the financial statements is necessary.
This SA also deals with how the form and content of the auditor’s report is affected when the
auditor expresses a modified opinion.
Audit Report
Unmodified Report Modified report
Emphasis of Matter Modified Opinion
Other Matter Qualified Opinion
Adverse Opinion
Disclaimer of Opiniont
18.1 Circumstances When a Modification to the Auditor’s Opinion Is Required

The auditor shall modify the opinion in the auditor’s report when:
(a) The auditor concludes that, based on the audit evidence obtained, the financial statements
as a whole are not free from material misstatement; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement.
18.2 Objective of the auditor - to express clearly an appropriately modified opinion
As per Standard on Auditing (SA) 705 “Modifications To The Opinion In The Independent
Auditor’s Report”, the objective of the auditor is to express clearly an appropriately modified
opinion on the financial statements that is necessary when:
(a) The auditor concludes, based on the audit evidence obtained, that the financial statements
as a whole are not free from material misstatement; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement.
18.3 Types of Modified Opinions

There are three types of modified opinions, namely-
1. A qualified opinion
2. An adverse opinion
3. A disclaimer of opinion.
Qualified Opinion Adverse Opinion Disclaimer of Opinion
• The auditor, having • The auditor shall express • The auditor shall disclaim
obtained sufficient an adverse opinion when an opinion when he is
appropriate audit the auditor, having unable to obtain sufficient
evidence, concludes that obtained sufficient appropriate audit
misstatements are appropriate audit evidence and he
material, but not evidence, concludes that concludes that the
pervasive misstatements, possible effects on the
individually or in the financial statements of
aggregate, are both undetected misstatements
material and pervasive could be both material
and pervasive.
Qualified Opinion
The auditor shall express a qualified opinion when:
(a) 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
(b) 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.
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.
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 misstatem ents, 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.
Definition of Pervasive – A term used, in the context of misstatements, to describe the effects
on the financial statements of misstatements or the possible effects on the financial statements
of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate
audit evidence.
Pervasive effects on the financial statements are those that, in the auditor’s judgment:
(i) Are not confined to specific elements, accounts or items of the financial statements;
(ii) If so confined, represent or could represent a substantial proportion of the
financial statements; or
(iii) In relation to disclosures, are fundamental to users’ understanding of the
18.4 Which type of opinion is appropriate?
The decision regarding which type of modified opinion is appropriate depends upon:
(a) The nature of the matter giving rise to the modification, that is, whether the financial
statements are materially misstated or, in the case of an inability to obtain sufficient
appropriate audit evidence, may be materially misstated; and
(b) The auditor’s judgment about the pervasiveness of the effects or possible effects of the
matter on the financial statements.
The table below illustrates how the auditor’s judgment about the nature of the matter giving rise
to the modification, and the pervasiveness of its effects or possible effects on the financial
statements, affects the type of opinion to be expressed.
Nature of Matter Giving Rise Auditor’s Judgment about the Pervasiveness of the
to the Modification Effects or Possible Effects on the Financial Statements
Material but Not Pervasive Material and Pervasive
Financial statements are Qualified opinion Adverse opinion
materially misstated
Inability to obtain sufficient Qualified opinion Disclaimer of opinion
appropriate audit evidence
18.5 Basis for Opinion
When the auditor modifies the opinion on the financial statements, the auditor shall, in addition
to the specific elements required by SA 700 (Revised)
(a) Amend the heading “Basis for Opinion” required by para of SA 700 (Revised) to “Basis for
Qualified Opinion,” “Basis for Adverse Opinion,” or “Basis for Disclaimer of Opinion,” as
appropriate; and
(b) Within this section, include a description of the matter giving rise to the modification.
19 Emphasis Of Matter Paragraphs And Other Matter Paragraphs In The Independent
Auditor’s Report.
19.1 Objective of the Auditor as per SA 706
As per SA 706 (Revised) on “Emphasis of Matter Paragraphs and Other Matter Paragraphs
In The Independent Auditor’s Report”, the objective of the auditor, having formed an opinion
on the financial statements, is to draw users’ attention, when in the auditor’s judgment it is
necessary to do so, by way of clear additional communication in the auditor’s report, to:
(a) A matter, although appropriately presented or disclosed in the financial statements, that is of
such importance that it is fundamental to users’ understanding of the financial statements; or
(b) As appropriate, any other matter that is relevant to users’ understanding of the audit, the
auditor’s responsibilities or the auditor’s report.
Definitions:
Emphasis of Matter paragraph – A paragraph included in the auditor’s report that refers to a matter
appropriately 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.
Other Matter paragraph – A paragraph included in the auditor’s report that refers to a matter
other than those presented or disclosed in the financial statements that, in the auditor’s
judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the
auditor’s report.
19.2 Emphasis of Matter Paragraphs in the Auditor’s Report
If 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:
(a) The auditor would not be required to modify the opinion in accordance with SA 705
(Revised) as a result of the matter; and
(b) When SA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.
19.2.1 Separate section for Emphasis of Matter paragraph
When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the
auditor shall:
(a) Include the paragraph within a separate section of the auditor’s report with an appropriate
heading that includes the term “Emphasis of Matter”;
(b) Include in the paragraph a clear reference to the matter being emphasized and to where
relevant disclosures that fully describe the matter can be found in the financial statements.
The paragraph shall refer only to information presented or disclosed in the financial
statements; and
(c) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.
19.3 Other Matter Paragraphs in the Auditor’s Report
If the auditor considers it necessary to communicate a matter other than those that are
presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to
users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report, the auditor
shall include an Other Matter paragraph in the auditor’s report, provided:
(a) This is not prohibited by law or regulation; and
(b) When SA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.
19.3.1 Separate section for Other Matter paragraph
When the auditor includes an Other Matter paragraph in the auditor’s report, the auditor
shall include the paragraph within a separate section with the heading “Other Matter,” or other
appropriate heading.
20. Communicating Key Audit Matters In The Independent Auditor’s Report
Definition of Key Audit Matters : Those matters that, in the auditor’s professional judgment,
were of most significance in the audit of the financial statements of the current period. Key audit
matters are selected from matters communicated with those charged with governance.
20.1 Purpose of communicating key audit matters
As per SA 701, “Communicating Key Audit Matters in the Auditor’s Report”, the purpose of
communicating key audit matters is to enhance the communicative value of the auditor’s report
by providing greater transparency about the audit that was performed. Com municating key audit
matters provides additional information to intended users of the financial statements to assist
them in understanding those matters that, in the auditor’s professional judgment, were of most
significance in the audit of the financial statements of the current period. Communicating key
audit matters may also assist intended users in understanding the entity and areas of significant
management judgment in the audited financial statements.
20.2 Objectives of the auditor regarding Key Audit Matters
As per SA 701, “Communicating Key Audit Matters in The Independent Auditor’s Report”, the
objectives of the auditor are to determine key audit matters and, having formed an opinion on the
financial statements, communicate those matters by describing them in the auditor’s report.
20.3 Determining Key Audit Matters
The auditor shall determine, from the matters communicated with those charged with
governance, those matters that required significant auditor attention in performing the audit.
In making this determination, the auditor shall take into account the following:
(a) Areas of higher assessed risk of material misstatement, or significant risks identified in
(b) Significant auditor judgments relating to areas in the financial statements that involved
significant management judgment, including accounting estimates that have been identified as
having high estimation uncertainty.
(c) The effect on the audit of significant events or transactions that occurred during the period.
The auditor shall determine which of the matters determined in accordance with above stated
para were of most significance in the audit of the financial statements of the current period and
therefore are the key audit matters.
20.4 Communicating Key Audit Matters
The auditor shall describe each key audit matter, using an appropriate subheading, in a separate
section of the auditor’s report under the heading “Key Audit Matters”. The introductory language
in this section of the auditor’s report shall state that:
(a) Key audit matters are those matters that, in the auditor’s professional judgment, were of
most significance in the audit of the financial statements [of the current period]; and
(b) These matters were addressed in the context of the audit of the financial statements as a
whole, and in forming the auditor’s opinion thereon, and the auditor does not provide a separate
opinion on these matters.
20.5 Communicating key audit matter- not a substitute for disclosure in the financial
statements etc. :
Communicating key audit matters in the auditor’s report is in the context of the auditor having
formed an opinion on the financial statements as a whole. Communicating key audit matters in
the auditor’s report is not:
(a) A substitute for disclosures in the financial statements that the applicable financial
reporting framework requires management to make, or that are otherwise necessary to achieve
fair presentation;
(b) A substitute for the auditor expressing a modified opinion when required by the
circumstances of a specific audit engagement in accordance with SA 705 (Revised);
(c) A substitute for reporting in accordance with SA 570 when a material uncertainty exists
relating to events or conditions that may cast significant doubt on an entity’s ability to continue
as a going concern; or
(d) A separate opinion on individual matters
In Chapter 5-Vouching, the topic “Payments controlled by the Companies Act, 2013”
given at page no. 5.11 has been revised and given hereunder:
In the case of a company, payments or transactions, directly or indirectly, have been
controlled/restricted by the Companies Act, 2013 (hereinafter referred as the Act). This may be
understood with some of the provisions of the Act as discussed below-
(i) Only such expenses which are incurred related to the business of the company are
chargeable to statement of profit and loss. The auditor is, therefore in terms of section
143(1)(e) of the Act, required to inquire whether personal expenses have been charged to
the revenue account. In case of any special comments to the said inquiry, he is also
required to report on the same.
(ii) Section 180 of the Act specifically restricts the powers of the Board i.e. the Board of
Directors of a company can exercise the following powers but only with the consent of the
company by a special resolution, namely -
(a) sell, lease or otherwise dispose of the whole or substantially the whole of the
undertaking of the company or where the company owns more than one undertaking,
of the whole or substantially the whole of any of such undertakings.
(b) invest otherwise in trust securities the amount of compensation received by it as a
result of any merger or amalgamation.
(c) borrow money, where the money to be borrowed, together with the money already
borrowed by the company will exceed aggregate of its paid-up share capital and free
reserves, apart from temporary loans obtained from the company’s bankers in the
ordinary course of business.
It is provided that the acceptance by a banking company, in the ordinary course of its
business, of deposits of money from the public, repayable on demand or otherwise,
and withdrawable by cheque, draft, order or otherwise, shall not be deemed to be a
borrowing of monies by the banking company within the meaning of this clause.
(d) remit, or give time for the repayment of, any debt due from a director.
(iii) Under section 181, the Board of Directors of a company can contribute to the bonafide
charitable and other funds any amount in any financial year. However, prior permission of
the company in general meeting is required if the aggregate of such contribution exceeds
5% of its average net profits for the three immediately preceding financial years.
(iv) Section 182 deals with prohibition and restriction regarding political contributions.
According to this section, a government company or any other company which has been
in existence for less than three financial years cannot contribute any amount directly or
indirectly to any political party. Notwithstanding anything contained in any other provision
of this Act, a Company, other than a Government Company and a company which has
been in existence for less than three financial years, may contribute any amount directly
or indirectly to any political party.
Every company shall disclose in its profit and loss account the total amount contributed by
it under this section during the financial year to which the account relates.
T he contribution under this section shall not be made except by an account payee cheque
drawn on a bank or an account payee bank draft or use of electronic clearing system
through a bank account.
(v) Section 183 permits the Board and other person to make contributions to the National
Defence Fund or any other Fund approved by the Central Government for the purpose of
National Defence to any extent as it thinks fit.
PART – II A: Multiple Choice Questions
1. Marvin Ltd. is a renowned food chain supplier in a posh area providing restaurant facility
along with food delivering. CA. Felix was appointed as an auditor of the company for the
Financial Year 2017-18. While examining the books of account of the company, CA. Felix
came to know about one of the major expenses of the company i.e. rent expense of
` 1,20,000 per month, for which he applied substantive analytical procedure for verification
purpose. Explain, how would CA. Felix perform substantive analytical procedure in the
given scenario?
(a) CA. Felix would inspect every single rent invoice per month of ` 1,20,000 and verify
other elements appropriately.
(b) CA. Felix would compare the rental expense of the company with that of another
nearby company having corresponding dimensions, for high degree of accuracy.
(c) CA. Felix would select the first month rent invoice of ` 1,20,000 and appropriately
verifying other elements would predict that the rent for the whole year would be `
14,40,000 (i.e. ` 1,20,000 * 12). Thereafter, he would compare the actuals with his
prediction and follow-up for any fluctuation.
(d) (a) and (b), both.
2. Coyote Ltd. is dealing in trading of electronic goods. Huge inventory (60% approximately)
of the company is lying on consignment (i.e. under the custody of third party). CA. Star,
the auditor of the company, wants to obtain sufficient appropriate audit evidence regarding
the existence and condition of the inventory lying on consignment. Thus, he requested &
obtained confirmation from the third party as to the quantities and condition of inventory
held on behalf of the entity, however, it raised doubts about the integrity and objectivity of
the third party. Which of the following other audit procedures may be performed by CA.
Star to obtain sufficient appropriate audit evidence regarding the existence and condition
of the inventory under the custody of third party?
(a) Attend third party’s physical counting of inventory.
(b) Arrange for another auditor to attend third party’s physical counting of inventory.
(c) Inspect warehouse receipts regarding inventory held by third parties.

(d) All of the above.
3. In July, 2018, M/s T om & Co. entered into an agreement with M/s Jerry & Co. under which
a machinery would be let on hire and M/s Jerry & Co. would have the option to purchase
the machinery in accordance with the terms of the agreement. Thus, M/s Jerry & Co.
agreed to pay M/s Tom & Co. a settled amount in periodical instalments. The property in
the goods shall be passed to M/s Jerry & Co. on the payment of last of such instalments.
While checking such hire-purchase transaction, what would the auditor examine?
(a) That the periodical instalments paid are charged as an expenditure by M/s Jerry &
Co.
(b) That the hire purchase agreement specifies clearly the hire-purchase price of the
machinery to which the agreement relates.
(c) That M/s Tom & Co. charges depreciation throughout the life of the machinery.
4. The management of Magoo Ltd. has developed a strong internal control in its accounting
system in such a way that the work of one person is reviewed by another. Since no
individual employee is allowed to handle a task alone from the beginning to the end, the
chances of early detection of frauds and errors are high. CA. Olive has been appointed as
an auditor of the company for current Financial Year 2017-18. Before starting the audit,
she wants to evaluate the internal control system of Magoo Ltd. To facilitate the
accumulation of the information necessary for the proper review and evaluation of internal
controls, CA. Olive decided to use internal control questionnaire to know and assimilate
the system and evaluate the same. Which of the following questions need not be framed
under internal control questionnaire relating to purchases?
(a) Are authorized signatories for purchases limited to elected officials?
(b) Are payments approved only on original invoices?
(c) Does authorized officials thoroughly review the documents before signing cheques?
(d) Are monthly bank reconciliations implemented for each and every bank accounts of
the company?
5. CA. Bobby is a recently qualified Chartered Accountant. He is appointed as an auditor of
Droopy Ltd. for the current Financial Year 2017-18. He is quite conservative in nature which
is also replicated in his professional work. CA. Bobby is of the view that he shall record all
the matters related to audit, audit procedures to be performed, audit evidence obtained
and conclusions reached. Thus, he maintained a file and recorded each and every of his
findings during the audit. His audit file, besides other thing, includes audit programmes,
notes reflecting preliminary thinking, letters of confirmation, e-mails concerning significant
matters, etc. State which of the following need not be included in the audit documentation?
(a) Audit programmes.

(b) Notes reflecting preliminary thinking.
(c) Letters of confirmation.
(d) E-mails concerning significant matters.
6. While auditing the books of accounts of QHMP Ltd., CA. Ranker, the statutory auditor of
the company, came to know that the management of the company has recognized
internally generated goodwill as a fixed asset. CA. Ranker discussed with the management
that according to accounting standards, internally generated goodwill is not recognized as
an asset because it is not an identifiable resource controlled by the enterprise that can be
measured reliably at cost. However, the management is quite rigid to the accounting
treatment followed for internally generated goodwill and not paying attention to the auditor.
Thus, through an example, CA. Ranker explained which type of goodwill may be
recognized as a fixed asset for which the management got justified. State which of the
following examples the auditor must have given to the management?
(a) If an item meeting the definition of an intangible asset is acquired in a business
combination, it forms part of the goodwill to be recognized at the date of the
amalgamation.
(b) Only those goodwill needs to be recognized as a fixed asset which can be touched
like physical assets, for example, land and buildings.
(c) Goodwill is recognised only when there is a contractual or other legal rights for a
physical asset which shall not be amortized over the period.
7. Eeyore Pvt. Ltd. is incorporated on 1st July, 2017. During the Financial Year ending on
31st March, 2018, the company did not opt for any borrowing at any point of time and have
a total revenue of ` 60 Lakh. At the year end, it provides the following information regarding
its paid-up capital and reserve & surplus-
Particulars Amount (in `)
Paid-up Capital
- Consideration received in cash for equity shares 40,00,000
(including unpaid calls of ` 5,00,000)
- Consideration received in cash for preference shares 25,00,000
- Bonus shares allotted 7,00,000
- Share application money received pending allotment 10,00,000
Sub-Total 82,00,000
Reserve & Surplus
- Balance in Statement of Profit and Loss 15,00,000
- Capital Reserves 10,00,000

Sub-Total 25,00,000
GRAND TOTAL 1,07,00,000
You are provided with the provisions regarding applicability of Companies (Auditor’s
Report) Order, 2016, (CARO, 2016) issued under section 143(11) of the Companies Act,
2013 to a private limited company that it specifically exempts a private limited compa ny
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 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 exceeding ` 10 crore
during the financial year.
Considering the information given above, which of the following shall be considered as a
reason regarding applicability or non-applicability of CARO, 2016?
(a) Reporting under CARO, 2016 shall be applicable as the company is having a paid up
capital and reserves and surplus of ` 1.07 crore i.e. more than ` 1 crore as on the
Balance Sheet date.
(b) Reporting under CARO, 2016 shall be applicable as the company is having a paid up
capital and reserves and surplus of ` 1.02 crore i.e. more than ` 1 crore as on the
Balance Sheet date.
(c) Reporting under CARO, 2016 shall not be applicable as the company is having a paid
up capital and reserves and surplus of ` 0.92 crore i.e. not more than ` 1 crore as on
the Balance Sheet date.
(d) Reporting under CARO, 2016 shall not be applicable as the company is having a paid
up capital and reserves and surplus of ` 0.82 crore i.e. not more than ` 1 crore as on
the Balance Sheet date.
8. CA. Goofy has been appointed as an auditor for audit of a complete set of financial
statements of Dippy Ltd., a listed company. The financial statements of the company are
prepared by the management in accordance with the Accounting Standards prescribed
under section 133 of the Companies Act, 2013. However, the inventories are misstated
which is deemed to be material but not pervasive to the financial statements. Based on the
audit evidences obtained, CA. Goofy has concluded that a material uncertainty does not
exist related to events or conditions that may cast significant doubt on the entity’s ability
to continue as a going concern in accordance with SA 570. Further, CA. Goofy is also
aware of the fact that a qualified opinion would be appropriate due to a material
misstatement of the Financial Statements. State what phrases should the auditor use while
drafting such opinion paragraph?
(a) In our opinion and to the best of our information and according to the explanations
given to us, except for the effects of the matter described in the Basis for Qualified
Opinion section of our report, the aforesaid financial statements present fairly, in all
material respects, or give a true and fair view in conformity with the applicable
financial reporting framework.
(b) In our opinion and to the best of our information and according to the explanations
given to us, with the foregoing explanation, the aforesaid financial statements present
fairly, in all material respects, or give a true and fair view in conformity with the
applicable financial reporting framework.
(c) In our opinion and to the best of our information and according to the explanations
given to us, subject to the misstatement regarding inventories, the aforesaid financial
statements present fairly, in all material respects, or give a true and fair view in
conformity with the applicable financial reporting framework.
(d) In our opinion and to the best of our information and according to the explanations
given to us, with the explanation described in the Basis for Qualified Opinion section
of our report, the aforesaid financial statements present fairly, in all material respects,
or give a true and fair view in conformity with the applicable financial reporting
framework.
9. While auditing the accounts of ThoughtCo Ltd., CA. Bliss, the auditor of the company came
across certain accounts payable balances for which direct confirmation procedure needs
to be applied. Thus, for the year ending 31 st March, 2018, he sent positive confirmation
requests wherein the trade payables are requested to respond whether or not they are in
agreement with the balance shown. The auditor received all the confirmation replies from
the trade payables on time as correct except from five of them. What other option the
auditor is left with regard to trade payables from which no reply for confirmation requests
received?
(a) Perform additional testing which may include agreeing the balance to subsequent
cash paid.
(b) Accept the balances as it is assuming other replies against received confirmation
requests being correct.
(c) Accept the balances as it is assuming that the trade payables must have replied in
case of any discrepancies.
(d) None of the above.
10. CA. Daffy is the auditor of xBose Ltd. for the previous 2 years. However, due to certain
unavoidable circumstances, no Annual General Meeting (AGM) was held for the current
Financial Year ending on 31 st March, 2018 within every possible time limit and thus, the
ratification procedure for her appointment in the AGM could not be performed. Whether
she may continue to hold the office of the auditor?
(a) CA. Daffy may continue to hold the office of the auditor for the current Financial Year
only and thereafter shall resign herself as the ratification procedure could not be
completed.
(b) CA. Daffy shall continue to hold the office of the auditor and ask the Board to re-
appoint her in a private meeting.
(c) CA. Daffy shall continue to hold the office of the auditor as no such ratification
provisions for appointment by members at every AGM exist.
(d) CA. Daffy shall not continue to hold office of the auditor as the ratification procedure
could not be completed as per proviso to section 139(1) of the Companies Act, 2013.
PART – II B: DESCRIPTIVE QUESTIONS
1. State with reason (in short) whether the following statements are true or false:
(i) Communicating key audit matters in the auditor’s report is a substitute for disclosures
in the financial statements that the applicable financial reporting framework requires
management to make, or that are otherwise necessary to achieve fair presentation;
(ii) When the auditor includes an Other Matter paragraph in the auditor’s report, the
auditor need not include the paragraph within a separate section.
(iii) 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.
(iv) In respect of audit work divided among the joint auditors, each joint auditor shall be
responsible for the work allocated to such joint auditor only.
(v) Inherent risk is the susceptibility of an account balance or class of transactions to
misstatement assuming that there were no related internal controls.
(vi) NGOs registered under the Companies Act, 2013 can maintain their books on either
accrual or cash basis.
(vii) The method which involves dividing the population into groups of items is knows as
block sampling.
(viii) A flow chart is a graphic presentation of each point of the company’s system of
internal control.
(ix) It is necessary for the auditor to maintain professional skepticism throughout the
audit.
(x) The scope of work of an internal auditor may extend even beyond the financial
accounting.
Nature of Auditing
2. (a) Shakti Cables Ltd is engaged in manufacturing and trading of cables of different
types. Its Books of account are not properly maintained and the control system is
weak, so the possibility of frauds and errors are enormous and the auditor, even with
the best of his efforts, may not be able to detect all of them. The fact is recognised
by the Courts from a study of the various judgments. State the tests that would be
applied by the courts to view the auditor’s performance judicially.
(b) Discuss with reference to SA 510, “Initial Audit Engagement – Opening Balances”,
the procedures the auditor should undertake in respect of opening balances for a new
audit engagement.
3. (a) Distinguish between absolute and reasonable assurance. Identify the type of
assurance that is expected in an audit of the financial statements, clearly outlining
the reasons to justify your point of view.
(b) State the Standards issued by AASB which are collectively known as engagement
standards.
4. (a) Fraudulent financial reporting involves intentional misstatements including omissions
of amounts or disclosures in financial statements to deceive financial statement
users. Explain stating clearly how it can be accomplished.
(b) The chief utility of audit lies in reliable financial statements on the basis of which the
state of affairs may be easy to understand. Explain stating the advantages of
independent audit.
Basic Concepts in Auditing
5. (a) In the context of SA-3l5, state the assertions used by auditor to consider the different
types of potential mis-statements that may occur w.r.t. classes of transactions and
events for period under audit.
(b) 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.
6. (a) With reference to SA 320 indicate the factors which may affect the identification of an
appropriate bench mark in determining materiality for the financial statement as a
whole.
(b) Mr. A was appointed statutory auditor of P Ltd., but he was not able to gather the
sufficient audit evidences. Discuss how he should proceed to gather more audit
evidences.
7. (a) In order to achieve the objectives of the accountancy profession, professional
accountants have to observe a number of prerequisites or fundamental principles
Explain
(b) The auditor R of GR and Co., a firm of Chartered Accountants is conducting audit of
B Industries Ltd. State the specific inquiries by auditor when deviations from controls are
detected.
Preparation for an Audit
8. (a) The agreed terms of the audit engagement shall be recorded in an audit engagement
letter or other suitable form of written agreement. Explain stating its contents.
(b) The auditor should plan his work to enable him to conduct an effective audit in an
efficient and timely manner. Discuss and explain what should be covered in audit
plans.
9. (a) The audit working papers constitute the link between the auditor’s report and the
client’s records. Explain clearly stating the definition and purpose of audit
documentation.
(b) State the factors affecting form, content and extent of working papers.
Internal Control
10. (a) Explain the purpose of Internal Control.
(b) Internal control, no matter how effective, can provide an entity with only reasonable
assurance about achieving the entity’s financial reporting objectives. The likelihood
of their achievement is affected by inherent limitations of internal control. Explain
those limitations.
(c) How would you assess the reliability of internal control system in Computerised
Information System (CIS) environment?
11. (a) Explain how does IT benefits an entity’s internal control.
(b) Explain the specific risks to an entity’s internal control posed by IT .
(c) State any four important elements of input control in processing of data in a
computerised accounting system.
Vouching & Verification of Assets and Liabilities
12. How will you vouch/verify the following:
(a) Refund of General Insurance premium paid
(b) Payment of Taxes
(c) Sale Proceeds of junk material
13. How will you vouch/verify the following?
(a) Foreign Travel Expenses
(b) Receipt of Capital subsidy
(c) Royalties received
(d) Goods sent out on Sale or Return basis.

14. How will you vouch and/or verify the following:
(a) Personal expenses of directors met by the company.
(b) Preliminary expenses.
(c) Advances given to suppliers.
The Company Audit
15. Discuss the following:
(a) 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.
(b) 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.
16. (a) Discuss the provisions relating to appointment of subsequent Auditors of Suruchi
Yarns Pvt Ltd.
(b) Discuss the reporting requirements regarding Fixed Assets under CARO, 2016
17. (a) Who shall authenticate financial statements of a company ?
(b) The provisions in the matter of books of account which a company is required to
maintain are contained in section 128 of the Companies Act, 2013. In the above
context, explain clearly the meaning of Books of Account as contained in the
Companies Act, 2013.
18. (a) Explain the provisions of the Companies Act, 2013 with regard to Alteration of Share
Capital and auditor’s duty in this regard.
(b) Discuss the provisions of the Companies Act, 2013 with regard to issue of Sweat
Equity Shares and auditor’s duty in this regard.
Special Audits
19. (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.
(b) Explain the powers of Comptroller and Auditor General of India.
20. Mention any eight special audit points to be considered by the auditor during the audit of
a Hospital?
SUGGESTED ANSWERS / HINTS
ANSWERS - MCQ’s
1. (c)
2. (d)
3. (b)
4. (d)
5. (b)
6. (a)
7. (c)
8. (a)
9. (a)
10. (c)
DESCRIPTIVE ANSWERS
1. (i) Incorrect Communicating key audit matters in the auditor’s report is in the context of
the auditor having formed an opinion on the financial statements as a whole.
Communicating key audit matters in the auditor’s report is not a substitute for
disclosures in the financial statements that the applicable financial reporting
framework requires management to make, or that are otherwise necessary to achieve
fair presentation;
(ii) Incorrect: When the auditor includes an Other Matter paragraph in the auditor’s
report, the auditor shall include the paragraph within a separate section with the
heading “Other Matter,” or other appropriate heading.
(iii) Incorrect: 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) Correct: In respect of audit work divided among the joint auditors, each joint auditor
shall be responsible only for the work allocated to such joint auditor including proper
execution of the audit procedures.
(v) Correct: 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.
(vi) 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.
(vii) 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.
(viii) Correct. Flow chart is a graphic presentation of each part of the entity’s system of
internal control. It minimizes the amount of narrative explanation and thereby
achieves a presentation not possible in any other form. It gives bird’s eye view of
system for suggestion
(ix) 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.
(x) Correct. The scope of work of an internal auditor may extend even beyond the
financial accounting and may include cost investigation, inquiries relating to losses
and wastages, production audit, performance audit, etc.
2. (a) If the books of account are not properly maintained and if the control system is weak,
the possibility of frauds and errors are enormous and the auditor, even with the best
of his efforts, may not be able to detect all of them. The fact is recognised by the
Courts as is obvious from a study of the various judgments. The auditor’s performance
is judicially viewed by applying the following tests:
(i) whether the auditor has exercised reasonable care and skill in carrying out his
work;
(ii) whether the errors and frauds were such as could have been detected in the
ordinary course of checking without the aid of any special efforts;
(iii) whether the auditor had any reason to suspect the existence of the errors and
frauds; and
(iv) whether the error or fraud was so deep laid that the same might not have been
detected by the application of normal audit procedures.
(b) Audit Procedures in respect of Opening Balances for a New Audit Engagement:
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.
3. (a) Absolute and Reasonable Assurance: Absolute assurance is the highest level of
assurance an auditor can give, if he check each and every transaction. Therefore,
absolute assurance is the level of assurance that can only be given if the auditor does
not perform sampling testing. However, it is not possible to give absolute assurance
because of time and cost involved. Therefore, auditors give reasonable assurance.
Reasonable assurance is less then absolute assurance.
As per SA-200 overall objectives of the independent auditor, in conducting an audit

of financial statements, one of the objective of the auditor is to obtain reasonable
assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, thereby enabling the auditor to express
an opinion on whether the financial statements are prepared, in all material respects,
in accordance with an applicable financial reporting framework.
As the basis for the auditor’s opinion, SAs require the auditor to obtain reasonable
assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error. Reasonable assurance is a high level of
assurance. It is obtained when the auditor has obtained sufficient appropriate audit
evidence to reduce audit risk (i.e., the risk that the auditor expresses an inappropriate
opinion when the financial statements are materially misstated) to an acceptably low
level. However, reasonable assurance is not an absolute level of assurance, because
there are inherent limitations of an audit which result in most of the audit evidence on
which the auditor draws conclusions and bases the auditor’s opinion being persuasive
rather than conclusive.
(b) Engagement Standards: The following standards issued by the Auditing and
Assurance Standards Board under the authority of the Council are collectively known
as the Engagement Standards-
(i) Standards on Auditing (SAs), to be applied in the audit of historical financial
information.
(ii) Standards on Review Engagements (SREs), to be applied in the review of
historical financial information.
(iii) Standards on Assurance Engagements (SAEs), to be applied in assurance
engagements, dealing with subject matters other than historical financial
information.
(iv) Standards on Related Services (SRSs), to be applied to engagements
involving application of agreed-upon procedures to information, compilation
engagements, and other related services engagements, as may be specified by
the ICAI.
4. (a) Fraudulent Financial Reporting: 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. Such earnings
management may start out with small actions or inappropriate adjustment of
assumptions and changes in judgments by management. Pressures and incentives
may lead these actions to increase to the extent that they result in fraudulent financial
reporting.
In some entities, management may be motivated to reduce earnings by a material

amount to minimize tax or to inflate earnings to secure bank financing.
Fraudulent financial reporting may be accomplished by the following:
(i) Manipulation, falsification (including forgery), or alteration of accounting records
or supporting documentation from which the financial statements are prepared.
(ii) Misrepresentation in or intentional omission from, the financial statements of
events, transactions or other significant information.
(iii) Intentional misapplication of accounting principles relating to amounts,
classification, manner of presentation, or disclosure.
Fraudulent financial reporting often involves management override of controls that
otherwise may appear to be operating effectively.
(b) Advantages of Independent Audit: The chief utility of audit lies in reliable financial
statements on the basis of which the state of affairs may be easy to understand. Apart
from this obvious utility, there are other advantages of audit. Some or all of these are
of considerable value even to those enterprises and organisations where audit is not
compulsory, these advantages are given below-
(i) It safeguards the financial interest of persons who are not associated with the
management of the entity, whether they are partners or shareholders.
(ii) It acts as a moral check on the employees from committing defalcations or
embezzlement.
(iii) Audited statements of account are helpful in settling liability for taxes,
negotiating loans and for determining the purchase consideration for a business.
(iv) These are also useful for settling trade disputes for higher wages or bonus as
well as claims in respect of damage suffered by property by fire or some other
calamity.
(v) An audit can also help in the detection of wastages and losses to show the
different ways by which these might be checked especially those that occur due
to the absence or inadequacy of internal checks or internal control measures.
(vi) Audit ascertains whether the necessary books of account and allied records
have been properly kept and helps the client in making good deficiencies or
inadequacies in this respect.
(vii) As an appraisal function, audit reviews the existence and operations of various
controls in the organisations and reports weaknesses, inadequacies, etc., in
them.
(viii) Audited accounts are of great help in the settlement of accounts at the time of
admission or death of partner.
(ix) Government may require audited and certified statement before it gives
assistance or issues a license for a particular trade.
5. (a) Assertions used by the auditor to consider the different types of potential
misstatements that may occur with respect to classes of transactions and events for
the period under audit:
(i) Occurrence—transactions and events that have been recorded have occurred
and pertain to the entity.
(ii) Completeness—all transactions and events that should have been recorded
have been recorded.
(iii) Accuracy—amounts and other data relating to recorded transactions and events
have been recorded appropriately.
(iv) Cut-off—transactions and events have been recorded in the correct accounting
period.
(v) Classification—transactions and events have been recorded in the proper
accounts.
(b) 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 specifi c
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.
6. (a) Factors that may affect the Identification of an Appropriate Benchmark in
Determining Materiality: As per SA 320 “Materiality in Planning and Performing an
Audit”, determining materiality involves the exercise of professional judgment. A
percentage is often applied to a chosen benchmark as a starting point in determining
materiality for the financial statements as a whole. Factors that may affect the
identification of an appropriate benchmark include the following-
(i) The elements of the financial statements (for example, assets, liabilities, equity,
revenue, expenses);
(ii) Whether there are items on which the attention of the users of the particular
entity’s financial statements tends to be focused (for example, for the purpose
of evaluating financial performance users may tend to focus on profit, revenue
or net assets);
(iii) The nature of the entity, where the entity is at in its life cycle, and the industry
and economic environment in which the entity operates;
(iv) The entity’s ownership structure and the way it is financed (for example, if an
entity is financed solely by debt rather than equity, users may put more emphasis
on assets, and claims on them, than on the entity’s earnings); and
(v) The relative volatility of the benchmark
(b) Audit Evidence: According to SA 500 “Audit Evidence”, audit procedures to gather
more audit evidence would include -
Inspection: Inspection involves examining records or documents, whether internal or
external, in paper form, electronic form, or other media, or a physical examination of
an asset. Inspection of records and documents provides audit evidence of varying
degrees of reliability, depending on their nature and source and, in the case of internal
records and documents, on the effectiveness of the controls over their production. An
example of inspection used as a test of controls is inspection of records for evidence
of authorisation.
Observation: Observation consists of looking at a process or procedure being
performed by others, for example, the auditor’s observation of inventory counting by
the entity’s personnel, or of the performance of control activities.
External Confirmation: An external confirmation represents audit evidence obtained
by the auditor as a direct written response to the auditor from a third party (the
confirming party), in paper form, or by electronic or other medium. External
confirmation procedures frequently are relevant when addressing assertions
associated with certain account balances and their elements. However, external
confirmations need not be restricted to account balances only.
Recalculation: Recalculation consists of checking the mathematical accuracy of
documents or records. Recalculation may be performed manually or electronically.
Re-performance: Re-performance involves the auditor’s independent execution of
procedures or controls that were originally performed as part of the entity’s internal
control.
Analytical Procedures: Analytical procedures consist of evaluations of financial
information made by a study of plausible relationships among both financial and non-
financial data. Analytical procedures also encompass the investigation of identified
fluctuations and relationships that are inconsistent with other relevant information or
deviate significantly from predicted amounts.
Inquiry: 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.
7. (a) In order to achieve the objectives of the accountancy profession, professional
accountants have to observe a number of prerequisites or fundamental
principles as under:
Integrity: A professional accountant should be straightforward and honest in
performing professional services.
Objectivity: A professional accountant should be fair and should not allow prejudice
or bias, conflict of interest or influence of others to override objectivity.
Professional Competence and Due Care: A professional accountant should
perform professional services with due care, competence and diligence and has a
continuing duty to maintain professional knowledge and skill at a level required to
ensure that a client or employer receives the advantage of competent professional
service based on up-to-date developments in practice, legislation and techniques.
Confidentiality: A professional accountant should respect the confidentiality of
information acquired during the course of performing professional services and
should not use or disclose any such information without proper and specific authority
or unless there is a legal or professional right or duty to disclose.
Professional Behaviour: A professional accountant should act in a manner
consistent with the good reputation of the profession and refrain from any conduct
which might bring discredit to the profession.
Technical Standards: A professional accountant should carry out professional
services in accordance with the relevant technical and professional standards.
Professional accountants have a duty to carry out with care and skill, the instructions
of the client or employer insofar as they are compatible with the requirements of
integrity, objectivity and, in the case of professional accountants in public practice,
independence.
(b) Specific inquiries by auditor when deviations from controls are detected.
When deviations from controls upon which the auditor intends to rely are detected,
the auditor shall make specific inquiries to understand these matters and their
potential consequences, and shall determine whether:
(a) The tests of controls that have been performed provide an appropriate basis for
reliance on the controls;
(b) Additional tests of controls are necessary; or
(c) The potential risks of misstatement need to be addressed using substantive

procedures.
8. (a) 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
(e) 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.
(b) “The auditor should plan his work to enable him to conduct an effective audit
in an efficient and timely manner. Plans should be based on knowledge of the
client’s business.
Plans should be made to cover, among other things:
(a) acquiring knowledge of the client’s accounting systems, policies and internal
control procedures;
(b) establishing the expected degree of reliance to be placed on internal control;
(c) determining and programming the nature, timing, and extent of the audit
procedures to be performed; and
(d) coordinating the work to be performed.
9. (a) The audit working papers constitute the link between the auditor’s report and
the client’s records. According to SA-230, Audit Documentation refers to the record
of audit procedures performed, relevant audit evidence obtained, and conclusions the
auditor reached (terms such as “working papers” or “work papers” are also sometimes
used). The objects of an auditor’s working papers are to record and demonstrate the
audit work from one year to another.
Audit documentation serves a number of purposes:
 Assisting the engagement team to plan and perform the audit.
 Assisting members of the engagement team responsible for supervision to direct
and supervise the audit work, and to discharge their review responsibilities in
 Enabling the engagement team to be accountable for its work.
 Retaining a record of matters of continuing significance to future audits.
 Enabling the conduct of quality control reviews and inspections in accordance with
SQC 1.
 Enabling the conduct of external inspections in accordance with applicable legal,
regulatory or other requirements
(b) Form and Content of Working Papers: Working papers should record the audit plan,
nature, timing and extent of auditing procedures performed, and the conclusions
drawn from the evidence obtained.
The form, content and extent of working papers depend on factors such as:
 The size and complexity of the entity.
 The nature of the audit procedures to be performed.
 The identified risks of material misstatement.
 The significance of the audit evidence obtained.
 The nature and extent of exceptions identified.
 The need to document a conclusion or the basis for a conclusion not readily
determinable from the documentation of the work performed or audit evidence
obtained.
 The audit methodology and tools used.
10. (a) Purpose of Internal Control: Internal control is designed, implemented and
maintained to address identified business risks that threaten the achievement of any
of the entity’s objectives that concern-
 The reliability of the entity’s financial reporting;
 The effectiveness and efficiency of its operations;
 Its compliance with applicable laws and regulations; and
 Safeguarding of assets.
(b) Limitations of Internal Control: Internal control, no matter how effective, c an
provide an entity with only reasonable assurance about achieving the entity’s financial
reporting objectives. The likelihood of their achievement is affected by inherent
limitations of internal control. These include-
(i) Role of Human Judgement: The realities that human judgment in decision-
making can be faulty and that breakdowns in internal control can occur because
of human error. For example, there may be an error in the design of, or in the
change to, a control.
(ii) Ineffective Operation of Control: Equally, the operation of a control may not
be effective, such as where information produced for the purposes of internal
control (for example, an exception report) is not effectively used because the
individual responsible for reviewing the information does not understand its
purpose or fails to take appropriate action.
Human
Judgement
Ineffective
Limitations of Operation of
Small Entities Control
Inherent
Limitations of
Internal
Control
Judgement Collusion
by among
Management Employees
(iii) Collusion among Employees: Additionally, controls can be circumvented by

the collusion of two or more people or inappropriate management override of
internal control. For example, management may enter into side agreements with
customers that alter the terms and conditions of the entity’s standard sales
contracts, which may result in improper revenue recognition. Also, edit checks
in a software program that are designed to identify and report transactions that
exceed specified credit limits may be overridden or disabled.
(iv) Judgement by Management: Further, in designing and implementing controls,
management may make judgments on the nature and extent of the controls it
chooses to implement, and the nature and extent of the risks it chooses to
assume.
(v) Considerations specific to Smaller Entities: Smaller entities often have fewer
employees which may limit the extent to which segregation of duties is
practicable. However, in a small owner-managed entity, the owner-manager may
be able to exercise more effective oversight than in a larger entity. This oversight
may compensate for the generally more limited opportunities for segregation of
duties.
On the other hand, the owner-manager may be more able to override controls
because the system of internal control is less structured. This is taken into
account by the auditor when identifying the risks of material misstatement due
to fraud.
(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 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.
(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.
11. (a) Generally, IT benefits an entity’s internal control by enabling an entity to:
 Consistently apply predefined business rules and perform complex calculations
in processing large volumes of transactions or data;
 Enhance the timeliness, availability, and accuracy of information;
 Facilitate the additional analysis of information;
 Enhance the ability to monitor the performance of the entity’s activities and its
policies and procedures;
 Reduce the risk that controls will be circumvented; and
 Enhance the ability to achieve effective segregation of duties by implementing
security controls in applications, databases, and operating systems.
(b) IT also poses specific risks to an entity’s internal control, including, for
example:
 Reliance on systems or programs that are inaccurately processing data,
processing inaccurate data, or both.
 Unauthorised access to data that may result in destruction of data or improper
changes to data, including the recording of unauthorised or non-existent
transactions, or inaccurate recording of transactions. Particular risks may arise
where multiple users access a common database.
 The possibility of IT personnel gaining access privileges beyond those
necessary to perform their assigned duties thereby breaking down segregation
of duties.
 Unauthorised changes to data in master files.
 Unauthorised changes to systems or programs.
 Failure to make necessary changes to systems or programs.
 Inappropriate manual intervention.

 Potential loss of data or inability to access data as required.
(c) Control Over Input in a Computerised Accounting System:
(i) The input fed into the computer should be authorized. The authorization levels
should be checked. The authorization is effected by levels of access to the entry
for the computer system. The access control is operated through use of
password and logging procedures.
(ii) The system should devise controls to check that data input are accurate.
(iii) The input document should be reviewed and verified by another person after
preparation.
(iv) Transaction should be accurately converted into machine readable language
and recorded in a computer data file.
(v) The transactions are not lost, duplicated, or changed without authorization.
(vi) There should be validity and cross reference checks inbuilt in the system to
throw light on errors which appear in the process of feeding input.
(vii) Incorrect transactions are thrown out by a list which must be corrected,
resubmitted before the process could run on the inputs.
(viii) The check digit total of financial information contained in the document or hash
total may be used to act as a control tool.
(ix) The serial control may be used in inputting data that are to follow serial
sequence. Any deviation in serial sequence will have to be automatically
signalled out.
12. (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) Payment of Taxes:

(i) Payment on account of income-tax and other taxes consequent upon a regular
assessment should be verified by reference to the copy of the assessment order,
assessment form, notice of demand and the receipted challan.
(ii) Payments or advance payments of income-tax should also be verified with the
notice of demand and the receipted challan acknowledging the amount paid.
(iii) The interest allowed on advance payments of income-tax should be included as
income and penal interest charged for non-payment should be debited to the
interest account.
(iv) Nowadays, electronic payment of taxes is also in trend. Electronic payment of
taxes means payment of taxes by way of internet banking facility or credit or
debit cards.
(v) The assessee can make electronic payment of taxes also from the account of
any other person. However, the challan for making such payment must clearly
indicate the Permanent Account Number (PAN) of the assessee on whose behalf
the payment is made.
(vi) It is not necessary for the assessee to make payment of taxes from his own
account in an authorized bank. While vouching such E-Payment, the auditor
should cross verify the payments of taxes through the receipted challan along
with PAN No./TAN No. etc.
(c) Sale Proceeds of Junk Material:
(i) Review the internal control on junk 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 junk materials.
(iii) Review the production and cost records for the determination of the extent of
junk materials that may arise in a given period.
(iv) Compare the income from the sale of junk materials with the corresponding
figures of the preceding three years.
(v) Check the rates at which different types of junk materials have been sold and
compare the same with the rates that prevailed in the preceding year.
(vi) See that all junk materials sold have 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
materials as to its reasonableness. Ensure that proper accounting has been

done for it.
13 (a) Foreign Travel Expenses:
(i) Examine Travelling Allowance bills submitted by the employees stating the details of
tour, details of expenses, etc.
(ii) Verify that the tour programme was properly authorized by the competent authority.
(iii) Check the T.A. bills along with accompanying supporting documents such as air
tickets, travel agents bill and hotel bills with reference to the internal rules for
entitlement of the employees and also make sure that the bills are properly passed.
(iv) See that the tour report accompanies the T.A. bill. The tour report will show the
purpose of the tour. Satisfy that the purpose of the tour as shown by the tour report
conforms to the authorization for the tour.
(v) Check Reserve Bank of India’s permission, if necessary, for withdrawing the foreign
exchange. For a company, the amount of foreign exchange spent is to be disclosed
separately in the accounts as per requirement of Schedule III to the Companies Act,
2013 and Accounting Standard 11 “The Effects of Changes in Foreign Exchange
Rates”.
(b) Receipt of Capital Subsidy:
(i) Refer to application made for the claim of subsidy to ascertain the purpose and
the scheme under which the subsidy has been made available.
(ii) Examine documents for the grant of subsidy and note the conditions attached
with the same relating to its use, etc.
(iii) See that conditions to be fulfilled and other terms especially whether the same
is for a specific asset or is for setting up a factory at a specific location.
(iv) Check relevant entries for receipt of subsidy.
(v) Check compliance with requirements of AS 12 on “Accounting for Government
Grants” i.e. whether it relates to specific amount or in the form of promoters’
contribution and accordingly accounted for as also compliance with the
disclosure requirements.
(c) Royalties received:
(i) Verify the relevant contract and ascertain the provisions relating to the
conditions of royalty such as rate, mode of calculation and due date.
(ii) Check the periodical statements received in respect of books printed, sold and
inventory lying at different locations.
(iii) Check the computation in the royalty statement and ensure that any deduction
or adjustment made from the royalty due is as per agreement conditions.
(iv) Verify the provisions for the royalty to be received as at the end of the year.
(d) 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.
14. (a) Personal Expenses of Directors:
(i) Check the articles of association, service contract, minutes of general meeting,
etc., to check the authorisation for such payment.
(ii) Enquire to ensure that personal expenses are not camouflaged in any other
revenue items as contemplated under section 143(1) of the Companies Act,
2013.
(iii) Ascertain compliance with disclosure according to requirements of Schedule III
to the Companies Act, 2013.
(iv) Check documentary evidences to examine the payments reimbursed.
(b) Preliminary Expenses: It is the expenditure incurred incidental to the creation,
formation and floating of a company. It consists of stamp duties, registration fees,
legal costs, consultants fees, expenses of printing of memorandum and articles, etc.
The following should be checked-
(i) Check Board’s minutes book containing the resolution approving the expenses
claimed by promoters as having been spent in formation of the company.
(ii) Examine supporting papers and vouchers, contracts, agreements, etc. to
support the promoters’ claims. Also check bills and receipts issued by the printer
of the memorandum and articles of association, share certificates, etc.
(iii) Check receipt for the registration fee paid for registration of the company.
(iv) Verify rates of stamp required to be affixed on the memorandum and articles of
association.
(v) Examine the compliance of AS 26 ‘Intangible Assets’ with regard to treatment of

such preliminary expenses in the books of account.
(vi) Check that no expenses other than those what constitutes preliminary expenses
are booked under this head, e.g. underwriting commission and brokerage paid.
(c) Advances to the Suppliers:
(i) Obtain schedule of debit balances in trade payables’ account and pay particular
attention to the age of the balances. Also scrutinise the bought ledger.
(ii) Enquiry should be made for long unadjusted outstandings and check as to
whether any of them would require provisioning.
(iii) Examine that the advances have not been shown as deposits in balance sheet
as per section 143(1) of the Companies Act, 2013.
(iv) Confirmation of balances should be obtained and reconciliation be done in case
of any discrepancies.
15. (a) 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.
(b) 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 sec urity 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 Firm 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.
16. (a) 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) 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.
(ii) The certificate shall also indicate whether the auditor satisfies the criteria
provided in section 141.
(iii) 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.
(b) Reporting requirements regarding Fixed Assets under CARO, 2016 are :
(a) Whether the company is maintaining proper records showing full particulars,
including quantitative details and situation of fixed assets;
(b) 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;
(c) Whether the title deeds of immovable properties are held in the name of the
company. If not, provide the details thereof;
17. (a) Authentication of Financial Statements: Section 134(1) provides that the financial
statements, including consolidated financial statement, if any, shall be approved by
the board of directors before they are signed on behalf of the board at least by the
following-
(a) The chairperson of the company where he is authorised by the Board; or
(b) By two directors out of which one shall be managing director and
(c) The Chief Executive Officer, if he is a director in the company,

(d) The Chief Financial Officer, wherever he is appointed; and
(e) The company secretary of the company, wherever he is appointed.
However, in the case of a one person company, the financial statement shall be
signed by only one director, for submission to the auditor for his report thereon.
As per section 134(2), the auditors’ report shall be attached to every financial
statement.
According to section 134(7), a signed copy of every financial statement, including
consolidated financial statement, if any, shall be issued, circulated or published along
with a copy each of—
(i) Any notes annexed to or forming part of such financial statement;
(ii) The auditor’s report; and
(iii) The Board’s report.
(b) Books of Account, etc., to be kept by Company: The provisions in the matter of
books of account which a company is required to maintain are contained in section
128 of the Companies Act, 2013 (hereinafter referred as the Act).
The term “Book and paper” and “Book or paper” has been defined under section
2(12) of the Act, which includes books of account, deeds, vouchers, writings,
documents, minutes and registers maintained on paper or in electronic form.
Further, “Books of account”, as defined under section 2(13) of the Act, includes
records maintained in respect of—
(a) all sums of money received and expended by a company and matters in relation
to which the receipts and expenditure take place;
(b) all sales and purchases of goods and services by the company;
(c) the assets and liabilities of the company; and
(d) the items of cost as may be prescribed under section 148 in the case of a
company which belongs to any class of companies specified under that section.
18. (a) Alteration of Share Capital: Section 61 of the Companies Act, 2013 lays down power
of limited company to alter its share capital. According to the provision a limited
company having a share capital may, if so authorised by its articles, alter its
memorandum in its general meeting to—
(a) increase its authorised share capital by such amount as it thinks expedient;
(b) consolidate and divide all or any of its share capital into shares of a larger
amount than its existing shares, however no consolidation and division which
results in changes in the voting percentage of shareholders shall take effect
unless it is approved by the Tribunal on an application made in the prescribed

manner;
(c) convert all or any of its fully paid-up shares into stock, and reconvert that stock
into fully paid-up shares of any denomination;
(d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed
by the memorandum, so, however, that in the sub-division the proportion
between the amount paid and the amount, if any, unpaid on each reduced share
shall be the same as it was in the case of the share from which the reduced
share is derived;
(e) cancel shares which, at the date of the passing of the resolution in that behalf,
have not been taken or agreed to be taken by any person, and diminish the
amount of its share capital by the amount of the shares so cancelled.
It may be noted that the cancellation of shares shall not be deemed to be a reduction
of share capital.
Section 64 of the Companies Act, 2013 provides that within 30 days of the shares
having been consolidated, converted, sub-divided, redeemed, or cancelled or the
stock having been reconverted, notice should be given to the Registrar in the
prescribed form along with an altered memorandum.
The auditor’s duties in the circumstances shall be:
(i) to verify that the alteration of capital is authorised by the Articles;
(ii) to inspect the minutes of the shareholders authorising the alteration;
(iii) to obtain Allotment Lists containing details of the new holdings of share or stock
by each member and to verify the same with the entries;
(iv) to inspect the directors’ resolution in regard to allotment, consolidation,
conversion or sub-division passed pursuant to the resolution of the members;
(v) to examine the cancelled share certificates, if any, and agree the same with the
counterfoils of new certificates issued;
(vi) to see that the procedure, prescribed by the Articles in this regard, has been
complied with;
(vii) to verify that the share capital account is correctly shown in the Balance Sheet;
and
(viii) to see that the necessary intimation to the Registrar contemplated by Section
64 has been sent.
(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 authorised 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 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.
19. (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 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) Powers of C&AG: The C&AG Act gives the following powers to the C&AG in
connection with the performance of his duties-
(a) To inspect any office of accounts under the control of the Union or a State
Government including office responsible for the creation of the initial or
subsidiary accounts.
(b) To require that any accounts, books, papers and other documents which deal
with or are otherwise relevant to the transactions under audit, be sent to
specified places.
(c) To put such questions or make such observations as he may consider necessary
to the person in charge of the office and to call for such information as he may
require for the preparation of any account or report which is his duty to prepare.
In carrying out the audit, the C&AG has the power to dispense with any part of detailed
audit of any accounts or class of transactions and to apply such limited checks in
relation to such accounts or transactions as he may determine
20. 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.
(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.
(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.
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT

SECTION – A: INFORMATION TECHNOLOGY
QUESTIONS
Multiple Choice Questions

1. In Computer Networks Open Systems Interconnection (OSI) Model, ______ defines the
relationship between a device and a physical medium.
(a) Physical Layer
(b) Data Link Layer
(c) Network Layer
(d) Session Layer
2. An aspiring CA in his interview was asked to provide correct sequence of the following
sub-processes that represent Procure to Pay Process Flow. The sub processes are - (1)
Purchase Order, (2) Receipts, (3) Request for Quote (RFQ), (4) Purchase Requisition, (5)
Payments, and (6) Quotation. What should be the sequence?
(a) (1)-(2)-(3)-(4)-(5)-(6)
(b) (4)-(3)-(6)-(1)-(2)-(5)
(c) (1)-(4)-(3)-(5)-(6)-(2)
(d) (5)-(3)-(1)-(2)-(4)-(6)
3. In real world networks, the terminology ____________ refers to the ability of a network to
recover from any kind of error like connection failure, loss of data etc.
(a) Routing
(b) Resilience
(c) Contention
(d) Bandwidth
4. To qualify as a Transaction Processing System (TPS), transactions made by the system
must pass the ACID Test – Atomicity, Consistency, Isolation and Durability. Which feature
under ACID Test refers to the pre-requisite that “Once transactions are completed, they
cannot be undone”.
(a) Atomicity
(b) Consistency
(c) Isolation
(d) Durability
2 I NTERMEDIATE (IPC) EXAMINATION: MAY, 2019
5. In Computer system, __________ establish the authenticity of persons and prevent the
denial of messages or contracts when data is exchanged electronically.
(a) Plastic Cards
(b) Digital Signatures
(c) One Time Password
(d) Encryption
Accounting Information Systems (AIS)
6. Accountants and Auditors must study and understand Accounting Information System s
(AIS) and related concepts so that they can accomplish the functions of accounting,
general accounting reports and using accounting reports. Determine the three basic
functions of AIS that they should build their understanding upon?
Flowchart
7. T he GST of 50 items is to be calculated as per the following details. With Code No. and
Value of Supply as input, draw a flowchart to calculate the Tax and print the Tax, Code No.
of the Item and the Type of Item. (Note: The rates have been taken hypothetically)
Code No.(C_No) Types of Item Tax Rate
001 Perishable 15%
002 Textiles 10%
003 Luxury Items 20%
004 Machinery 12%
Mobile Computing
8. Mobile Computing enables enterprises to connect with their employees all times resulting
in the increased productivity and a better Return on Investments (RoI). Discuss some
examples of its business applications.
Information Systems Life Cycle
9. In an organization, there may come a time when the existing systems may not remain
efficient and effective, thus, arising a need for the development of new Information
Systems. Identify the various phases involved in the development of an Information
System.
Network Architecture and Protocol
10. Discuss Network Architecture and Protocol.
E-Commerce Applications
11. As a user, determine the benefits that can be derived by using E-Commerce applications
and their implementation.
PAPER – 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT 3
Transaction Processing Systems (TPS)

12. Discuss the attributes that any Transaction Processing System (TPS) would possess.
Credit Card
13. A customer contacted a bank’s customer care executive to enquire about the processing
of Credit Cards. As an executive, what shall be your explanation?
Input Controls
14. Discuss Input Controls under Application Controls.
Grid Computing
15. You are deputed as an IT Administrator in ABC company. From your perspective,
determine the reasons why Grid Computing should be used.
1. (a) Physical Layer

2. (b) (4)-(3)-(6)-(1)-(2)-(5)
3. (b) Resilience
4. (d) Durability
5. (b) Digital Signatures
6. Accountants and Auditors must study and understand Accounting Information System s
(AIS) and related concepts so that they can accomplish the functions of accounting,
general accounting reports and using accounting reports. The Accounting Information
System is the mechanism that allows accountants to perform their accounting functions
and tasks. As auditors, understanding of AIS is critical for collecting and evaluating
evidence to provide an opinion/report on the completeness and accuracy of accounting
information which is processed through AIS to produce the financial reports. The three
basic functions of AIS are as under:
(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. Accuracy and efficiency in recording transaction data can be
further improved if source documents are properly designed.
(ii) Record transaction: Record transactions data into journals that 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 is
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. The
functions to be performed by different people are authorizing (approval) transactions,
recording (capture) transactions and maintaining custody (protect) of assets, thereby
ensuring that business activities are performed efficiently and in accordance with
management’s objectives.
7. The required flowchart is as below:
Start
Set N = 0
Read C_No,Val_Spl
Cal_Tax = Val_Spl*0.15
If C_No = 001?
Yes T_It = “Perishable”
No
If C_No = 002? Cal_Tax = Val_Spl*0.10

Yes T _It = “Textiles”
No
If C_No = 003? Cal_Tax = Val_Spl*0.20
Yes T_It = “Luxury Items”
No
Cal_Tax = Val_Spl*0.12
T _It = “Machinery”
Print C_No, Cal_Tax, T_It
No
N=N+ 1 If N < 50? Stop
Yes

T he variables are defined as follows:

C = Code No; Val_Spl = Value of Supply; T_It = Types of Item
N = Counter; Cal_Tax = Calculated Tax after GST
8. Mobile Computing enables enterprises to connect with their employees all times resulting
in increased productivity and a better Return on Investments (RoI). Some examples of
business applications are as follows:
• There is an 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.
• 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 speeded up.
• 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 because the increasing acceptance as business
tools.
9. Various phases that are involved in developing an Information System are as follows:
• Phase 1: System Investigation: This phase examines that ‘What is the problem and
is it worth solving’? The feasibility study under the following dimensions is as follows:
o Technical feasibility: Does the technology exist to implement the proposed
system or is it a practical proposition?
o Economic feasibility: Is proposed system cost-effective: if benefits do not
outweigh costs, it’s not worth going ahead?
o Legal feasibility: Is there any conflict between the proposed system and legal
requirements?
o Operational feasibility: Are the current work practices and procedures
adequate to support the new system?
o 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:
o Interviewing staff: at different levels from end-users to senior management;
o Examine current business: systems documents and output including current
order documents, computer system procedures and reports used by operations
and senior management;
o Sending out questionnaires: that must be carefully constructed to elicit
unambiguous answers; and
o 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:
o Hardware platform: Computer, network capabilities, input, storage and output
devices;
o Software: Programming language, package and database;
o Outputs: Report layouts and screen designs;
o Inputs: Documents, screen layouts and validation procedures;
o User interface: How users will interact with the computer system;
o Modular design: Of each program in the application;

o Test plan: Develop test data;
o Conversion plan: How the new system is to be implemented; and
o 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:
o Coding and testing of the system;
o Acquisition of hardware and software; and
o 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:
o Programming amendments,
o Adjustment of clerical procedures,
o Modification of Reports, and
o Request for new programs.
10. Network Architecture: Network Architecture refers to the layout of the network consisting
of the hardware, software, connectivity, communication protocols and mode of
transmission, such as wired or wireless. The diagram of the network architecture provides
a full picture of the established network with detailed view of all the resources accessible.
In other words, Network Architecture includes hardware components used for
communication, cabling and device types, network layout and topologies, physical and
wireless connections, implemented areas and future. In addition, the software rules and
protocols also constitute to the network architecture. The goal of network architecture is to
promote an open, simple, flexible, and efficient telecommunications environment. This is
accomplished using Standard protocols; Standard communications hardware and software
interfaces; and standard multilevel interface between end users and computer systems.
Protocols: Protocols are software that performs a variety of actions necessary for data
transmission between computers. Stated more precisely, protocols are a set of rules for
intercomputer 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. Thus, we can say that,
Network protocols which are essentially software 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.
(a) 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.
(b) Semantics: Type and order of messages used to ensure reliable and error free
information transfer.
(c) Timing: Defines data rate selection and correct timing for various events during data
transfer.
At the sending computer, protocols –
(i) Break data down into packets;
(ii) Add destination address to the packet; and
(iii) Prepares data for transmission through Network Interface Card (NIC)
At the receiving computer, protocols –
(i) Take data packets off the cable;
(ii) Bring packets into computer through Network Interface Card (NIC);
(iii) Strip the packets off any transmitting information;
(iv) Copy data from packet to a buffer for reassembly; and
(v) Pass the reassembled data to the application.
11. E-Commerce presents immense benefits to individual organizations, consumers, and
society as a whole.
• Reduction in costs to buyers from increased competition in procurement as more
suppliers are able to compete in an electronically open marketplace.
• Reduction in errors, time, and overhead costs in information processing by eliminating
requirements for re-entering data.
• Reduction in costs to suppliers by electronically accessing on-line databases of bid
opportunities, on-line abilities to submit bids, and on-line review of rewards.
• Reduction in time to complete business transactions, particularly from delivery to
payment.
• Creation of new markets through the ability to easily and cheaply reach potential
customers.
• Easier entry into new markets, especially geographically remote markets, for
enterprises regardless of size and location.
• Better quality of goods as specifications are standardized and competition is
increased and improved variety of goods through expanded markets and the ability
to produce customized goods.
• Faster time to market as business processes are linked, thus enabling seamless
processing and eliminating time delays.
• Optimization of resource selection as businesses form cooperative teams to increase
the chances of economic successes, and to provide the custom er products and
capabilities more exactly meeting the requirements.
• Reduction in inventories and reduction of risk of obsolete inventories as the demand
for goods and services is electronically linked through just-in-time inventory and
integrated manufacturing techniques.
• Reduction in overhead costs through uniformity, automation, and large-scale
integration of management processes.
• Reduction in use of ecologically damaging materials through electronic coordination
of activities and the movement of information rather than physical objects).
• Reduction in advertising costs.
12. The attributes of Transaction Processing Systems (TPS) are as follows:
• Access Control - TPS: Most Transaction Processing Systems come with access
control to put a ceiling on users to only those allowed to accomplish so. Access
Control ensures that people who are not authorized to use the system are not
permissible to influence or transform the transaction process.
• Equivalence - TPS: Transactions are processed in the similar format every time to
ensure that full effectiveness is achieved. The TPS Interfaces are designed to get
hold of identical data for each transaction, despite the consequences of the source.
• High Volume Rapid Processing - TPS: In most of the transaction processing, the
foremost issue is momentum. The instantaneous processing of transactions is
noteworthy to the success of certain industry such as banking. TPS is designed to
process transactions in an immediate effect to make confident that the transaction
data is available to other users or processes that entail it.
• Trustworthiness - TPS: A TPS system is designed to be robust and trustworthy. The
system is capable to process transactions very rapidly, yet at the same time, conduct
several checks to make certain that the data integrity is preserved.
13. Credit Cards: In a credit card transaction, the consumer presents preliminary proof of his
ability to pay by presenting his credit card number to the merchant. The merchant can
verify this with the bank, and create a purchase slip for the consumer to endorse. The
merchant then uses this purchase slip to collect funds from the bank, and, on the next
billing cycle, the consumer receives a statement from the bank with a record of the
transaction.
Processing of Credit Card involves following steps:
• Step 1: Authorization – This is the first step in processing a credit card. After a
merchant swipes the card, the data is submitted to merchant’s bank, called an
acquirer, to request authorization for the sale. The acquirer then routes the request
to the card issuing bank, where it is authorized or denied, and the merchant can
process the sale.
• Step 2: Batching – This is the second step in processing a credit card. At the end of
a day, the merchant reviews all the day’s sales to ensure they were authorized and
signed by the cardholder. It then transmits all the sales at once, called a batch, to the
acquirer to receive payment.
• Step 3: Clearing – This is the third step in processing a credit card. After the acquirer
receives the batch, it sends it through the card network, where each sale is routed to
the appropriate issuing bank. The issuing bank then subtracts its interchange fees,
which are shared with the card network, and transfers the remaining amount through
the network back to the acquirer.
• Step 4: Funding –This is the fourth and final step in processing a credit card. After
receiving payment from the issuer, minus interchange fees, the acquirer subtracts its
discount fee and sends the remainder to the merchant. The merchant is now paid for
the transaction, and the cardholder is billed.
14. Input Controls: These are responsible for ensuring the accuracy and completeness of
data that are input into an application system. Input controls are important since substantial
time is spent on inputting data which involves human intervention and are therefore prone
to errors and fraud. The type of data input method used in an information system affects
asset safeguarding, data integrity, system effectiveness, and system efficiency objectives.
If data is keyed into an information system via a terminal, high quality screen design is
important to minimizing input errors and to achieving effective and efficient input of data.
• Source Document Control: From a control viewpoint, a well-designed source
document reduces the likelihood of data recording errors, increases the speed with
which data can be recorded and controls the work flow. Source Document Controls
facilitates the data entry into a computer system and subsequent reference checking.
• Data Coding Controls: Data Coding Controls are put in place to reduce user error
during data feeding.
• Batch Controls: These are put in place at locations where batch processing is being
used. Batch processing is where there is a time gap between occurrence and
recording of transactions, that is, transactions are not recorded at the time of
occurrence but are accumulated and a set (based on number/ time) is processed.
• Validation Controls: These validate the accuracy/correctness of input data. Input
Validation Controls are intended to detect errors in transaction data before the data
are processed.
15. From an Administrative Perspective, Grid Computing is used because of following reasons:
• Planning: The administrator should understand the organization’s requirements for
the grid to better choose the grid technologies that satisfy grid’s requirements. One
of the first considerations is the hardware available and how it is connected via a LAN
or WAN. Next, an organization may want to add additional hardware to supplement
the capabilities of the grid.
o Security: Security is a much more important factor in planning and maintaining
a grid where data sharing comprises the bulk of the activity. In a grid, the
member machines are configured to execute programs rather than just move
data. This makes an unsecured grid potentially fertile ground for viruses and
Trojan horse programs. For this reason, it is important to understand the issues
involved in authenticating users and providing proper authorization for specific
operations.
o Organization: It is important to understand how the departments in an
organization interact, operate, and contribute to the whole. Often, there are
barriers built between departments and projects to protect their resources in an
effort to increase the probability of timely success. For example, a project that
finds itself behind schedule and over budget may not be able to afford the
resources required to solve the problem. A grid would give such projects an
added measure of safety, providing an extra margin of resource.
• Installation: First, the selected grid system must be installed on an appropriately
configured set of machines. These machines should be connected using networks
with sufficient bandwidth to other machines on the grid. Machines should be
configured and connected to facilitate recovery scenarios. Any critical databases or
other data essential for keeping track of the jobs in the grid, members of the grid, and
machines on the grid should have suitable backups.
• Managing enrollment of donors and users: The administrator is responsible for
controlling the rights of the users in the grid. Donor machines may have access rights
that require management as well. The rights of these grid user IDs must be properly
set so that grid jobs do not allow access to parts of the donor machine to which the
users are not entitled. As users join the grid, their identity must be positively
established and entered in the Certificate Authority. Further, procedures for removing
users and machines must also be executed by the administrator.
• Certificate Authority: It is critical to ensure the highest levels of security in a grid
because the grid is designed to execute code and not just share data. Thus, viruses,
Trojan horses, and other attacks cane affect the grid system. The Certificate Authority
is one of the most important aspects of maintaining strong grid security. An
organization may choose to use an external Certificate Authority or operate one itself.
• Resource Management: Another responsibility of the administrator is to manage the
resources of the grid. This includes setting permissions for grid users to use the
resources as well as tracking resource usage and implementing a corresponding
accounting or billing system. Usage statistics are useful in identifying trends in an
organization that may require the acquisition of additional hardware; reduction in
excess hardware to reduce costs; and adjustments in priorities and policies to achieve
better for attaining the overall goals of an organization etc.
• Data sharing: For small grids, the sharing of data can be fairly easy, using existing
networked file systems, databases, or standard data transfer protocols. As a grid
grows and the users become dependent on any of the data storage repositories, the
administrator should consider procedures to maintain backup copies and replicas to
improve performance. All of the resource management concerns apply to data on the
grid.
SECTION – B: STRATEGIC MANAGEMENT

Multiple Choice Questions
1. (i) What do we mean by the term 'strategic change'?
(a) The proactive management of change to achieve strategic objectives.
(b) The changes that inevitably result in organisations as they evolve in a changing
environment.
(c) An important organisational change.
(d) Planned change.
(ii) Which of the following statement is correct for strategy implementation?
(a) Strategy implementation positions forces before the action.
(b) It requires intellectual skills.
(c) It is basically an operational process.
(d) It focuses on effectiveness.
(iii) An organization’s strengths and weaknesses are determined relative to
(a) its strategic business units
(b) government
(c) competitors
(d) external opportunities and threats
(iv) Developing a vision and mission, identifying an organization’s external opportunities
and threats, and determining internal strengths and weaknesses are all __________
activities.
(a) strategy-formulation
(b) strategy-implementation
(c) long-range planning
(d) short-range planning
(v) In a large organization, strategic management activities occur at what level(s)?
(a) Corporate and divisional only
(b) Divisional
(c) Strategic business unit only
(d) Functional, divisional, and corporate
(vi) Developing new digital watch by a company manufacturing analogue watches is:
(a) a product development strategy
(b) a market development strategy
(c) a market penetration strategy
(d) none of the above
(vii) Which of the following is not a significance of SWOT analysis:
(a) SWOT provides a logical framework of analysis
(b) SWOT presents a comparative account
(c) SWOT overemphasizes a single dimension of strategy.
(d) SWOT guides the strategist in strategy identification
(viii) The scope of Financial management covers:
(a) Sources of finance
(b) Financing mix
(c) How firm should analyze, plan and control its financial affairs
(d) All the above
(ix) What action involves reconfiguring or redesigning work, jobs and processes for the
purpose of improving costs, quality, service and speed?
(a) Restructuring
(b) Downsizing
(c) Reengineering
(d) Benchmarking
(x) What is not one of Michael Porter’s five competitive forces?
(a) New entrants
(b) Rivalry among existing firms
(c) Bargaining power of unions
(d) Bargaining power of suppliers
Differences between the two concepts
2. Distinguish between the following:
(a) SWOT and TOWS matrix
(b) Operational control and Management control
(c) Vision and mission
Short notes
3. Write short notes on the following:
(a) Strategic surveillance
(b) Objectives of business
(c) Experience curve
Brief answers
4. Briefly answer the following questions:
(a) Under what conditions a turnaround strategy can be used in an organization?
(b) “Six sigma is not merely a quality initiative, it is a business initiative.” Elucidate.
(c) Does HRM function play a role in organizational strategy?
Descriptive answers
Chapter 1-Business Environment
5. "A business enterprise is a sub-system of the larger environmental system." Discuss the
relationship between the organization and its business environment.
6. How PESTLE analysis is used for analyzing the macro environment? Explain.
Chapter 2-Business Policy and Strategic Management
7. Explain in detail the term corporate strategy with its characteristics.
8. What are the major dimensions of strategic decision making?
Chapter 3-Strategic Analysis
9. How would you argue that strategic analysis is the starting point for strategic thinking?
10. How an organization analyses its business portfolio explain on market growth rate and
relative market share.
Chapter 4-Strategic Planning
11. What are the various bases on which an existing firm can diversify strategically?
12. Discuss how mergers and acquisitions are used for business growth. What are the various
types of mergers?
Chapter 5-Formulation of Functional Strategy
13. How Research and Development (R&D) personnel can play an integral part in strategy
implementation?
14. What are the requirements for the successful implementation of supply chain management
system? Discuss.
Chapter 6-Strategic Implementation and Control

15. Explain the various types of strategic control.
16. What are the leadership roles played by a strategic leader? Distinguish between a
transformational leader and a traditional leader.
Chapter 7-Reaching Strategic Edge
17. What is Benchmarking? What are the areas where benchmarking can help?
18. How would you explain the managerial significance of Six Sigma in today’s business world?
SUGGESTED ANSWERS / HINTS
1.
i ii iii iv v vi vii viii ix x
a c c a d a c d c c
2. (a) TOWS Analysis is a variant of the classic business tool, SWOT Analysis. TOWS and
SWOT are acronyms for different arrangements of the words Strengths, Weaknesses,
Opportunities and Threats. By analyzing the external environment (threats and
opportunities), and internal environment (weaknesses and strengths), we can use
these techniques to think about the strategy of a company. Following are the some
basic differences between TOWS and SWOT matrix:
 TOWS emphasise on external environment whereas SWOT emphasises on
internal environment.
 TOWS matrix is about the combinations of SO, ST, WO, WT whereas SWOT
matrix is about S, W, O, T.
 TOWS analysis is an action tool whereas SWOT analysis is a planning tool.
 TOWS is particularly useful in evaluating the potential impact of sudden events
or developments while SWOT is usually employed in evaluating a company’s
business plan.
(b) Differences between Operational Control and Management Control are as under:
(i) The thrust of operational control is on individual tasks or transactions as against
total or more aggregative management functions. When compared with
operational, management control is more inclusive and more aggregative, in the
sense of embracing the integrated activities of a complete department, division
or even entire organisation, instead or mere narrowly circumscribed activities of
sub-units. For example, procuring specific items for inventory is a matter of
operational control, in contrast to inventory management as a whole.
(ii) Many of the control systems in organisations are operational and mechanistic in
nature. A set of standards, plans and instructions are formulated. On the other
hand, the basic purpose of management control is the achievement of enterprise
goals – short range and long range – in an effective and efficient manner.
(c) The vision describes a future identity while the Mission serves as an ongoing and
time-independent guide.
The vision statement can galvanize the people to achieve defined objectives, even if
they are stretch objectives, provided the vision is specific, measurable, achievable,
relevant and time bound. A mission statement provides a path to realize the vision in
line with its values. These statements have a direct bearing on the bottom line and
success of the organization.
A mission statement defines the purpose or broader goal for being in existence or in
the business and can remain the same for decades if crafted well while a vision
statement is more specific in terms of both the future state and the time frame. Vision
describes what will be achieved if the organization is successful.
3. (a) Strategic surveillance: Contrary to the premise control, the strategic surveillance is
unfocussed. It involves general monitoring of various sources of information to
uncover unanticipated information having a bearing on the organizational strategy. It
involves casual environmental browsing. Reading financial and other newspapers,
business magazines, meetings, conferences, disc ussions at clubs or parties and so
on can help in strategic surveillance.
Strategic surveillance may be loose form of strategic control, but is capable of
uncovering information relevant to the strategy.
(b) Enterprises pursue multiple objectives rather than a single objective. In general, we
may identify a set of business objectives pursued by a large cross-section of
enterprises. These relate to profitability, productive efficiency, growth, technological
dynamism, stability, self-reliance, survival, competitive strength, customer service,
financial solvency, product quality, diversification, employee satisfaction and welfare,
and so on. Enterprises seek to balance these objectives in some appropriate manner.
We may now elaborate some of the more important objectives of business
 Survival
 Stability
 Growth
 Efficiency
 Profitability
(c) Experience curve is similar to learning curve which explains the efficiency gained by
workers through repetitive productive work. Experience curve is based on the
commonly observed phenomenon that unit costs decline as a firm accumulates
experience in terms of a cumulative volume of production. The implication is that

larger firms in an industry would tend to have lower unit costs as compared to those
of smaller organizations, thereby gaining a competitive cost advantage. 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.
4. (a) 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. These conditions may be, inter alia cash flow problems, lower profit
margins, high employee turnover and decline in market share, capacity
underutilization, low morale of employees, recessionary conditions, mismanagement,
raw material supply problems and so on.
(b) 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.
(c) The role of human resources in enabling the organization to effectively deal with the
external environmental challenges, the human resource management function has
been accepted as a strategic 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. An organization’s
recruitment, selection, training, performance appraisal, and compensation practices
can have a strong influence on employee competence is very important.
5. A business does not function in isolation, rather, it acts as a sub-system of its environment
consisting of society, economy, laws, competitors and so on. Business draws certain inputs
from environment in the form of resources and information and transforms them into
outputs. The relationship between the organization and its environm ent may be discussed
in terms of interactions between them that can be broadly outlined as below:
Exchange of information: The organization scans the external environmental variables,
their behaviour and changes, generates important information and uses it for its planning,
decision-making and control purposes.
On the other hand, the organization itself transmits information to several external
agencies either voluntarily, inadvertently or legally.
Exchange of resources: The organization receives inputs — finance, materials, manpower,

equipment etc., from the external environment. It sustains itself by employing the above
inputs for involving or producing output of products and services.
The organization is also dependent on the external environment for disposal of its output
of products and services to a wide range of clientele.
Exchange of influence and power: The external environment holds considerable power over
the organization both by virtue of its being more inclusive as also by virtue of its command
over resources, information and other inputs. The external environment is also in a position
to impose its will over the organization. Governmental control, competitors, customers,
suppliers, investors etc., exercise considerable power and influence over the organization.
In turn, the organization itself is sometimes in a position to wield power and influence over
the external environment by virtue of its command over resources and information.
6. The term PESTLE is used to describe a framework for analysis of macro environmental
factors. PESTLE analysis involves identifying the political, economic, socio-cultural,
technological, legal and environmental influences on an organization and providing a way
of scanning the environmental influences that have affected or are likely to affect an
organization or its policy. PESTLE is an acronym for:
• P- political
• E- economic
• S- socio-cultural
• T- technological
• L- legal
• E- environmental
The PESTLE analysis is a simple to understand and quick to implement. The advantage
of this tool is that it encourages management into proactive and structured thinking in its
decision making.
The Key Factors
• Political factors are how and to what extent a government intervenes in the economy
and the activities of corporate. Political factors may also include goods and services
which the government wants to provide or be provided and those that the government
does not want to be provided.
• Economic factors have major impacts on how businesses operate and take
decisions. For example, interest rates affect a firm's cost of capital and therefore to
what extent a business grows and expands. The money supply, inflation, credit flow,
per capita income, growth rates have a bearing on the business decisions.
• Social factors affect the demand for a company's products and how that company
operates.
• Technological factors can determine barriers to entry, minimum efficient production
level and influence outsourcing decisions. Furthermore, technological shifts can
affect costs, quality, and lead to innovation.
• Legal factors affect how a company operates, its costs, and the demand for its
products.
• Environmental factors affect industries such as tourism, farming, and insurance.
Growing awareness to climate change is affecting how companies operate and the
products they offer.
On the basis of these, it should be possible to identify a number of key environmental
influences, which are in effect, the drivers of change. These are the factors that require to
be considered in matrix. A typical example is as follows:
Political Economic
• Political stability • Economic situation & trends
• Political principles and ideologies • Market and trade cycles
• Current and future taxation policy • Specific industry factors
• Regulatory bodies and processes • Customer/end-user drivers
• Government policies • Interest and exchange rates
• Government term and change • Inflation and unemployment
• Thrust areas of political leaders. • Strength of consumer spending
Social Technological
• Lifestyle trends • Replacement technology/solutions
• Demographics • Maturity of technology
• Consumer attitudes and opinions • Manufacturing maturity and capacity
• Brand, company, technology • Innovation potential
image • Technology access, licensing,
• Consumer buying patterns patents
• Ethnic/religious factors • Intellectual property rights and
• Media views and perception copyrights
Legal Environmental
• Business and Corporate Laws • Ecological/environmental issues
• Employment Law • Environmental hazards
• Competition Law • Environmental legislation
• Health & Safety Law • Energy consumption
• International Treaty and Law • Waste disposal
• Regional Legislation
7. The term strategy is associated with unified design and action for achieving major goals,
gaining command over the situation with a long-range perspective and securing a critically
advantageous position. Strategies are formulated at the corporate, divisional and
functional level. Corporate strategies are formulated by the top managers. They include
the determination of the business lines, expansion and growth, vertical and horizontal
integration, diversification, takeovers and mergers, new investment and divestment areas,
R & D projects, and so on. These corporate wide strategies need to be operationalized by
divisional and functional strategies regarding product lines, production volumes, quality
ranges, prices, product promotion, market penetration, purchasing sources, personnel
development and like.
In general, a corporate strategy has the following characteristics:
• It is generally long-range in nature, though it is valid for short-range situations also
and has short-range implications.
• It is action oriented and is more specific than objectives.
• It is multi-pronged and integrated.
• It is flexible and dynamic.
• It is formulated at the top management level, though middle and lower level managers
are associated in their formulation and in designing sub-strategies.
• It is generally meant to cope with a competitive and complex setting.
• It flows out of the goals and objectives of the enterprise and is meant to translate
them into realities.
• It is concerned with perceiving opportunities and threats and seizing initiatives to cope
with them. It is also concerned with deployment of limited organizational resources in
the best possible manner.
• It gives importance to combination, sequence, timing, direction and depth of various
moves and action initiatives taken by managers to handle environmental uncertainties
and complexities.
• It provides unified criteria for managers in function of decision making.
8. Strategic decisions are different in nature than all other decisions which are taken at
various levels of the organization during day-to-day working of the organizations. The
major dimensions of strategic decisions are given below:
• Strategic issues require top-management decisions: Strategic issues involve thinking
in totality of the organizations and also there is lot of risk involved. Hence, problems
calling for strategic decisions require to be considered by top management.
• Strategic issues involve the allocation of large amounts of company resources: It may
require huge financial investment to venture into a new area of business or the
organization may require huge number of manpower with new set of skills in them.
• Strategic issues are likely to have a significant impact on the long term prosperity of
the firm: Generally the results of strategic implementation are seen on a long term
basis and not immediately.
• Strategic issues are future oriented: Strategic thinking involves predicting the future
environmental conditions and how to orient for the changed conditions.
• Strategic issues usually have major multifunctional or multi-business consequences:
As they involve organization in totality they affect different sections of the organization
with varying degree.
• Strategic issues necessitate consideration of factors in the firm’s external
environment: Strategic focus in organization involves orienting its internal
environment to the changes of external environment.
9. The external analysis process focuses on scanning of environment in which all
organizations work as sub-systems. The scanning of external environment leads to the
identification of opportunities and threats & opening the organizations to the external world.
While the internal analysis leads to the study of strengths and weakness which will decide
to what extent each company is going to capitalize the opportunities and threats.
Moreover, strategic thinking judges about the nature of strategy and proceeds to flow directly
from analysis of a company’s external environment and internal situation. The analytical
sequence starts from strategic appraisal of the company’s external and internal situations
and to evaluate alternatives for implanting the strategy choices. Accurate diagnosis of the
company’s situation is necessary. Managerial preparation for deciding a sound long term
direction is done by setting appraisal alternate and creating a winning strategy.
Understanding of the strategic aspects of a company’s external and internal environment,
the changes are greatly influenced that how managers will lay out a strategic game plan.
Thus, it is a major prospect for building competitive advantage and that is likely to boost
company performance.
10. The BCG growth-share matrix is the simplest way to portray a corporation’s portfolio of
investments. Growth share matrix also known for its cow and dog metaphors is popularly
used for resource allocation in a diversified company. Using the BCG approach, a company
classifies its different businesses on a two-dimensional growth-share matrix. In the matrix:
• 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.
Using the matrix, organisations can identify four different types of products or SBU as
follows:
• Stars are products or SBUs that are growing rapidly. They also need heavy
investment to maintain their position and finance their rapid growth potential. They
represent best opportunities for expansion.
• Cash Cows are low-growth, high market share businesses or products. They
generate cash and have low costs. They are established, successful, and need less
investment to maintain their market share. In long run when the growth rate slows
down, stars become cash cows.
Stars Question Marks

High
? ?
Market Growth Rate
?
Cash Cows Dogs
R&D
Low
High Relative Market Share Low
Figure: BCG Growth-Share Matrix

• Question Marks, sometimes called problem children or wildcats, are low market
share business 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 them
stars and then to cash cows when the growth rate reduces.
• Dogs are low-growth, low-share businesses and products. They may generate
enough cash to maintain themselves, but do not have much future. Sometimes they
may need cash to survive. Dogs should be minimised by means of divestment or
liquidation.
Once the organisations have classified its products or SBUs, it must determ ine what
role each will play in the future. The four strategies that can be pursued are:
(i) 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.
(ii) Hold: Here the objective is to preserve market share.
(iii) Harvest: Here the objective is to increase short-term cash flow regardless of
long-term effect.
(iv) Divest: Here the objective is to sell or liquidate the business because resources
can be better used elsewhere.
The growth-share matrix has done much to help strategic planning study; however,
there are problems and limitations with the method. BCG matrix can be difficult,
time-consuming, and costly to implement. Management may find it difficult to define
SBUs and measure market share and growth. It also focuses on classifying current
businesses but provide little advice for future planning. They can lead the company
to placing too much emphasis on market-share growth or growth through entry into
attractive new markets. This can cause unwise expansion into hot, new, risky
ventures or giving up on established units too quickly.
11. Diversification Strategy: Diversification endeavours can be related or unrelated to
existing businesses of the firm. Based on the nature and extent of their relationship to
existing businesses, diversification endeavours have been classified into four broad
categories:
(i) Vertically integrated diversification
(ii) Horizontally integrated diversification
(iii) Concentric diversification
(iv) Conglomerate diversification
In vertically integrated diversification, firms opt to engage in businesses that are related
to the existing business of the firm. The firm remains vertically within the same process.
Sequence It moves forward or backward in the chain and enters specific product/process
steps with the intention of making them into new businesses for the firm. The characteristic
feature of vertically integrated diversification is that here, the firm does not jump outside
the vertically linked product-process chain.
Horizontal Integrated Diversification: Through the acquisition of one or more similar
business operating at the same stage of the production-marketing chain that is going into
complementary products, by-products or taking over competitors’ products.
Concentric Diversification: Concentric diversification too amounts to related
diversification. In concentric diversification, the new business is linked to the existing
businesses through process, technology or marketing. The new product is a spin-off from
the existing facilities and products/processes. This means that in concentric diversification
too, there are benefits of synergy with the current operations. However, concentric
diversification differs from vertically integrated diversification in the nature of the linkage
the new product has with the existing ones. The new product is only connected in a loop -
like manner at one or more points in the firm's existing process/technology/product chain.
Conglomerate Diversification: In conglomerate diversification, no such linkages exist;
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.
12. Many organizations in order to achieve quick growth, expand or diversify use strategies
such as mergers and acquisitions. This also helps 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 process
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.
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 diversify 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.
13. 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 tec hnology,
adjusting processes to local raw materials, adapting processes to local markets, and
altering products to particular tastes and specifications.
Technological improvements that affect consumer and industrial products and services
shorten product life cycles. Companies in virtually, every industry are relying on the
development of new products and services to fuel profitability and growth. Surveys suggest
that the most successful organizations use an R&D strategy that ties external opportunities
to internal strengths and is linked with objectives. Well formulated R&D policies match
market opportunities with internal capabilities. R&D policies can enhance strategy
implementation efforts to:
 Emphasize product or process improvements.
 Stress basic or applied research.
 Be leaders or followers in R&D.
 Develop robotics or manual-type processes.
 Spend a high, average, or low amount of money on R&D.
 Perform R&D within the firm or to contract R&D to outside firms.
 Use university researchers or private sector researchers.
14. Successful implementation of supply management system 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 proper knowledge.
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, customer service, productivity and quality.
15. Types of Strategic Control: There are four types of strategic control as follows:
 Premise control: 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.
 Strategic surveillance: Contrary to the premise control, the strategic surveillance is
unfocussed. It involves general monitoring of various sources of information to
uncover unanticipated information having a bearing on the organizational strategy. It
involves casual environmental browsing. Reading financial and other newspapers,
business magazines, meetings, conferences, discussions at clubs or parties and so
on can help in strategic surveillance.
Strategic surveillance may be loose form of strategic control, but is capable of
uncovering information relevant to the strategy.
 Special alert control: At times unexpected events may force organizations to
reconsider their strategy. Sudden changes in government, natural calamities, terrorist
attacks, unexpected merger/acquisition by competitors, industrial disasters and other
such events may trigger an immediate and intense review of strategy. Organizations
to cope up with these eventualities, form crisis management teams.
 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. Unlike
operational controls, it continuously monitors the basic direction of the strategy. The
two basis forms of implementation control are:

(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.
Strategic Surveillance
Premise Control
Special Alert Control
Implementation Control
Strategy Formulation
Strategy Implementation
Time 1 Time 2 Time 3
Source: From book "Strategic management-formulation, Implementation and control" by

John A Pearce II, Richard B Robinson, Jr. and Amita Mital.
These four strategic controls steer the organisation and its different sub-systems to
the right track. They help the organisation to negotiate through the turbulent and
complex environment.
16. A strategy manager has many different leadership roles to play: visionary, chief
entrepreneur and strategist, chief administrator, culture builder, resource acquirer and
allocator, capabilities builder, process integrator, crisis solver, spokesperson, negotiator,
motivator, arbitrator, policy maker, policy enforcer, and head cheerleader. Sometimes it is
useful to be authoritarian; sometimes it is best to be a perceptive listener and a
compromising decision maker; sometimes a strongly participative, collegial approach
works best; and sometimes being a coach and adviser is the proper role. Many occasions
call for a highly visible role and extensive time commitments, while others entail a brief
ceremonial performance with the details delegated to subordinates.
For the most part, major change efforts have to be top-down and vision-driven. Leading
change has to start with diagnosing the situation and then deciding which of several ways to
handle it. Managers have five leadership roles to play in pushing for good strategy execution:

1. Staying on top of what is happening, closely monitoring progress, ferreting out issues,
and learning what obstacles lie in the path of good execution.
2. Promoting a culture and esprit de corps that mobilizes and energizes organizational
members to execute strategy in a competent fashion and perform at a high level.
3. Keeping the organization responsive to changing conditions, alert for new
opportunities, bubbling with innovative ideas, and ahead of rivals in developing
competitively valuable competencies and capabilities.
4. Exercising ethics leadership and insisting that the company conduct its affairs like a
model corporate citizen.
5. Pushing corrective actions to improve strategy execution and overall strategic
performance.
Strategic leadership is the ability of influencing others to voluntarily make decisions that
enhance prospects for the organisation’s long-term success while maintaining short-term
financial stability. Two basic approaches to leadership can be transformational leadership
style and transactional leadership style. The difference between transformational and
traditional leadership style can be given as follows:
1. Traditional leadership borrowed its concept from formal Top-down type of leadership
such as in the military. The style is based on the belief that power is bestowed on the
leader, in keeping with the traditions of the past. This type of leadership places
managers at the top and workers at the bottom of rung of power.
In transformational leadership, leader motivates and empowers employees to achieve
company’s objectives by appealing to higher ideas and values. They use charisma
and enthusiasm to inspire people to exert them for the good of the organization.
2. Traditional leadership emphasizes characteristics or behaviours of only one leader
within a particular group whereas transformational leadership provides a space to
have more than one leader in the same group at the same time. According to the
transformational leadership style, a leader at one instance can also be a follower in
another instance. Thus, there is element of flexibility in the relationships.
3. Traditional leadership is more focused in getting the work done in routine
environment. Traditional leaders are effective in achieving the set objectives and
goals whereas transformational leaders have behavioural capacity to recognize and
react to paradoxes, contradictions and complexities in the environment.
Transformational leadership style is more focus on the special skills or talents that
the leaders must have to practice to face challenging situations. Transformational
leaders work to change the organisational culture by implementing new ideas.
4. In traditional leadership, followers are loyal to the position and what it represents
rather than who happens to be holding that position whereas in transformational
leadership followers dedicate and admire the quality of the leader not of its position.
17. In simple words, benchmarking is an approach of setting goals and measuring productivity
based on best industry practices. It developed out of need to have information against which
performances can be measured. For example, a customer support engineer of a television
manufacturer attends a call within forty-eight hours. If the industry norm is that all calls are
attended within twenty-four hours, then the twenty-four hours can be a benchmark.
Benchmarking helps in improving performance by learning from best practices and the
processes by which they are achieved. It involves regularly comparing different aspects of
performance with the best practices, identifying gaps and finding out novel methods to not
only reduce the gaps but to improve the situations so that the gaps are positive for the
organization. Benchmarking can help in almost all aspect of business that are amenable to
comparison and are significant to business. Typically organisations can use benchmarking
process to achieve improvement in diverse range of management function like:
 Maintenance operations
 Assessment of total manufacturing costs
 Product development
 Product distribution
 Customer services
 Plant utilization levels
 Human resource management
18. Six sigma means maintenance of the desired quality in processes and end products. It
takes a systematic and integrated effort towards improving quality and reducing cost
besides meeting and improving the organizational goals related to quality, cost,
scheduling, manpower, new products and so on. It works continuously towards revising
the current standards and establishing higher ones.
Conclusively, six sigma starts with a dream or vision to have the goal of near perfect
products and services and superb customer satisfaction. Managers and leaders should
accept the challenge to keep the organization adaptable with the changing environment.
Six sigma is often related to Motorola, the company that has invented it. It pointed out that
modern technology was so complex that old ideas about acceptable quality levels are no
longer acceptable. The success of Motorola effectively changed the focus of quality
worldwide. Many corporate giants like Xerox, Boeing, GE, Kodak etc followed Motorola's
lead. In India also Tata’s, WIPRO and Bharti’s and others are effectively reaping the
benefits of six-sigma.
With the help of improved technology and other tools, Management is able to enhance the
quality of their products and therefore meets the human unending demand for better quality
products and services. Six Sigma helps the management to not only restrict itself in
satisfying the existing desires of customers or to put boundary on quality by limiting it to
current information and perspective of customers rather, it also helps to be futuristic i.e.,
in addition to meeting customer’s present expectations it should also be able to improve
them.

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A. Applicable for May, 2019 examination

2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Following table summarises the changes made by the Companies (Accounting

4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

spares, and (e) Stores and paragraph i.e.

amount of the directly related to the

6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Adjustment When the identity of presented as a

PART – II: QUESTIONS AND ANSWERS

Financial Statements of Companies

Selling Expenses 2,37,300

8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Trade Payables 15,52,500

10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(xiii) Expenditure on construction work 83,376

Securities premium 1,00,000

12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(7) Investments to be sold for ` 4,00,000.

14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Discount Received 5,000 Debtor’s cheque returned 15,000

16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Proceeds of Bills receivable discounted at 2%) 1,22,500

18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Accounting in Computerized Environment

20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(iv) TDS on interest income earned on investments made

AS 13 Accounting for Investments

22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Balance sheet of Shweta Ltd. as on 31 st March, 2018

6,000 6% Redeemable Preference Shares of 100

24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

7. Intangible Fixed Assets

11. Other Expenses

(b) Computation of effective capital:

26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Profit on sale of investments (non-operating income) (240)

Preliminary expenses 20,000 Post 20,000

28 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Extract of Balance Sheet as at 30 th April, 2017 (after bonus issue)

5. Journal Entries in the books of Kishor Limited

To Capital reduction A/c 2,00,000

30 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

a Long-term provisions 3 1,00,000

5 Cash and cash equivalents

INTERMEDIATE(IPC) EXAMINATION: MAY, 2019

31.3.17 By Balance 2,04,329

9 In the books of Prime Ltd.

34 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

To Groundman's wages 3,360 By Bank interest 920

Capital fund on 87,200 Car 48,760

36 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

6. Depreciation on car and its written down value on 31 st March, 2018

Less: Drawings (1,40,000) 5,22,500 Bills Receivable (W.N.4) 35,000

38 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

4. Bills Receivable account

6. Balance Sheet as on 1 st April, 2017

8. Interest on Government securities

11. Credit sales

40 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Less: Depreciation on ` 1,60,000 @ 20% for the second year 32,000

SCRIP: Equity Shares in C LTD.

42 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019