Suggested Answers CAP III - Dec 2018

CHARTERED ACCOUNTANCY PROFESSIONAL
(CAP-III)
Suggested Answer
December 2018
The Institute of Chartered Accountants of Nepal

CAP III Suggested Answer- Dec 2018
Paper 1: Advanced Financial Reporting
The Institute of Chartered Accountants of Nepal 2

Advanced Financial Reporting

Suggested Answer
Roll No……………. Maximum Marks - 100
Total No. of Questions - 6 Total No. of Printed Pages - 15
Time Allowed - 3 Hours Marks

Attempt all questions. Working notes should form part of the answers.
Use separate answer book for each question.
1. The following is the Statements of Profit or Loss and Other Comprehensive Income
of Bagmati Ltd. and its investee companies, Gandaki Ltd. and Lumbini Ltd.:
Statement of Profit or Loss and Other Comprehensive Income
for the fiscal year ended 32nd Ashadh, 2075
Particulars Bagmati Ltd. Gandaki Ltd. Lumbini Ltd.
(Rs. million) (Rs. million) (Rs. million)
Revenue 3,500 760 900
Cost of sales (2,000) (320) (300)
Gross profit 1,500 440 600
Operating cost (210) (160) (240)
Finance cost (30) (20) (40)
Other income 20 - 80
Profit before taxation 1,280 260 400
Taxation (150) (60) (40)
Profit for the year 1,130 200 360
Other comprehensive income
(amounts that will not be reclassified
to profit or loss)
Gain on revaluation of property 60 - -
Total comprehensive income for the 1,190 200 360
year
The following additional information is provided:
i) Bagmati Ltd. bought a 70% holding in the voting equity of Gandaki Ltd. on
1st Kartik, 2074. The purchase price of the investment was agreed at Rs. 2,500
million. The 30% non-controlling interest in Gandaki Ltd. had a fair value of
Rs. 1,000 million at that date. Gandaki Ltd.'s identifiable net assets had a fair
value of Rs. 3,000 million on 1st Kartik, 2074. It was decided to apply the fair
value method to calculate goodwill on acquisition, as permitted by
NFRS 3 – Business Combination.
ii) Bagmati Ltd. purchased 30% of the voting equity of Lumbini Ltd. on 1st Magh,
2074. Bagmati Ltd. exerts significant influence over Lumbini Ltd. because of
this investment.
iii) Goodwill of Gandaki Ltd. was reviewed for impairment on 32nd Ashadh, 2075
and was found suffered an impairment loss of Rs. 30 million. Investment in

Lumbini Ltd. was also reviewed for impairment on the same date and found to
have suffered an impairment loss of Rs. 25 million.
iv) Included in Gandaki Ltd.‟s net assets, on the acquisition date, was machinery
with a fair value of Rs. 48 million above its carrying amount. The useful life of
this machinery at the acquisition date was estimated to be six years. The fair
value adjustment has been considered in arriving at the Rs. 3,000 million referred
to in (i) above, but has not been incorporated in the books of Bagmati Ltd.
v) During the fiscal year ended 32nd Ashadh, 2075, Bagmati Ltd. sold goods to
Gandaki Ltd. totaling Rs. 36 million. These goods were sold by Bagmati Ltd. at
mark up of 20% on cost price. The goods were traded evenly throughout the
year. Rs. 6 million worth of inventory (cost to Gandaki Ltd.) was held by
Gandaki Ltd. at 32nd Ashadh, 2075. These goods were supplied on Jestha and
Ashadh 2075.
vi) On 1st Jestha, 2075, Lumbini Ltd. sold some land to Bagmati Ltd. for Rs. 200
million, recording a profit of Rs. 80 million. This profit is included under „other
income‟ in the books of Lumbini Ltd. Assume that this transaction had no tax
implication.
vii) Bagmati Ltd. has a policy of revaluing property to fair value as permitted under
the revaluation model of NAS 16. Neither Gandaki Ltd. nor Lumbini Ltd. adopts
the revaluation model of NAS 16, instead choosing the cost model. If they had
adopted the revaluation model, Bagmati Ltd. would have recorded revaluation
gain of Rs. 15 million at 32nd Ashadh, 2075. No revaluation would have been
necessary prior to its acquisition.
viii) Assume all income and expenses accrue evenly throughout the year unless
otherwise stated.
Required:
a) Calculate the goodwill arising on the acquisition of Gandaki Ltd. in accordance
with NFRS 3. Calculate the amount of goodwill that should appear in the
Consolidated Statement of Financial Position of Bagmati Ltd. at 32nd Ashadh,
2075. 3
b) Prepare the Consolidated Statement of Profit or Loss and Other Comprehensive
Income for the Bagmati Group for the fiscal year ended 32nd Ashadh, 2075. 17
Answer:
a) Calculation of goodwill on acquisition of Gandaki Ltd.
Particulars Rs. in million.
Cost of investment 2,500
Fair value of Non Controlling Interest (NCI) 1,000
Fair value of net assets at acquisition (3,000)
Goodwill on acquisition 500
Impairment loss Ashadh 32, 2075 (30)
Recoverable amount of goodwill on Ashadh 32, 2075 470
(Goodwill to appear in consolidated statement of financial position)

b) Bagmati Ltd.’s Consolidated Statement of Profit or Loss and Other

Comprehensive Income for the fiscal year ended Ashad 32, 2075
Particulars Rs. in million

Revenue 3,500+ (760 * 9/12) – 27 (WN 6) 4,043
Cost of sales 2,000 + (320 * 9/12) + 6 – 27 +1 (2,220)
(WN 5 & 6)
Gross Profit 1,823
Operating 210 + (160 * 9/12) + 30 (WN 3) (360)
expenses
Finance costs 30 + (20 * 9/12) (45)
Other income 20
Share of
profit for year 17
of associate (WN 4)
Profit before 1,455
taxation
Taxation 150 + 60 * 9/12) (195)
Profit for the 1,260
year
Other comprehensive income (Amounts that will not be reclassified

to profit or loss)
Gains on revaluation of (60 + 15) (WN 7) 75
property
Total comprehensive 1,335
income for the year
Profit of the year attributable to:

Owner of the parent (balancing figure 1,260 – 34.2) 1,225.80
Non-controlling
(WN 2) 34.20
interest
1,260.00
Total comprehensive income attributable to

Owner of the parent (balancing figure 1,335 – 38.7) 1,296.30
Non-controlling
interest (WN 2) 38.70
1,335.00
Working Notes:
1) Group Structure
Bagmati Ltd. Parent
Gandaki Ltd. - 70% ownership interest acquired by Bagmati Ltd. after three
months start of the fiscal year. Hence, Gandaki Ltd. is a subsidiary of

Bagmati Ltd. for nine months of the fiscal year. Therefore, include 100% of
results, time apportioned by 9/12 months. Non-controlling interest (NCI)
30%
Lumbini Ltd. – 30% ownership interest acquired by Bagmati Ltd. after six
months of the start of the fiscal year. Therefore, Lumbini Ltd. is an associate
of the group. Include a single-line adjustment 30% of profit of the year and
30% of other comprehensive income, time apportion by 6/12 months.
2) Non-Controlling Interest (NCI)

Rs. in
million
Particulars Profit TCI*

Gandaki Ltd.‟s profit for 9 months (200/12*9) 150 150
Less: Goodwill impairment loss (WN 3) (30) (30)
Less: Adjustment for depreciation on FV of Machine (WN 5) (6) (6)
Add: Revaluation Gain of Gandaki Ltd. - 15
Adjusted Figure 114 129
NCI percentage 30% 30%
NCI amount 34.20 38.70
 Total Comprehensive Income
3) Goodwill impairment
Impairment loss on consolidated goodwill of Rs. 30 m included as operating
expenses in year of recognition. NCI is affected as the fair value method was
used to calculate goodwill.
Note: Goodwill may be included in cost of sales for full credit.
4) Share of result of associate

Particulars Rs. in
million
Profit for year generated by associate 360
Profit on sale of land included above (a) (80)
Profit generated across the year 280
Bagmati Ltd.‟s share of profit of associates (280 * 30% * 6/12) 42
Bagmati Ltd.‟s share of profit on sale of land (80 * 30%) (b) 24
Eliminated due to inter-company trading (80 * 30%) (b) (24)
Impairment loss this year on investment in associate (25)

Net income recognized from associates 17
Note: The profit on sale of land by associate has two complications:

a) It occurred during the period Bagmati Ltd. had significant influence.
Hence, it is not appropriate to time-apportion the gain. It did not accrue
evenly during the period.
b) The gain arised on the sale of land to Bagmati Ltd. Hence from a group
perspective, this gain is unrealized. As normal we eliminate the group‟s
share (30%) of any unrealized gains or losses on trading with an
associate. Hence the recognition and elimination cancel each other out.
5) Fair Value adjustment consequences

Additional depreciation not yet charged on fair value adjustment
(48 m/ 6 years * 9/12) Rs. 6 m

Add to cost of sales this year
NCI is affected as it is Bagmati Ltd.‟s assets that is being adjusted.
6) Intra-group trading
i) Eliminate the portion intra-group sales and purchase that occurred since
acquisition (Rs. 36 m*9/12 = Rs. 27 m) in full from group revenue
and group cost of sales.
ii) Unrealized profit provision required = Rs. 6 m * 20/120 = Rs. 1 m
Increase cost of sales with this amount.
NCI is not affected as Bagmati Ltd. (parent) was the internal selling company
that recorded the gain.
7) Harmonization of accounting policies
Add Rs. 15 m of revaluation gain to Gandaki Ltd. Other Comprehensive Income
(OCI)
NCI will share in this gain also.
Note: It is important that all companies being consolidated adopt consistent
accounting policies. Hence, we must make adjustment of OCI to recognize
the revaluation gains of Gandaki Ltd. As these gains all occurred after the
date of acquisition, time apportion is not applied.
2.
a) Saguregadi Hills Ltd. is operating its business since 11 years. The
accountant is not being able to finalize its accounts, with the
following information for the year ended 32nd Ashadh, 2075:
(Rs. million)
 Share capital in the beginning 1,000
 Retained earnings in the beginning 2,000
 Securities premium in the beginning 1,000

 Capital redemption reserve in the beginning 1,000

 Revaluation reserve in the beginning 1,000
 Corrections of prior years' errors resulting in increase in profit 100
 Changes in accounting policy resulting in increase in profit 200
 Net income for the year (including Rs. 40 million net gain from FCY
Translation) 400
 Revaluation gain on non-current fixed assets 200
 Profit on re-measuring of financial assets held as available for sale 400
 Effective portion of upward change in fair value of hedging
instruments in cash flow hedges 100
 Actuarial gain on defined benefit plans 100
 Dividends 100
 Issue of bonus shares out of capital redemption reserve 900
 Issue of 1 million new shares of Rs. 100 each at Rs. 1,000 each.
 Buy back of 0.4 million shares of Rs. 100 each at Rs. 500 each out of securities
premium.
Required:
Prepare a statement of changes in equity of Saguregadi Hills Ltd. for the year ended
32nd Asahdh, 2075. 10
b) Vhairab Industries Ltd. (VIL) operates a funded gratuity scheme for all of its
employees. Following relevant information has been extracted from report for
actuarial valuation and other records relevant to FY 2074/75:
Particulars 2074/75 2073/74
Discount Rate 9% 8%
Rs. in Million
Present value of defined benefit obligations 482 438
Fair value of plan assets 491 449
Current service cost 19 15
Contributions paid during the year 37 21
Benefits paid during the year 23 16
Additional Information:
i) Present value of defined benefit obligations and Fair value of plan assets as on 1st
Shrawan, 2073 were Rs. 380 million and Rs. 352 million respectively.
ii) On 28th Ashadh, 2074 VIL sold one of its division and transferred relevant portion of
defined benefit plan to the buyer. The present value of defined benefit obligations
and plan assets transferred was Rs. 21 million and Rs. 19 million respectively.
iii) On 1st Shrawan, 2074, VIL changed terms of the scheme for employees who had
completed 4 years of service. As a result, present value of defined benefit obligations
increased by Rs. 30 million. 40% of the increased obligations were related to
employees who had already completed 4 years of service and remaining increase
pertained to employees who had provided 2 years of service on average.
iv) Based on the advice received from actuary, contribution for the year 2075/76 would
be Rs. 23 million.

v) The plan assets comprise of: 65% debt securities (2073/74: 66%), 15% mutual fund
units (2073/74:10%), 10% equity (2073/74:14%) and the balance in bank deposits.
vi) The average remaining working lives of employees are 10 years.
Required:
Prepare relevant extracts with comparatives to be reflected in statement of financial
position, statement of profit or loss, statement of comprehensive income and notes to the
financial statements for the FY 2074/75 in accordance with NAS. 10
Answer:
a)
Statement of changes in Equity of Saguregadi Hills Ltd.
For the year ended 32nd Ashadh 2075
(Rs. million)
Particular Share Retained Securities Capital Revaluation Total
capital Earnings premium Red. Reserve equity
Reserve
A. Balance in the 1,000 2,000 1,000 1,000 1,000 6,000
beginning
B. Prior period errors 100 100
C. Changes in 200 200
Accounting policy
D. Restated Balance 1,000 2,300 1,000 1,000 1,000 6,300
E. Net Income for the
period 400 400
F. Effect of
Revaluation
1. Revaluation of 200 200
non-current fixed
assets
2. Profit on re-
measuring of 400 400
financial assets
3. Effective portion
of change in fair
value of hedging 100 100
instruments
4. Actuarial gains on
defined benefit 100 100
plans
Total (F) 0 0 0 0 800 800
G. Transaction with
shareholders
1. Dividends (100) (100)
2. Issue of new 100 900 1,000
shares
3. Buy back of (40) (40) (160) 40 (200)
shares
4. Issue of bonus 900 (900) 0
shares

Total (G) 960 (140) 740 (860) (700)

H. Balance at the end 1,960 2,560 1,740 140 1,800 8,200
(D+E+F+G)
b) Vhairab Ltd. (Relevant extracts) (Rs. in million)

Statement of Financial Position FY 2074/75 FY 2073/74
Other Assets:
Net Defined Benefit assets 9 11
[ 2074/75:: Rs. 491-482
[ 2073/74:: Rs. 449-438]
Statement of Profit or loss

2074/75 2073/74
Operating Expenses ( Note 1.3) 48.01 15.24
Statement of Other Comprehensive Income 2074/75 2073/74

Re measurement gain on defined benefit plan (Actuarial
gain or loss) 9.01 33.24
(21.42 - 12.41)
(82.84 - 49.60)
Notes to the financial statements 2074/75 2073/74
Note Amount recognized in Profit & Loss

1.1 Account
Current Service Cost 19 15
Past Service Cost (increase in the PV of
defined benefit obligation) 30 -
Interest Cost (Rs. 438 m x 9%; Rs. 380 x
8%) 39.42 30.40
Less: Interest Income on plan assets (Rs.
449 m x 9%, Rs. 352 m x8%) (40.41) (28.16)
Gain on settlement Rs. (21-19) m
(on sale of division and try of defined benefit
plan - (2)
48.01 15.24
Note
1.2 Reconciliation- Present value of obligation
Opening Balance 438 380
Interest Cost 39.42 30.40
Current Service Cost 19 15
Past Service Cost 30
Benefits paid (23) (16)
Settlement (21)
Actuarial (Gain)/Loss (balancing figure) (21.42) 49.60
Closing Balance 482 438

Note
1.3 Reconciliation- Fair value of plan assets
Opening Balance 449 352
Interest income on plan assets 40.41 28.16
Contributions paid 37 21
Benefits paid (23) (16)
Settlement (19)
Actuarial Gain/(Loss) on plan assets
(balancing figure) (12.41) 82.84
Closing Balance 491 449
Note Key Actuarial assumption used are:

1.4
Discounting Factor 9% 8%
Average remaining working life 10 years 10 years
Based on the actuarial advice, the amount of expected contribution to the defined
benefit scheme for 2075/76 will be Rs. 23 Million
Note
1.5 Composition of plan assets:
Plan Assets Comprises of 2074/75 2073/74
Rs in Million % Rs in Million %
Debt Securities 319.15 65% 296.34 66%
Mutual Fund Units 73.65 15% 44.90 10%
Equity 49.10 10% 62.86 14%
Bank Deposits 49.10 10% 44.90 10%
Total 491 100% 449 100%
3.
a) ABC Ltd. presented its most recent financial statements under the national GAAP
for FY 2074/75. It adopted NFRS from FY 2075/76 and is required to prepare an
opening NFRS statement of financial position as at 1st Shrawan, 2074. In preparing
the NFRS opening statement of financial position, ABC Ltd. noted the following:
i) Under its previous GAAP, ABC Ltd. sold certain financial receivables as well
as trade receivables for the amount of Rs. 250,000 to special-purpose entities
(SPEs) that are not consolidated although they conduct activities on behalf of
the Group.
ii) In addition, ABC Ltd. was using the last-in first-out (LIFO) method to account
for certain inventories, and, consequently, reported the carrying value of
inventory reduced by Rs. 150,000, as compared to the value under the FIFO
method.
iii) It had not discounted, to present value, long-term provisions for warranty of
Rs. 100,000 although the effect of discounting would be material (Rs. 10,000).
iv) Research and development costs of Rs. 500,000 (of which total Rs. 300,000
relates to research costs) for the invention of new products were expensed
when incurred.

v) The court case filed against ABC Ltd. was decided during FY 2075/76. Based
on the court decision, ABC Ltd. had to pay Rs. 100,000 as compensation to
one of its debtors. For the litigation, a provision of Rs. 110,000 was made in
financial statements for year ending Ashadh 2074.
Required:
State the adjustments that would be required in the opening statement of financial
position under NFRS for the cases above with reference to relevant NFRS/NAS. 10
b) Palpa Co. has lent a sum of Rs. 1 million at 18% p.a. for 10 years. The loan had a
fair value of Rs. 1,223,960 at the effective interest rate of 13%. To mitigate
prepayment risks but at the same time retaining control over the loan, Palpa Co.
transferred its right to receive the principal amount of the loan on its maturity with
interest, after retaining right over 10% of principal and 4% interest that carries fair
value of Rs. 29,000 and Rs. 184,620 respectively. The consideration for the
transaction was Rs. 990,000. The interest component retained included a 2% fee
towards collection of principal and interest that has fair value of Rs. 65,160.
Defaults, if any, are deductible to a maximum extent of the company‟s claim on
principal portion.
Required:
Show the journal entries to record derecognition of the loan. 10
Answer:
a) In order to prepare the opening statement of financial position under NFRS at 1st
Shrawan 2074, ABC Ltd. would need to make the following adjustments to its
statement of financial position at 31st Ashadh 2074, presented under its previous
GAAP:
i) NFRS 10 - Consolidated Financial Statement requires ABC Ltd. to consolidate a

SPE where it is deemed to control it. Indicators of Control include the SPE
conducting activities on behalf of the Group and/or the Group holding the
majority of the risks and rewards of the SPE. Thus, SPEs should be consolidated
and Rs. 250,000 of receivables is recognized.
ii) NAS 2 - Inventories prohibits the use of LIFO. Consequently, it should adopt the
FIFO method and have to increase inventory by Rs. 150,000. Effect should be
given on retained earning.
iii) NAS 37 - Provisions, Contingent Liabilities and Contingent Assets states that
long-term provisions must be discounted to their present value if the effect from
discounting is material. As a result, the adjustment required for the amount of
provisions for warranty by Rs. 10,000, as the effect of discounting. Effect should
be given on retained earning.
iv) NAS 38 - Intangible Assets allows that development costs are capitalized as
intangible assets if the technical and economic feasibility of a project can be
demonstrated. Thus, Rs. 200,000 (i.e. Rs. 500,000 - Rs. 300,000) incurred on
development costs should be capitalized as an intangible asset. Effect should be
given on retained earning.

v) No adjustment is required in opening NFRS statement as change in estimates are

not permitted by NFRS 1 - First Time Adoption of NFRS. Therefore, the
difference in provision of Rs. 10,000 should be treated in Statement of Profit or
Loss.
b) Journal Entries to record the decognition of the Loan:

Rs. Rs.
Bank A/c Dr. 990,000
To Loan A/c Cr. 825,468
To Profit & Loss A/c Cr. 164,532
(Being entry for securitization of 90% principal with interest)
Rs. Rs.
Interest Strip a/c Dr. 97,601
Servicing Asset A/c Dr. 53,237
Principal Strip A/c Dr. 23,694
To Loan A/c Cr. 174,532
(Being entry for interest, servicing asset and principal strips received)
Working Notes:
1. Calculation of securitized component of loan
Rs.
Fair Value 1,223,960
Less: Principal strip receivable (fair value) 29,000
Less: Interest strip receivable (fair value) 119,460
(184,620 – 65,160)
Less: Value of service asset (fair value) 65,160 (213,620)
1,010,340
2. Apportionment of carrying amount in the ratio of fair values

Fair Value Apportionment
(Rs.) (Rs.)
Securitized 1,010,340 (1,010,340 825,468
component of loan x1,000,000)
1,223,960
Principal strip 29,000 (29,000 x1,000,000) 23, 694
receivable 1,223,960
Interest strip 119,460 (119,460 97,601
receivable x1,000,000)
1,223,960
Servicing Asset 65,160 (65,160 x1,000,000) 53,237
1,223,960
4. Write short notes on the following:

(5×3=15)
a) List of contingent liabilities of Banks and Financial Institutions.
b) Features of service concession arrangements.

c) Define investment property and explain how the treatment of an investment

property carried under the fair value model differs from an owner-occupied
property carried under the revaluation model.
d) Opportunity cost in the context of human resource accounting.
e) Currency option
Answer:
a) Contingent Liabilities of Banks and Financial Institutions are:
 Claims on Institution but not accepted by the institution
 Letter of credit
 Rediscounted bills
 Full value of pre-matured guarantees
 Unpaid amount, if any, against investment in shares
 If the licensed institution has entered into a forward exchange contract with its
customers, the full value of immature contract
 The amount of Acceptances and Endorsements, Underwriting Commitments,
Loan Commitments
 Unpaid Guarantee Claim
 Performance bonds, bid bonds, warranties, indemnities and standby letters of
credit in relation to a non-monetary obligation of counterparty under a particular
transaction
 Counter Guarantee of Internationally Rated Banks
b) Some common features of service concession arrangements are described below:
 The grantor is a public sector entity, including a governmental body, or a private
sector entity to which the responsibility for the service has been devolved.
 The operator is responsible for at least some of the management of the
infrastructure and related services and does not merely act as an agent on behalf
of the grantor.
 The contract sets the initial prices to be levied by the operator and regulates price
revisions over the period of the service arrangement.
 The operator is obliged to hand over the infrastructure to the grantor in a specified
condition at the end of the period of the arrangement, for little or no incremental
consideration irrespective of which party initially financed it.
c) An investment property is a property held to earn rentals or for capital appreciation or

both, rather than for:
 use in the production or supply of goods or services or for administration
purposes; or
 sale in the ordinary course of business
The accounting treatment for investment property is different from that of owner-
occupied property because investment properties are acquired to earn rentals or for
capital appreciation or both and thus their cash flows are largely independent of those
from other assets held by the enterprise.
After initial recognition, if fair valuation model is adopted, an entity must measure all
investment properties at that value with any gains/losses being included in net

profit/loss for the period in which it arises. This differs from an owner occupied
property carried under revaluation model because in the case of the latter, the
resultant gain/surplus is dealt with in other comprehensive income and held in equity.
d) It is one of the economic value models used for measurement and valuation of human
assets. As per this model, opportunity cost is the value of an employee in his/her
alternative use. This opportunity cost is used as a basis for estimating the value of
Human Resources. Opportunity cost value may be established by competitive bidding
within the firm so that in effect, managers must bid for any scarce employee. A
human asset will have a value only if it is a scarce resource, that is, when its
employment in one division denies it to another division. This method excludes
employees of the type of which can be readily hired from outside the firm. Also, it is
in very rare cases that managers would like to bid for an employee.
e) Currency option gives the client the right, but not the obligation, to buy/sell a
specified amount of currency at a specified price on a specified date. Currency option
provides a tool for hedging foreign exchange risk arising out of the firm‟s operation.
Currency options enable the business house to remove downside risk without limiting
the upside potential. Options can be put option or call option. A put option is a
contract that specifies the currency that the holder has the right to sell. A call option is
a contract that specifies the currency that the holder has the right to buy.
5.
a) „Nepal Public Sector Accounting Standard‟ states "All comparisons of budget and
actual amount shall be presented on a comparable basis to the budget". Explain
the detail provisions of above standard for comparison of budget and actual
amount. 8
b) The following particulars regarding capital structure of Ulitmate Ltd. is relating
to financial year ended 32nd Ashadh 2075:
 800,000 equity shares of Rs. 100 each = Rs. 80 million
 100,000 12% preference shares of Rs. 250 each = Rs. 25 million
 100,000 10% debentures of Rs. 500 each = Rs. 50 million
 Term loan from Investment Bank @ 10% = Rs. 45 million
The company‟s statement of profit and loss for the FY 2074/75 showed profit
after tax of Rs. 10 million, after appropriating equity dividend @ 20%. The
company is in the 40% tax bracket. Treasury bonds carry 6.5% interest and beta
factor for the company may be taken as 1.5 times. The long run market rate of
return may be taken as 16.50%.
Required:
Calculate economic value added from the information given above. 7
Answer:
a) Clause 1.9.25 to 1.9.30 of Nepal Public Sector Accounting Standard issued by
Accounting Standard Board of Nepal deals with the comparable basis for comparison of
budget and the actual amount. The content of above standard are given below:
1.9.25 All comparisons of budget and actual amounts shall be presented on a

comparable basis to the budget.

1.9.26 The comparison of budget and actual amounts will be presented on the same
accounting basis (accrual, cash or other basis), same classification basis and for
the same entities and period as for the approved budget. This will ensure that the
disclosure of information about compliance with the budget in the financial
statements is on the same basis as the budget itself. In some cases, this may mean
presenting a budget and actual comparison on a different basis of accounting, for
a different group of activities, and with a different presentation or classification
format than that adopted for the financial statements.
1.9.27 Financial statements consolidate entities and activities controlled by the entity.
As noted in paragraph 1.9.10, separate budgets may be approved and made
publicly available for individual entities or particular activities that make up the
consolidated financial statements. Where this occurs, the separate budgets may
be recompiled for presentation in the financial statements in accordance with the
requirements of this Standard. Where such recompilation occurs, it will not
involve changes or revisions to approved budgets. This is because this Standard
requires a comparison of actual amounts with the approved budget amounts.
1.9.28 Entities may adopt different bases of accounting for the preparation of their
financial statements and for their approved budgets. For example, in some, cases
a government or government agency may adopt the cash basis for its financial
statements and the accrual basis for its budget. In addition, budgets may focus
on, or include information about, commitments to expend funds in the future and
changes in those commitments, while the financial statements will report cash
receipts and payments and balances thereof. However, the budget entity and
financial reporting entity will often be the same. Similarly, the period for which
the budget is prepared and the classification basis adopted for the budget will
often be reflected in financial statements. This will ensure that the accounting
system records and reports financial information in a manner which facilitates
the comparison of budget and actual data for management and for accountability
purposes - for example, for monitoring progress of execution of the budget
during the budget period and for reporting to the government, the public and
other users on a relevant and timely basis.
1.9.29 In some cases, budgets may be prepared on a cash or accrual basis consistent
with a statistical reporting system that encompasses entities and activities
different from those included in the financial statements. For example, budgets
prepared to comply with a statistical reporting system may focus on the general
government sector and encompass only entities fulfilling the "primary" or "non-
market" functions of government as their major activity, while financial
statements report on all activities controlled by a government, including the
business activities of the government.
1.9.30 In statistical reporting models, the general government sector may comprise
national, state/provincial and local government levels. Sometimes, the national
government may control state/provincial and local governments, consolidate
those governments in its financial statements and develop, and require to be
made publicly available, an approved budget that encompasses all three levels of
government. In these cases, the requirements of this Standard will apply to the
financial statements of those national governmental entities. However, where a
national government does not control state or local governments, its financial
statement will not consolidate state/provincial or local governments. Rather,

separate financial statements are prepared for each level of government. The
requirements of this Standard will only apply to the financial statements of
governmental entities when approved budgets for the entities and activities they
control, or subsections thereof, are made publicly available.
b) Calculation of Economic Value Added
Particular Rs. in million

Profit before interest and taxes (from WN 1) 57.83
Less: Interest (5 + 4.5) (9.50)
PBT 48.33
Less: Taxes (19.33)
PAT 29.00
Add: Interest (net of tax) [9.50 x (1 – 0.40)] 5.70
Net operating profit after taxes 34.70
Less: Cost of Capital (Capital employed x WACC)[200 x (25.90)
12.95%(WN 2,3,and 4)]
Economic value added 8.80
Working Notes:
1. Calculation of profit before tax
Particular Computation Rs. in Lakhs
Profit before interest and taxes Balancing figure 57.83
Less: interest on debenture 10% x 50 (5.00)
Less: Interest on bank loan 10% x 45 (4.50)
Profit before tax 29 ÷60% 48.33
Less: tax @ 40% (29 ÷60%) x 40% (19.33)
Profit after tax 29.00
Less: preference Dividend 12% x 25 (3.00)
Residual earnings for equity shareholders 26.00
Less: Equity Dividend 20% x 80 (16.00)
Net profit in profit & loss account Given 10.00
2. Computation of cost of equity

= Risk Free rate + Beta x (market rate – Risk free rate)
= 6.5% + 1.5 (16.50 – 6.50) = 21.50%
3. Cost of Debt = Interest ( net of tax) x 100

Debt
= 5.70 x 100
95
= 6%
4. Computation of weighted average cost of capital
Component Amount (Rs. Ratio Individual cost WACC

million)
Equity 80 40.00% 21.50% 8.60%

Preference 25 12.50% 12% 1.50%

Debt 95 47.50% 6% 2.85%
Total 200 12.95%
6.
a) M Ltd. adopts fair value for subsequent measurement of its intangible assets. An
intangible with an estimated useful life of 9 years was acquired on 1st Shrawan,
2073 for Rs. 270,000. It was revalued to Rs. 326,400 on 31st Ashadh, 2074 and
the revaluation surplus was correctly recognized on that date. As at 32nd Ashadh,
2075, the asset was revalued at Rs. 192,000.
Required:
State the accounting treatment required in the financial statements of FY 2073/74
and FY 2074/75. 5
b) You work for Laligurans Ltd. and the Finance Director of the company has asked
your advice on the preparation of the financial statement for the fiscal year ended
32nd Ashadh, 2075 on the following:
i) The inventory at the fiscal year-end includes goods that were purchased by
Laligurans Ltd. under a consignment agreement. The agreement is that
Laligurans Ltd. can return the goods at any time and the price will be
determined by market change.
ii) The Board of Directors of Laligurans Ltd. met on 1st Ashadh, 2075 and
agreed on a decision to sell a warehouse. At the fiscal year end, the
warehouse is on the market and a sale is considered to be highly likely.
Required:
Explain the accounting treatment and the impact on the financial statements
referring to the relevant provision of Nepal Financial Reporting Standards. (2.5+2.5=5)
Answer:
a) In FY
2073/74
The Income statement for FY 2073/74 shows an amortization of Rs. 30,000 [Rs.
270,000/9 years].
The statement of financial position as at 31st Ashadh 2074 shows the following:
The asset at a carrying amount of Rs. 326,400 under non-current asset.
A revaluation surplus of Rs. 86,400 [Rs. 326,400 – Rs. 240,000] under equity.
In FY 2074/75
Amortisation of Rs. 40,800 [Rs. 326,400/ 8 years (remaining useful life)] is
charged to income statement.
A transfer should be made from revaluation surplus to retained earnings through

the statement of changes in equity of the excess amortization of Rs. 10,800 [Rs.
40,800 charged less Rs. 30,000 based on the original cost] and thereby reducing
the revaluation surplus to Rs. 75,600.

The carrying amount of the intangible asset as at 32nd Ashadh 2075 is now Rs.
285,600 [Rs. 326,400 – Rs. 40,800] but this should be reduced to Rs. 192,000.
The revaluation deficit is Rs. 93,600 [Rs. 285,600 - Rs. 192,000] of which Rs.
75,600 should be recognized in other comprehensive income (reducing the
revaluation surplus to nil and the Rs. 18,000 remainder is recognized as an
expense in the income statement.
Alternatively: The Company Can Charged total depreciations into PL account. If
so then revaluations deficit 93,600 of which 86,400 should be recognized into
OCI reducing the revaluations surplus NIL and remaining 7,200 will be
recognized into income statement.
b)
i) The consignment inventory should be accounted for by reference to the substance of
the transaction, which means by looking at the commercial substance rather than the
legal form of the transaction.
Laligurans Ltd. needs to consider whether they have risk and rewards of this
inventory. The fact that the Laligurans Ltd. has the right to return the goods at any
time along with the fact that the price may change would indicate that Laligurans Ltd.
does not have the risk of ownership.
The inventory should not be included within Laligurans Ltd.‟s inventory and the
transaction should be reversed.
ii) The following conditions need to be met to decide if the warehouse should be
classified as an assets held for sale under NFRS 5. The conditions are that
management are committed to a plan and the warehouse are available for immediate
sale. They should be actively looking for a buyer and a sale needs to be highly
probable with no expected changes.
Based on the facts given, it seems that the warehouse meets these conditions but this
would need to be confirmed. If this is the case, then the warehouse should be moved
from non-current assets into assets held for sale.
The warehouse should be measured at the lower of carrying value and fair value less
cost to sale. Depreciation on warehouse should cease.

Specific Comments on the Performance of the Students

Batch: - December 2018
Level: - CAP-III
Subject: - Advanced Financial Reporting
Qn.1 (a) Most of the Students have attempted this question properly.
Qn. 1 (b) i) Working notes were not provided properly.
ii) Students are lacking deep understanding of the subject matter.
iii) Students were not clear on subject matter. .
Qn. 2 (a) Students have performed averagely. Students failed to present properly in number
of cases.
Qn. 2 (b) Performance was below average. Most of the students failed to compute the
reconciliation of present value of obligation, fair value of planned assets and
extract of profit or loss & other comprehensive income.
Qn. 3 (a) Most of the students provided very general answer to the question. .
Qn. 3 (b) Most of the students have not solved this question and very few students have
solved the question properly. Most of the students have not understood
securitization properly.
Qn. 4 (a) Proper preparation to answer this question was lacking from most of the students.
Qn. 4 (b) ) Proper preparation to answer this question was lacking from most of the students.
Qn. 4 (c) Students have taken right approach to solve this problem.
Qn. 4 (d) Proper preparation to answer this question was lacking from most of the students.
Qn. 4 (e) Students have done average performance.
Qn. 5 (a) Most of the students couldn‟t answer question properly. The answers provided by
them was only a general concept of the student.
Qn. 5 (b) Students have only attempted the question. They could not answer well.
Qn. 6 Most of the students solved part (a) satisfactorily. However, lack of adequate
knowledge and relevant provisions of NFRS in part (b) noticed.

Paper 2:
Advanced Financial Management

Advanced Financial Management

Suggested
Roll No……………. Maximum Marks – 100
Total No. of Questions – 6 Total No. of Printed Pages - 16
Time Allowed - 3 Hours
Marks
Attempt all questions.
Working notes should form part of the answers. Make assumptions wherever necessary.
1.
Deluxe Transport Limited is considering starting an express bus service between city A
to city B. The one way fare is Rs. 50. It has under consideration two proposals of (i)
either 32 or (ii) 52 passengers' bus. The relevant data is as follows:
Particulars 32 passenger bus 52 passenger bus
Number of each buses to be purchased 6 4
Useful life (years) 8 10
Purchase prices of each bus (Rs.) 8,000,000 11,000,000
Road permit and registration of Transport
250,000 300,000
Co. in the beginning (Rs.)
Kilometre per litre of diesel 5 4
Drivers' hourly wages – both regular and part
150 200
time (Rs.)
Price per litre of diesel (Rs.) 100 100
Other annual cash expenses per bus (Rs.) 300,000 400,000
Salvage value per bus (Rs.) 800,000 1,500,000
During the daily rush-hour period totalling 4 hours, all buses would be in services and
are expected to operate at full capacity in both directions of the route, each bus
covering the route 12 times (6 round trip) during the period. The local law prohibits
standees in the express buses.
During the remaining 12 hours of daily service period, 500 passengers would be
carried, and the company will operate 4 buses on the route.
A bus travelling on the route all the day would cover 480 kilometres and one in use
only during rush hours would cover 120 kilometres a day. 260 days period considered
as operating days in a year.
Assume 15 percent cost of capital, and no taxes, all the cash flows accrue at the year
end.
Required: 20
Calculate cash inflows and Net present value of both options and advice the DTL
whether it should introduce buses of capacity 32 or 52 passengers.

Discounting factors for 15% is given below:
Year 1 2 3 4 5 6 7 8 9 10
PV factor 0.870 0.756 0.657 0.572 0.497 0.432 0.376 0.327 0.284 0.247
Answer:1
Calculation of cash outflows:
(In lakh Rs)
Purchase price of buses:
6 × Rs. 8,000,000 480.00
4 × Rs. 11,000,000 440.00
Road permit and registration 2.50 3.00
Total 482.50 443.00
Calculation of cash inflows and NPV:

(Amount in lakh Rs)
Estimated annual operating revenues 364.52 389.48
Less: Estimated annual cash expenses:
Drivers wages 28.08 33.28
Diesel cost 112.32 124.80
Other cash expenses 18.00 16.00
Net operating income 206.12 215.40
PV factor @ 15% for 8 years, 10 years 4.487 5.018
PV of operating income (A) 924.86 1080.88
Salvage value 48.00 60.00
PV factor @ 15% for 8th year, 10th year 0.327 0.247
PV of salvage value (B) 15.69 14.83
Total PV (A) + (B) 940.62 1,095.87
Less: Cash out flows 482.50 443.00
Net Present Value 458.12 652.87
Capital recovery factor 4.487 5.019
Equivalent Annual Net Present Value 102.09 130.09
Recommendation: As the equivalent annual NPV is higher with 52 passenger buses,

Deluxe Transport Limited should introduce buses having capacity of 52 passengers.
Working notes:
(i) Estimated annual revenue

Rush-hour passengers:
Passengers per trip 32 52
Number of trips (6 round trip) × 12 × 12
Total passengers carried by each bus 384 624
Number of buses ×6 ×4
Total rush hour passengers per day 2,304 2,496
Total other passengers per day 500 500
Total daily passengers 2,804 2,996
Operating days per year × 260 × 260
Total annual passengers carried 729,040 778,960
Fare per passenger per trip (Rs) × 50.00 × 50.00
Total annual fare (Rs) 36,452,000 38,948,000
(ii) Estimated annual drivers wages

Number of buses operating during rush-hours 6 4
Rush hours per day ×4 ×4
Rush-hour time for all drivers (A) 24 16
Number of buses operating in non-rush-hours 4 4
Operating hours other than rush-hours × 12 × 12
Non-rush-hour time for all drivers (B) 48 48
Total daily hours for all drivers: (A) + (B) 72 64
Total annual hours for drivers 18,720 16,640
Wages per hour (Rs) × 150.00 × 200.00
Total annual wages (Rs) 2,808,000 3,328,000
(iii) Estimated annual cost of diesel

Number of buses operating during rush-hours 6 4
Rush-hour kilometers per bus × 120 × 120
Total rush-hour kilometers (A) 720 480
Number of buses operating in non-rush-hours 4 4
Non-rush-hour kilometers per bus (480 – 120) × 360 × 360
Non-rush-hour kilometers per day (B) 1,440 1,440
Total daily travelling kilometers: (A) + (B) 2,160 1,920
Total annual kilometers travelled 561,600 499,200
Kilometer per litre of diesel 5 4

Annual diesel consumption (in liter) 112,320 124,800

Cost per litre of diesel (Rs) × 100 × 100
Annual diesel cost (Rs) 11,232,000 12,480,000
2.
a) The total values (equity plus debt) of two companies, Alpha and Beta, are
expected to fluctuate according to the state of the economy.
Recession Slow growth Rapid growth
Probability 0.15 0.65 0.20
Total values (Rs. in Million)
Alpha 84 110 150
Beta 126 160 240
Alpha currently has Rs. 90 million of debt, and Beta has Rs. 20 million of debt.
Required: 10
If the two companies were to merge, and assuming that no operational synergy
occurs as a result of the merger, calculate the expected value of debt and equity of
the merged company. Explain the reasons for any difference that exists from the
expected values of debt and equity if they do not merge.
b) Bonds of a Garment Company, which carries AA rating, with five years to
maturity and 16% coupon rate, payable half-yearly, is being traded at Rs. 1,040.
You as a Fund Manager of Trust Fund, a 80% Debt Fund, want to ascertain the
intrinsic value and take a decision accordingly.
Your Asset Management Company has laid down the guideline that for AA Rated
Instruments, discount rate to be applied is 364-Day T Bill Rate+4% (T-Bill Rate
is 10%)
Required:(4+2+4=10)
i) Calculate Intrinsic Value of the Bond.
ii) Advice whether to buy or not bond in auction.
iii) Calculate Yield to maturity of the Bond.
Answer: 2(a)
Value of Alpha’s shares

To find the value of Alpha‟s equity shares, debt shall be deducted from total value.
(Rs. In Million)
Recession Slow growth Rapid growth
Total values 84 110 150
Debt (given) 90 90 90
Equity (6) 20 60

This gives negative value to equity in the recession scenario, which cannot happen
because the shares have limited liability. Let us assume the shares are zero value and the
debt has declined to 84 m because of bankruptcy risk. The expected value of equity and
debt can then be computed as:
Recession Slow growth Rapid Expected Value
growth
Equity (Rs. In Million) 0 20 60 25
Debt (Rs. In Million) 84 90 90 89.10
Total (Rs. In Million) 84 110 150 114.10
Value of Beta’s shares

The value of Beta‟s equity share can be obtained by subtracting debt of Rs. 20 million
from total value.
Recession Slow Rapid Expected
growth growth Value
Equity (Rs. In 106 140 220 150.90
Million)
Debt (Rs. In Million) 20 20 20 20.00
Total (Rs. In Million) 126 160 240 170.90
Effect of Merger
When the companies merge, economic values of equity and debt are merged together. This
means using the negative Rs. 6 million value for Alpha‟s equity in the recession scenario.
Its debt will be restored to Rs. 90 million because the bankruptcy risk will have disappeared
by combination with a low-geared company.
Recession Slow Rapid Expected
growth growth Value
Combined Equity (Rs. In 100 160 280 175
Million)
Combined Debt (Rs. In 110 110 110 110
Million)
Total (Rs. In Million) 210 270 390 285
Summary
Expected equity values (Rs. Million)
Alpha 25.00
Beta 150.90
Total 175.90
Combined company 175.00
Loss in equity value after combination 0.90
Expected Debt values

Alpha 89.10
Beta 20.00
Total 109.10
Combined company 110.00

Gain in debt value after combination 0.90
After the combination, in the absence of synergy, the total economic value of the business
remains at Rs. 285 million, but the total expected value of debt has increased by Rs. 0.90 m
at the expense of equity. This is because, under the recession scenario, there is no longer a
bankruptcy risk for the debt holders of Alpha.
Answer: 2b
1. Computation of Intrinsic Value

a) Present value of Interest Cash Flow
Particulars Value
a) Face Value Rs. 1000
b) Coupon Rate 16%
Half-
Yearly
d) Period to Maturity 5 years
e) Half-yearly Interest Amount(16%*1000*6mth/12mths) Rs. 80
f) No of Interest Payments for next 5 yrs. (5yrs*2Per Yr) 10
g) Discount Rate (T Bill Rate 10%+4%) 14%
h) Annuity Factor for 10 Periods at 7% (i.e half of Discount Rate) 7.024
i) Present Value of Cash Flows on account of Interest Flow Rs. 562
b) Present Value of Maturity Proceeds

Particulars Value
a) Maturity Proceeds = Face Value Rs. 1000
b) PV Factor at 7% at the end of 10 Periods 0.508
c) Present Value of Maturity Proceeds 508
Note: Since interest is payable half-yearly, present value at the end of 5th Year is to be computed
based on the half yearly interest rate of 8% and the number of periods as 10.
c) Intrinsic Value
Intrinsic Value = PV of Interest Flows + PV of Maturity Proceeds
Intrinsic Value = Rs. 562+Rs 508
Intrinsic Value = Rs. 1070
2. Action on Bond
Particulars Value
Value of Bond (Expected Price = Intrinsic Value) 1070
Actual Market Price per Bond 1040
Evaluation (Actual Price vs Expected Price) Actual price is lower
Inference Bond is Underpriced
Action BUY
3. Yield based on Current Market Price

Particulars Face Value Intrinsic Value

Value of Bond Rs 1000 (v1) Rs 1070 (v2)
Yield Percentage 16% p.a (R1) 14% p.a (R2)
If the present value is Rs 1040(vm) i.e between Rs 1000 and Rs 1070, Current Yield(y)
is between 14%(R2) and 16% p.a (R1). Therefore by interpolation, Current Yield is
14.85% p.a or 7.43% half yearly.
Yield to maturity(y) = R2+(V2-Vm)*(R1-R2)

(V2-V1)
Yield to maturity(y) = 14%+(1070-1040)*(16%-14%)

(1070-1000)
= 14% + 30/70×2%
= 14% + 0.428571×2%
= 0.14857
= 14.86%
3.
a) A person gets an interest free loan of USD 300,000. Repayment is to be done in
three equal half-yearly instalments.
Assume the following rates:
Today Six months forward rate 105/106.25
At the end of 6 months Spot 107.50/107.75
Six months forward 108.50 / 108.75
At the end of one year Spot 110/110.25
Six months forward 111.25/111.50
At the end of one & half year Spot 112.50/112.75
Six months forward 114 / 114.25
Required: (2+4+4=10)
Find the amount he has to pay in rupees in the following three cases and give your
recommendation.
i) No hedging
ii) Rupee roll over forward
iii) Three separate forward contracts, one today, one after 6 months, and one after
one year from today.(Ignore bank charges)
b) Following is the historical performance information of the capital market and
Bright Future Mutual Fund:
Year Bright Future Bright Future Mutual Return on Market Return on Govt.
Mutual Fund Beta Fund Return (%) Index (%) Securities (%)
2008 0.90 –3.00 –8.50 6.50
2009 0.95 1.50 4.00 6.50

2010 0.95 18.00 14.00 6.00

2011 1.00 22.00 18.50 6.00
2012 1.00 10.00 5.70 5.75
2013 0.90 7.00 1.20 5.75
2014 0.80 18.00 16.00 6.00
2015 0.75 24.00 18.00 5.50
2016 0.75 15.00 10.00 5.50
2017 0.70 –2.00 8.00 6.00
Required: (9+1=10)
i) Calculate the Reward-to-Variability Ratio and Reward-to-Volatility Ratio for
the Market and the Mutual Fund.
ii) Comment on the performance of the Bright Future Mutual Fund.
Answer: 3(a)
i) No Hedging
At the end of 6 months: 100,000 × 107.75 = 10,775,000

At the end of 1 year: 100,000 × 110.25 = 11,025,000
At the end of one & half year: 100,000 × 112.75 = 11,275,000
ii) Rupee roll over forward
Today:
Enter into a forward contract to purchase $ 300,000 after 6 months from today @
NPR 106.25
After 6 months from today:
Purchase $ 300,000 @ NPR 106.25, use $ 100,000 to repay the first installment of
loan , sell remaining $200,000 to bank on spot basis @ NPR 107.50 . Then enter into
a 6 months forward contract to purchase $200,000 @ NPR 108.75.
Net Payment to Bank = 300,000 ×106.25 – 200,000 × 107.50 = NPR 10,375,000
After 1 year from today:
Purchase $200,000 @ NPR 108.75, use 100,000 to repay the second installment of
loan, sell remaining $ 100,000 to bank on spot basis @ NPR 110. Then enter into a 6
months forward contract to purchase $100,000 @ NPR 111.50
Net payment to Bank = 200,000 × 108.75 – 100,000 × 110 = NPR 10,750,000
Purchase $100,000 @ NPR 111.50 and use to repay the final installment of loan.
Net payment to bank = 100,000 × 111.50 = NPR 11,150,000
iii) Today:
Enter into 6 months forward contract to purchase $100,000 @106.25 ,


Purchase $100,000 @ 106.25 and repay the first installment.
Enter into 6 months forward contract to purchase $100,000 @ 108.75
Total Payment = 100,000 × 106.25 = 10,625,000
After 1 Year from today:
Purchase $100,000 @ 108.75 and repay the second installment.
Enter into 6 months forward contract to purchase $100,000 @ 111.50
Total payment = 100,000 × 108.75 = 10,875,000

Purchase $100,000 @ 111.50 and repay the final installment.
Total Payment = 100,000 × 111.50 = 11,150,000
Comparison of Payments in 3 alternatives
Particulars No hedging Rupee roll over Separate forward contract
After 6 months from today 10,775,000 10,375,000 10,625,000
Total payment 33,075,000 32,275,000 32,650,000
Hence 2nd alternative is recommended.

Answer: 3(b)
i) Reward-to-Variability Ratio and Reward-to-Volatility Ratio for the Market and the
Mutual Fund:
Reward-to-Variability Ratio or Sharpe Ratio:
For Market:
rm  r f 8.69  5.95
SR    0.34
m 8.06
For Mutual Fund:
rp  r f 11.05  5.95
SR    0.54
p 9.36
Reward-to-Volatility Ratio or Treynor Ratio:
For Market:
rm  r f 8.69  5.95
TR    2.74
m 1.00

For Mutual Fund:

rp  r f 11.05  5.95
TR    5.86
p 0.87
Working notes:
I.
Calculation of average of the given variables
0.90  0.95  0.95  1.00  1.00  0.90  0.80  0.75  0.75  0.70
1. Beta 
10
 0.87
 3.00  1.50  18.00  22.00  10.00  7.00  18.00  24.00  15.00  2.00
2. Re turn ( MF ) 
10
11.05
 8.50  4.00  14.00  18.50  5.70  1.20  16.00  18.00  10.00  8.00
3. Re turn ( MI ) 
10
 8.69
6.50  6.50  6.00  6.00  5.75  5.75  6.00  5.50  5.50  6.00
4. Re turn (GS ) 
10
 5.95
ii)
Standard deviation of returns of Bright Future Mutual Fund
Year Return (X) X2
2008 –3.00 9.00
2009 1.50 2.25
2010 18.00 324.00
2011 22.00 484.00
2012 10.00 100.00
2013 7.00 49.00
2014 18.00 324.00
2015 24.00 576.00
2016 15.00 225.00
2017 –2.00 4.00
Total 110.50 2,097.25

N  X 2  ( X ) 2
p
N2
(10  2,097 .25)  (110 .5) 2 20,972 .50 12,210 .25
 2
  87.62  9.36%
10 100
iii)
Standard deviation of returns of the Market Index
Year Return (X) X2
2008 –8.50 72.25
2009 4.00 16.00
2010 14.00 196.00
2011 18.50 342.25
2012 5.70 32.49
2013 1.20 1.44
2014 16.00 256.00
2015 18.00 324.00
2016 10.00 100.00
2017 8.00 64.00
Total 86.90 1,404.43
N  X 2  ( X ) 2
m 
N2
(10 1,404 .43)  (86.90) 2 14,044 .30  7,551 .61
 2
  64.93  8.06%
10 100
(ii) Comment on the performance of the Bright Future Mutual Fund:

Ratios of the Bright Future Mutual Fund and Market Index:
Ratio Mutual Fund Market Index
Sharpe 0.54 0.34
Treynor 5.86 2.74
From the ratios calculated above it is clear that the Bright Future Mutual Fund has
performed better than the performance of the market.

4.
Answer the following questions: (5×3=15)
a)
Distinguish between Standard Deviation and Beta as a measurement of
risk.
b)
Elaborate CAMEL model in credit rating.
c)
What are the important features of an options contract?
d)
Define price discovery and identify its mechanism.
e)
Distinguish between Deposit financial intermediaries and Non-deposit
financial intermediaries.
Answer: Q No 4
a)
Standard Deviation versus Beta as a measure of risk.
A rational risk-averse investor views the standard deviation of his/her portfolio‟s return
as the proper risk of his/her portfolio. If for some other reason or another the investor
can hold only one security, the standard deviation of that security‟s return becomes the
standard deviation of the portfolio‟s return. Hence the standard deviation of the
security‟s return is the security‟s proper measure of risk.
While risk is broken into diversifiable and non-diversifiable segments, the market
generally does not reward for diversifiable risk since the investor himself is expected to
diversify the risk himself. However, if the investor does not diversify he cannot be
considered to be an efficient investor. The market therefore rewards an investor only for
the non-diversifiable risk. Hence the investor needs to know how much non-diversifiable
risk he is taking. This is measured in terms of beta.
Beta of a stock measures the sensitivity of the stock with reference to a broad base
market index like BSE sensex. For example a beta of 1.4 for a stock would indicate that
this stock is 40% riskier than the sensex. Similarly a beta of a 0.7 would indicate that the
stock is 30% less risky than the sensex. However, a beta of one would indicate that the
stock is as risky as the stock market index.
An investor therefor, views the beta of a security as a proper measure of risk, in
evaluating how much the market reward him for the non-diversifiable risk that he is
assuming in relation to a security. An investor who is evaluating the non-diversifiable
element of risk, that is extent of deviation of returns viz-a-viz the market therefore
consider beta as a proper measure of risk.

b)
CAMEL model in credit rating
Credit rating is a codified rating assigned to an issue by authorized credit rating agencies.
It is an exercise of assessing the credit record, integrity and capability of a prospective
borrower to meet its debt obligations. Credit rating relates to companies, individuals and
even countries. The rating represents the rating agencies opinion at that time on the
relative safety of timely payment of interest and principal associated with particular debt
obligations. Camel stands for Capital, Assets, Management, Earnings and Liquidity .The
CAMEL model adopted by the rating agencies focuses on the following aspects-
i) Capital Adequacy
ii) Assets
iii) Management
iv)Earnings
v) Liquidity
These five aspects from the five core basis for estimating credit worthiness of an issuer
which leads to the rating of an instrument. Rating agencies determine the pre-dominance
of positive/negative aspects under each of these five categories and these are evaluated
for making the overall rating decisions.
c)
The important features of options contract are as follows:
i) The option is exercisable only by the owner, namely the buyer of the option.
ii) The owner has limited liability.
iii) Owners of options have no right affordable to shareholders such as voting right
and dividend right.
iv) Options have high degree of risk to the option writers.
v) Options are popular because they allow the buyer profits from favorable
movements in exchange rates.
vi) Options involve buying counter positions by the option sellers.
vii) Options contract provide flexibility as per investors need.
viii) No certificates are issued by the company.
d)
Define price discovery and identify its mechanism.
Price discovery is the process/ mechanism through which market participants attempt
to find equilibrium price. It is the price at which the market clears/ deals, and can
therefore also be called market-clearing price. Thus the equilibrium price is the price
at which a buyer and a seller have agreed to transact certain quantity of securities. In
summary, price discovery is the process of discovering/ determining the price of a
security in the market place (order driven or quote driven market, OTC or exchange)
through the bids and offers of buyers and sellers, based on information at their
disposal at that time. The following mechanisms interact in price discovery:
 the market (order driven or quote driven)

 market participants
 bid (buying) price
 offer (selling) price
 spread (the difference between bid and offer)
 quantity of securities
e) Distinguish between Deposit financial intermediaries and Non-deposit financial

intermediaries.
Many different types of institutions perform intermediation function. In terms of
fundamental function of intermediation, there lies little distinction between Deposit
financial intermediaries and Non-deposit financial intermediaries. The distinguishing
characteristics lie in the nature of claims (on indirect securities) and services offered
to lenders, and in the nature of claims (on primary securities) and services offered to
the borrowers.
Deposit financial intermediaries are Central banks and Private sector banks. The
central bank is funded by its issue of bank notes and coins, by the deposit of private
sector banks and government and by issue of its own securities. Its assets are made up
of various domestic securities and foreign securities. The private sector banks
intermediate between all the ultimate lenders and borrowers, and take deposits from
other intermediaries.
Non-deposit financial intermediaries are Contractual intermediaries (Long-term
issuers, Short-term issuers, and Retirement funds), Collective investment schemes or
Portfolio intermediaries (Securities unit trust or Mutual funds, Property unit trust,
Exchange traded funds) and Alternative investments (Hedge funds, Private equity
funds). Contractual intermediaries and Portfolio intermediaries take funds mainly
from household sector and invest in the primary securities and indirect securities.
Alternative investments issue liabilities to all the ultimate lenders and also take funds
from retirement funds.
5.
a)
A year ago, the spot exchange rate of NPR was $ 0.0091. At that time, Tall Co. (a
U.S. firm) invested $ 4 million to establish a project in Nepal. It expected that this
project would generate cash flows of Rs. 300 million at the end of the first and
second years.
Tall always uses the spot rate as its forecast of future exchange rates. It uses a
required rate of return of 20 percent on international projects.
Because conditions in Nepal are weaker than expected, the cash flows in the first
year of the project were Rs. 200 million, and Tall now believes the expected cash
flows for next year will be Rs. 100 million. A company offers to buy the project
from Tall today for $1.25 million. Today, the spot rate of RS. is $ 0.0085. The 1-
year forward rate of NPR is $ 0.0083.
Tall expects the spot rate of NPR to be $ 0.0081 in 1 year.
Assume the following money market rates and no tax effect:
US Nepal
Deposit rate 5% 8%
Borrowing rate 6% 9%

Required: (3+4=7)
i) Should Tall accept the offer? Show your work.
ii) Determine the dollar cash flows to be received in 1 year from now, if Tall uses
a money market hedge.
b)
Golden Ltd., a large IT company, evaluates the potential acquisition of Silver Ltd.
Silver Ltd. currently has a Rs. 62.50 million market value of equity and Rs. 27
million in debt with 9% interest rate, for a total market value of Rs. 89.5 million.
Golden Ltd. intends to finance the acquisition with this same proportion of debt
and plans to maintain this constant capital structure throughout the projection
period and thereafter. Silver Ltd. is a publicly traded company, and its market-
determined per-merger beta was 1.2. The risk-free rate is 7% and market risk
premium is 5%. The corporate tax rate is 30%.
The selected items from post merger financial statements for Silver Ltd. are:
(Rs. million)
Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
EBIT 7 12 16 20.7 23
Interest expenses 3 3.2 3.5 3.7 3.9
Debt 33.2 35.8 38.7 41.1 43.6 46.2
Total net operating capital 116 117 121 125 131 138
There are no non-operating assets. Projected growth in the post horizon period will
be 6%.
Required: 8
How much would Silver Ltd. be worth to Golden Ltd. after the merger? Use
corporate valuation model.
Answer: Q No 5(a)
i) As of today, the NPV from selling the project is
Proceeds received from selling the project – Present value of the forgone cash flows.
Here,
Proceeds = $1.25 million.
PV of forgone cash flows = (Next year cash flow×Current spot rate)/(1+required rate
of return)
= (NPR 100 million × $ 0.0085)/ 1.20
= $ 0.7083 million
Now,
NPV from selling the project = $ 1.25 million – $ 0.7083 million
= $ 0.5417 million
Therefore, selling the project is feasible and Tall should accept the offer.
The amount of investment and first year cash flow is irrelevant for this decision.
ii) Dollar cash flows to be received, if Tall uses a money market hedge
Cash flows to be received from the project in 1 year from now = NPR 100 million
Borrow NPR:

Amount to be borrowed now = Cash flows to be received/ (1+borrowing rate in

Nepal)
= NPR 100/ 1.09 = NPR 91.74 million
Convert NPR to Dollar:
Amount after conversion = Borrowing in NPR × Current spot rate
= NPR 91.74 million × $ 0.0085
= $ 0.7798 million
Invest the dollar:
Amount after investment = Converted amount × Deposit rate in US
= $ 0.7798 million × 1.05
= $ 0.8188 million
Therefore, if Tall uses a money market hedge, dollar cash flows to be received in 1
year will be $0.8188.
Answer: Q No 5(b)
i. WACC of Silver Ltd.
Since, Golden Ltd. does not plan on changing Silver's capital structure; the post-
merger WACC will be equal to the pre-merger WACC as calculated below:
Pre-merger required rate of return of Silver Ltd. (re) = 7% + 1.2 × 5% = 13%
Silver's cost of debt (rd) = 9%
Now,
WACC = Wd × (1-t) × rd + We × re
= (27/89.5) × (1-0.30) × 0.09 + (62.5/89.5) × 0.13
= 0.3017 × 0.70 × 0.09 + 0.6983 × 0.13
= 0.019 + 0.091
= 0.11 = 11%
ii. Post merger cash flows (under corporate valuation model) and their PV for Silver
Ltd.
(Rs. million)
Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
NOPAT (EBIT × 0.70) 4.90 8.40 11.20 14.49 16.10
Less: Net investment (1) (4) (4) (6) (7)
(change) in operating
capital
Free cash flow (FCF) 3.90 4.40 7.20 8.49 9.10
PVIF @ 11% 0.9009 0.8116 0.7312 0.6587 0.5934
PV of FCF 3.5135 3.5710 5.2646 5.5924 5.3999
Total PV of FCF 23.3414
iii. The horizon value of Silver's operations as of Year 5 and its present value
HVoperation, Y5 = FCFY6 ÷ (WACC – g) = {FCFY5 × (1+g)} ÷ (WACC – g)
= (9.10 × 1.06) ÷ (0.11 – 0.06)
= 9.646 ÷ 0.05
= Rs. 192.92 million
PV of HVoperation, Y5 = Rs. 192.92 million × 0.5934
iv. Value of operation as of Year 0

Voperation, Y0 = PV of FCF in the projected period + PV of HVoperation, Y5

= Rs. 23.3414 million + Rs. 114.4787 million
v. Silver Ltd.'s worth to Golden Ltd.

Since there are no non-operating assets, the worth (value equity) of Silver Ltd. to
Golden Ltd., if Silver Ltd. is acquired will be equal to the value of operations at Year
0 less the value of debt of Silver Ltd. as below:
Worth of Silver Ltd. = Rs. 137.8201 million – Rs. 27 million
6.
a)
Sony Limited is considering installment sale of LCD Television as a sales
promotion strategy. In a deal of LCD Television, with selling price of Rs.
100,000, a customer can purchase it for cash down payment of Rs. 20,000 and
balance amount by adopting any of the following options:
Number of Monthly Installment Installment Amount (Equated)
12 Rs. 7,600
24 Rs. 4,300
Required: 5
Calculate the flat and effective rate of interest for both of the options.
b)
Mr. Raman had entered into 5 Put Options and 5 Call Options in different
securities, the particulars of which are given below, along with their exercise price
and actual market price on the date of exercise.
Call Options Put Options
Security Exercise Actual market Security Exercise Actual market
price (Rs.) Price (Rs.) price (Rs.) Price (Rs.)
R P 370 376 A 118 122
e Q 450 444 B 758 758
q R 1790 1700 C 350 340
u S 135 140 D 65 69
i T 953 953 E 230 220
Req: 5
Calculate his position on the date of exercise and find out what would he do?
Answer: Q No 6(a)
Calculation of total annual charge for loan – 12 months scheme:
Total of installment amount = Rs. 7,600 × 12
= Rs. 91,200
Annual charge = Rs. 91,200 – Rs. 80,000
= Rs. 11,200

Calculation of total annual charge for loan – 24 months scheme:

Total of installment amount = Rs. 4,300 × 24
= Rs. 103,200
Annual charge = (Rs. 103,200 – Rs. 80,000)/2
= Rs. 11,600
Calculation of flat and effective rate of interest under both the options:
Particulars 12 months option 24 months option
Flat Rate of Interest (F) Rs.11,200 Rs.11,600
100 14% 100 14.50%
Rs. 80,000 Rs.80,000
Effective Rate of Interest n 12 n 24
 2 F   28  25.85%  2 F   29  27.84%
n 1 13 n 1 25
Answer: Q No 6(b)
Put Options (Right to sell)
Security Exercise Price Actual AMP vs. EP Position Action
(EP) Market Price whichever
(AMP) higher
A 118 122 AMP Out of money Lapse
B 758 758 Equal At the money No action
C 350 340 EP In the money Exercise
D 65 69 AMP Out of money Lapse
E 230 220 EP In the money Exercise
Call Options (Right to buy)

Security Exercise Actual AMP vs. EP Position Action
Price (EP) Market whichever
Price higher
(AMP)
P 370 376 AMP In the money Exercise
Q 450 444 EP Out of money Lapse
R 1790 1700 EP Out of money Lapse
S 135 140 AMP In the money Exercise
T 953 953 Equal At the money No Action


Level: - CAP-III
Subject: - Advanced Financial Management
Qn. 1 Most of the students found to have clear concept of the subject matter however,
practical knowledge in this regard was lacking.
Qn. 2 (a) Students made mistake on recession state of economic under this question
in case of Alpha. In recession state students wrongly calculated the
expected value of equity by taking negative value and expected value of
debt has been calculated without reducing the value to debt. Again, most of
the student were not able to present loss in equity value after combination
and gain in debt value after combination and explain the reason for
differences that exists from the expected values of debt and equity if they
are do not merge.
Qn. 2 (b) Most of the students solved this question. But in part (ii) some students
confused about concept of overprice and underprice so their buy or not
decision were wrong. Again, in part (iii) of this question for computing
YTM some students used the approximate YTM formulation instead of
computing exact YTM by using interpolation method.
Qn. 3 (a) This question was well attempted by most of the students and performance
of the students in this question was found to be satisfactory. The answers
given by few of the candidates were not properly structured in the way
required by the question even though individual components calculated in
a scattered way were correct. In general, following mistakes were
committed:
 Few students were not able to understand the fundamental concept of
spot and forward exchange rate and picked up wrong exchange rates to
calculate total cash outflows associated with different payment points
under option I.
 Under rupee roll over forward contract option, quite a few students
depicted their poor knowledge in the concept of roll over forward
contract and simply calculated cash flows associated with each
payment point by applying spot exchange rates given for that particular
payment point.
 Under three separate forward contract option, few students calculated
cash outflows associated with each payment point by applying spot
exchange rates given for the payment point thereby depicting their
poor knowledge on the concept of forward contract.
 Few students didn‟t prepare comparative statement of cash outflows
associated with different options while giving their recommendation.
Qn. 3 (b) Performance of the students in this questions was found to be average.
Some of the students depicted their poor knowledge on the concept of
Sharpe Ratio and Treynor Ratio. The answers given by majority of the
students were not properly structured in the way required by the question
even though individual components calculated in a scattered way were
correct to some extent. In general, following mistakes were observed:
 Large number of students calculated both the ratios for individual
years instead of calculating them on an average basis.

 Few students wrongly interchanged the formula while calculating

ratios thereby leading to wrong outcome for the rest of the solutions.
 Significant number of students calculated required return by applying
CAPM formula and ended up with wrong conclusion.
 Comment on the performance of the Mutual Fund was not properly
done by majority of the students. A plane statement on the
performance of Mutual Fund without reciting to any data reason was
given by most of the students.
Qn. 4 Most of the students did not answer all five parts of theoretical question. This
may be due to lack of conceptual knowledge & being unaware about new
emerging concept of financial market.
Qn. 5 Though question was mathematical & formula based, no one can score 100%.
Generally students have attempted the question but could not answer properly.
Qn. 6 Most of the students could not attempted question 6(a) correctly. So, more than
55% students could not secure pass marks from 6(a) question. However,
performance on question 6(b) was satisfactory as only 8% students could not
attempt to score pass mark.

Paper 3:
Advanced Audit and Assurance

Advanced Audit And Assurance

Suggested
Total No. of Questions - 6 Total No. of Printed Pages -11

Marks
1. Comment and give your views with reasons on each of the following cases, giving
consideration to respective Standards, Laws and Code of Ethics:
a) The position of ABC Company Private Limited as on Ashadh 32, 2075 is as
below:
The paid capital of the company is Rs. 25 crore. The company has fixed assets
costing Rs. 2 crore on which depreciation provision was Rs. 1.95 crore, which
was equal to the full cost of depreciable assets. The balance of Rs. 5 lakh
represented the cost of land. It has discontinued its operations for past many
years. The company has made investment in various companies to the tune of Rs.
30 crore.
Unfortunately, all these investee companies have turned out to be bankrupt and
nothing is expected to be realized on such investments. The company has dues
from customers amounting to Rs. 4.95 crore of which Rs. 4.90 crore is due from
businesses which have become defunct. The balance Rs. 5 lakh is due for over 3
years. The accumulated loss is Rs. 10 crore. The amounts due to suppliers are Rs.
3 crore and they are overdue for long time. The balancing figure in the balance
sheet refers to loan from financial institutions.
Workers who had put in long years of service have lodged claims for termination
benefits of Rs. 10 crore, which have been decreed in their favor. No accounting
entries have been passed since the decree on Jestha 29, 2073. Also, the company
continues to prepare its accounts under Going Concern assumption.
In the light of NSA 570 (Revised) relating to Going Concern you are required to
i)
Analyze the facts of the case and state the reasons supporting your audit
opinion. 5
ii)
Draft appropriate paragraph for your audit report:
Basis for Opinion 3.5
Opinion 1.5

b)
i)
Expert Limited has not included in the Balance Sheet as on 32/3/2075 a sum
of Rs. 15 million being amount in the arrears of salaries and wages payable to
the staff for the last two years as a result of successful negotiations which
were going on during the last 18 months and concluded on 30/4/2075. The
auditor wants to sign the said Balance Sheet and give the audit report on
31/5/2075. The auditor came to know the result of the negotiations on
15/5/2075. Comment. 5
ii)
ABC and Associates has a policy to retain working paper file for 4 years after
signing of report, due to shortage of space in its office, unless the group
auditor or any law requires the retention for a longer period. 5
Answer1(a):
NSA 570 (Revised) “Going Concern” requires the auditor to consider the
appropriateness of the going concern assumption underlying the preparation of the
financial statements which may no longer be appropriate. The following indications
inter alia have to be taken into consideration in determining the appropriateness of
going concern assumption:
 Financial indications such as negative net worth, adverse key financial ratios,
substantial operation loss, inability to pay creditors on due date etc.
 Operating indications such as labor difficulties, loss of major markets etc.
 Other indicators include non-realizability of investment etc.
Having regard to aforesaid indicators and as per the facts of the case, the company is
not going concern as on Ashad 32, 2075 on account of the following reasons
 The company has discontinued its operations for last many years. It‟s productive
fixed assets are fully depreciated. The only productive asset left is land worth of
Rs. 5 lakhs.
 The claim of worker for termination benefits amounting to Rs. 10 crore though
decreed on Jestha 29, 2073 has not been provided for in the books of accounts.
 The amounts recoverable from customer totaling Rs. 4.95 crore of which Rs. 4.90
crore are due from business which are totally defunct are doubtful of recovery in
its entirety. Even the balance amount is due for more than three years. Hence the
amount is doubtful of recovery.
 The company has not been able to pay to its suppliers amounting to Rs. 3 crore
which are long overdue.
 The company‟s investment to the tune of Rs. 30 crore are not realizable and are
worthless in view the investee companies are bankrupt and nothing is realizable
from them.
 The balance figure for loan from financial institutions works out to Rs. 17 crore as
per the records which company is unable to pay.
 Thus, in view of the aforesaid financial, operation and other indicators, the
assumption of going concern is not appropriate.

Since, the company continues to prepare its account on going concern basis though
going concern is inappropriate, the auditor should give adverse opinion in accordance
to NSA 705 (Revised) Modifications to the Onion in the Independent Auditors
Report.
Basis for Adverse Opinon
The Company as at Ashad 32, 2075 has an accumulated loss of Rs. 10 cores, has
irrevocable debts of Rs. 4.95 crore as at that date, the diminution in value of its
investment is Rs. 30 crore as at that date and a non-provision of decree obligation in
favor of employees of Rs. 10 crore. The company has discontinued its operation for
last many years and has not been able to honor its obligation to creditors and financial
institutions for quite some time. Thus, the total accumulated losses are Rs. 54.95
crore (and not 10 crore as reported).
After taking into account the above factors we are of the opinion that the company is
not going concern as on at Ashad 32, 2075 and thus, the usage of going concern
assumption in the preparation of financial statements is inappropriate.
Adverse Opinon
In our opinion, because of the significance of the matter discussed in the Basis for
Adverse Opinon paragraph, the financial statements do not give true and fair view in
conformity with the accounting principles generally accepted in Nepal
a. In the case of the Balance Sheet of the state of the affairs of the company as at
Ashad 32, 2075.
b. In the case of the Profit and Loss account, of the profit/loss of the year ended on
that date.
c. In the case of the Cash Flow Statement, of the cash flows for the year ended on
that date.
Answer:1(b)(i)
As per NAS 10, "Events After the Reporting Period" adjustments to assets and
liabilities are required for events occurring after the Balance sheet date provide
additional information materially affecting the determination of the amounts relating
to conditions existing at the Balance Sheet date. Similarly, as per NAS 37,
"Provisions, Contingent Liabilities and Contingent Assets" future events that may
affect the amount required to settle an obligation should be settled in the amount of a
provision where there is sufficient objective evidence that the event will occur.
In the instant case, the amount of Rs. 15 million is a material amount and it is the
result of an event, which has occurred after the Balance Sheet date. The facts have
become known to the auditor before the date of issue of the Audit Report and
Financial Statements.
The auditor has to perform the procedure to obtain sufficient, appropriate evidence
covering the period from the date of the financial statement i.e. 31/3/2075 to the date
of Auditors Report i.e. 31/5/2075. It will be observed that as a result of long pending
negotiations a sum of Rs. 15 million representing arrears of salaries of the previous 2

financial years have not been included in the financial statements. It is quite clear that
the obligation requires provision for outstanding expenses as per NAS 10 and NAS
37.
As per NSA 560, "Subsequent Events" the auditor should assume that all events
occurring subsequent to the date of the financial statements and for which the
applicable financial reporting framework requires adjustment or disclosure have been
adjusted or disclosed. So, the auditor should request the management to adjust the
sum of Rs. 15 million by making provision for expenses. If the management does not
accept the request the auditor should qualify the audit report.
Answer:1(b)(ii)
Retention period of working papers: NSQC 1 (or national requirements that are at
least as demanding) requires firms to establish policies and procedures for the
retention of engagement documentation. Accordingly the firm can establish a policy
of retention period for working paper. However, NSA 230 requires that the retention
period for audit engagements ordinarily should not be shorter than five years from the
date of the auditor‟s report, or, if later, the date of the group auditor‟s report.
On the basis of above requirements of the standards it seems that the working paper
retention policy of ABC and Associates is not appropriate and hence it can be
suggested that ABC and Associates should review its policy of retention period to
meet the requirement of NSA 230.
2. Answer the following:

a) Gajakarna News Private Limited is a media house publishing a daily newspaper
named as Taja Khabar. It also publishes a monthly magazine named as World
Update covering local and international business news. The circulation
department is responsible for selling paper by means of annual subscription
(delivered by cycle boy on daily basis) and retail sales (through stationery
shops/newsstand). The annual subscription for the Taja Khabar and World Update
is Rs. 2,500 and Rs. 1,000 respectively. As on Ashadh end 2075, draft financial
statements of Gajakarna News Private Limited shows revenue of Rs. 28.20
million, receivables of Rs. 5.60 million and profit before tax of Rs. 4.80 million.
i)
The Chief Finance Officer claims that the company has been recognizing
subscription income as and when cash is realized and is trying to convince the
auditor to accept the same. Suggest the CFO about the correct accounting
treatment with regard to recognition of subscription revenue. 5
ii)
One of the advertising agency owed an amount of Rs. 350,000 at the year end.
Testing of receivables after year end highlighted that no amounts had been
paid to Gajakarna News Private Limited from this customer as they were
disputing the quality of certain advertisement published. The Chief Finance
Officer is confident that the issue will be resolved and no allowance for

receivables was made with regards to the receivable. Describe the procedures
to be followed by the audit team to resolve this issue and its impact on the
audit report if it remains unresolved. 5
b) The internal audit was carried out recently at Black Stone Inc. (P) Ltd. as a
special assignment by an audit practitioner. The draft report issued by the internal
auditor to the management includes a number of internal control weaknesses
identified during the audit. The following have been identified as critical issues:
- Generating of sales invoices, recording of sales and receipt are performed by
the same person. Therefore, there is no segregation of duties.
- There are large numbers of small items with large value and there are
inadequate physical controls to prevent threat of theft.
- Differences have been noted between the sales ledger and the general ledger
and the reason for such differences are not explained.
You are required to:
i)
Explain the importance of internal controls to an organization. 3
ii)
Discuss two importance of segregation of duties to the company. 3
iii)
State measures that management can take to ensure the
physical safeguard of inventories. 2
iv)
State the objective of arithmetical and accounting controls. 2
Answer:2(a)(i)
The subscribers pay their annual subscription fee upfront to receive a daily newspaper
and/or monthly magazine and in exchange, the company promises to deliver a new
issue every day/month for 12 months.
When a business charges money for a service they intend to deliver over a long
period of time, they will need to gauge the proportion of a service that has been
provided during the financial year in order to determine the amount of revenue that
may be recognized, possibly on a percentage basis. There are revenue
recognition rules that must be followed called deferred revenue. Deferred revenue is
income that you have received for goods or services not yet delivered. From
a financial reporting perspective, a business should be able to see at any given time
how much money it has collected from subscriber for subscription revenue, how
much of that money is still in a deferred revenue account, and how much of that
revenue has actually been recognized because the service has not been fully
delivered.
Hence, practice followed by Gajakarna News Private Limited is not correct. Revenue
should be accrued on a daily, monthly or quarterly basis depending on the level of
accuracy required. However, it must be adjusted at least in a financial year to give a
true and fair view.

Answer:2(a)(ii)
A customer of Gajakarna News Private Limited owing Rs. 350,000 at the year-end
has not made any post year-end payments as they are disputing the quality of
advertisement published. No allowance for receivables has been made against this
balance. As the balance is being disputed, there is a risk of incorrect valuation as
some or all of the receivable balance is overstated, as it may not be paid. This Rs.
350,000 receivables balance represents 1·20% (0·35/28·2m) of revenue, 6·3%
(0·35/5·6m) of receivables and 7·3% (0·35/4·8m) of profit before tax; hence this is a
material
A procedure to adopt includes:
o Review whether any payments have subsequently been made by this customer
o Discuss with management whether the issue of quality of advertisement published
to the customer has been resolved, or whether it is still in dispute.
o Review the latest customer correspondence with regards to an assessment of the
likelihood of the customer making payment.
If management refuses to provide against this receivable, the audit report will need to
be modified. As receivables are overstated and the error is material but not pervasive
a qualified opinion would be necessary.
Answer:2(b)
i) Internal controls are important:
- All the business organizations have risks (e.g. risk of fraud, risk of omissions etc.,
operational risks). When controls are implemented it reduces risks at the level of
business processes and operations.
- Controls ensure compliance with laws, regulations applicable to the entity.
- Controls reduce the risks of loss of efficiency or effectiveness in business
operations; ensure operations are conducted in accordance with organizations
policies and objectives.
- Controls ensure reliability and accuracy of financial information processed
through the entity‟s system
- Ensure assets are safeguard including information
- Fraud is prevented or detected if it occurs.
ii)
- It reduces the risks of fraud and will be able to detect errors or omissions made by
person who initiating the transactions if those are checked by another person in
the organization.
- It makes difficult for an individual to commit fraud.
iii)
- High value small items that are movable easily can be kept in lockable cabins.
- The management can have CCTV cameras to monitor stores.
- Assign a reasonable person to monitor the movement of toe items and make him
responsible for any shortage of items.
- Implement necessary requirement to obtain insurance cover.
- Frequent stock verification.

iv) The objective of controls on arithmetical and accounting records to check the
correct and accurate recording and processing of transactions. For example
reconciling sales ledger with the general ledger is an arithmetical and accounting
control and it will ensure accuracy and completeness of sales recorded in the
ledger.
3. Comment and give your views with reasons on each of the following cases:
a) XYZ & Associates had been appointed as external auditor of ABC Ltd. During
the audit, the auditor relied upon the procedures followed by the internal audit
function of the entity and expressed unmodified opinion on the financial
statements. However, later on some misstatements in the financial statements
were revealed. The auditor is seeking relief stating that the internal audit function
of the entity was liable for the negligence. Express your opinion regarding the
situation. 8
b) Mr. Kothari is dissatisfied with a Chartered Accountant and is willing to file
complain against the ICAN Member. He is asking you whether there is any
provision to do the same. What would be your advice to him? How is the case
taken by ICAN and if found guilty, what punishments might the member be
imposed? 7
Answer:3(a)
Reliance on internal Audit function: NSA 610, ―Using the work of internal auditors
clearly mentions that the external auditor has sole responsibility for the audit opinion
expressed, and that responsibility is not reduced by the external auditor„s use of the
work of the internal audit function on the engagement. Although the function may
perform audit procedures similar to those performed by the external auditor, neither
the internal audit function nor the internal auditors are independent of the entity as is
required of the external auditor in an audit of financial statements in accordance with
NSA 200.
While determining whether, in which areas, and to what extent the work of the
Internal Audit Function can be used, the auditor need to evaluate the internal audit
function. The external auditor exercises professional judgment in determining
whether the work of the internal audit function can be used for purposes of the audit,
and the nature and extent to which the work of the internal audit function can be used
in the circumstances.
The application of a systematic and disciplined approach to planning, performing,

supervising, reviewing and documenting its activities distinguishes the activities of
the internal audit function from other monitoring control activities that may be
performed within the entity. Factors that may affect the external auditor„s
determination of whether the internal audit function applies a systematic and
disciplined approach include the following:
• The existence, adequacy and use of documented internal audit procedures or
guidance covering such areas as risk assessments, work programs, documentation and
reporting, the nature and extent of which is commensurate with the size and
circumstances of an entity.
• Whether the internal audit function has appropriate quality control policies and
procedures, for example, such as those policies and procedures in NSQC that would

be applicable to an internal audit function (such as those relating to leadership, human

resources and engagement performance) or quality control requirements in standards
set by the relevant professional bodies for internal auditors. Such bodies may also
establish other appropriate requirements such as conducting periodic external quality
assessments.
Hence, in the above case, XYZ and associates were required to evaluate the internal
audit function based on above criteria during the audit. However, with regards to the
opinion expressed the full responsibility vests upon the auditor.
Answer:3(b)
Complaint against member of ICAN and possible punishments upon proved guilty of
professional misconduct: Section 34 of ICAN Act 1997 mentions that Members of
ICAN should observe the code of Conduct. The concerned person may lodge
complaint to the Institute of Chartered Accountants of Nepal against any member or
member holding Certificate of Practice for not upholding the conduct mentioned in
this Act or the Regulations framed under this Act or for violation of this Act or
Regulations framed under this Act. The person can give application showing all the
available evidence and paying a fee of Rs. 100. However, no fee is required if the
complainant is from any Government agencies or other entity where council has
waived such fee. The Executive Director shall, if he finds convincing information that
proves any member or member holding Certificate of Practice is not observing the
conduct, submit the proposal along with the related facts to the Council for further
action against such member or member holding Certificate of Practice. The council if
finds the complaints convincing, the complaint is placed in the disciplinary committee
for further discoveries and recommendation.
Pursuant to section 14 of ICAN Act, a Disciplinary Committee, comprising of

following members, shall be constituted to recommend the Council to take necessary
actions after investigation upon complaints lodged against any action, contrary to the
Chartered Accountants Act or Regulations or code of conduct framed under this Act,
rendered by any member, or the Institute receives any information of such kind.
 A FCA member designated by council from amongst elected CA council
members -Chairman
 Three persons nominated by the Council from amongst the Council members -
Member
 Two persons nominated by the Council amongst the members - Member
 One person nominated by the Auditor General - Member
The Disciplinary committee shall have the authority, similar to a judicial court, in
respect of
summoning concerned person and investigating evidences and witnesses. The
Disciplinary committee shall recommend to the Council, along with its opinion and
finding, for necessary action against a member, if found guilty, and the council may,
considering such are commendation, impose any of the following punishment
according to the degree of offence:
a. Reprimanding,

b. Removing from the membership for a period up to five years,

c. Prohibiting from carrying on the accounting profession for any particular period,
d. Cancellation of the Certificate of Practice (COP) or membership.
However, before imposing any punishment, the Council shall provide reasonable
opportunity to the concerned members to submit their clarification. The concerned
member may, if he is not satisfied with the decision file an appeal in the Appellate
Court.

a) While verifying the employees‟ records in a company, it was found that a major
portion of the labour employed was child labour. On questioning the
management, the statutory auditor was told that it was outside his scope of the
financial audit to look into the compliance with other laws. Comment. 7
b) Define Corporate Governance and explain how can audit function within an
entity improve Corporate Governance structure within the entity. (2+6=8)
Answer:4(a)
Compliance with other laws and regulations: As per NSA 250 ―Consideration of
Laws and Regulation in an Audit of financial statements, the auditor is required to
obtain sufficient appropriate audit evidence regarding the compliance with the
provisions of those laws and regulations generally recognized to have a direct impact
on the determination of material amounts and disclosures in the financial statements
including tax and labour law. For the other laws, the auditor„s responsibility is limited
to undertake specified audit procedures to help identify non-compliance with those
laws and regulations that may have a material effect on the financial statements. Non-
compliance with other laws and regulations may result in fines, litigation or other
consequences for the entity, the cost of which may need to be provided for.
In the given case, major portion of the labour employed was child labour. Auditor
should ensure the disclosure of above fact and provision of the cost of fines, litigation
or other consequences. In case auditor concludes that non-compliance may have a
material effect on financial statements, he should modify his opinion accordingly.
Answer:4(b)
Corporate Governance is the process and structure used to direct and manage the
business and affairs of the corporations with the objective of enhancing shareholder
value, which includes ensuring the financial viability of the business. The process and
structure define the division of power and establish mechanisms for achieving
accountability among shareholders, the board and management. These requirements
are well complimented by the audit functions within a company.
There are two types of audit functions within a company. One is audit committee
overlooking the internal audit and other control functions and the other one being
statutory audit. The audit committee composed of independent nonexecutives with
clear terms of reference act as a watch dog in monitoring the compliance with the
applicable laws and regulations. It acts as a mechanism to promote transparency,
accountability and control within an organization. On the other hand, the statutory
auditor plays a central role in good corporate governance by virtue of:

o audit financial statements and other (financial) reporting;

o attest internal control statements, where applicable; and
o review or attest corporate governance statements where applicable.
Accordingly, the audit functions support the best practice of good corporate
governance by
ensuring:
 Ensuring best management practices;
 Appropriate delegation of authority and responsibility;
 Compliance with the applicable laws and regulations;
 Adherence to the management policies and procedures;
 Review of internal control structures including financial, operational and
compliance controls;
 Safeguard of assets; and
 Overall transparency and accountability within an organization; and
 Timely and accurate financial reporting to the stakeholders.

a) When is forensic audit necessary? Elaborate. 8
b) State the important characteristics of an effective system of Computer Audit
Programme. 7
Answer:5(a)
Necessity of forensic audit: Forensic in laymen terms means relating to court of law
or something which can be held as an evidence in a court of law. Accordingly,
forensic audit is necessary when any fraud is alleged and such allegation is to be
proved/disproved in court of law. Mainly, Frauds are divided into following
categories which require a Forensic Audit:
 Financial Statement Fraud
 Asset Misappropriation regarding:
-Cash Receipts
-Fraudulent Disbursements
-Inventory and Other Assets
 Bribery and Corruption
 Theft of data and intellectual property
 Financial Institution Fraud
 Payment Fraud
 Insurance Fraud
 Health Care Fraud
 Consumer Fraud
 Computer & Internet Fraud
 Contract & Procurement Fraud
 Insolvency Fraud
 Securities Fraud
 Money Laundering Fraud
 Tax Fraud

Now, a Forensic Auditor in any of the above mentioned cases have to gather evidence
and give conclusion on that whether any fraud has happened or not and the same can
be challenged in a court of law so that the auditor may also have to act as an expert
witness in some of the cases. Forensic Auditors could be acting on behalf of either the
management or Government Authorities.
Answer:5(b)
Important characteristics of an effective system of computer audit program:
i. The system has to be simple to use and eliminate the need to remember countless
details normally required in writing or revising computer programs.
ii. It has to be easily understandable even by those with little computer expertise and
easy to use.
iii. It has to be capable of being used with different configuration of computers.
iv. The package has to include adequate support at the time of installation, provide
adequate training to the staff and to provide documentation. There should be a
provision for future revision of the program.
v. The package should have statistical sampling capability.
vi. The system has to be acceptable to all users in terms of easy execution and
compatible with the existing system.
vii. The program has to be capable of processing different types of applications.
viii. The program should have strong report writing function including the ability to
prepare multiple reports in a single program run and to generate flexible output
report formats.
6. Write short notes on the following: (5×3=15)

a) Performance Audit
b) Sampling Risk
c) Management Audit
d) Financial Mediation
e) Risk Based Audit
Answer:6(a)
Performance Audit: A performance audit is an objective and systematic examination
of evidence for the purpose of providing an independent assessment of the
performance of a government organization, program, activity or function in order to
provide information to improve public accountability and facilitate decision making
by parties with responsibilities to oversee or initiate corrective action. Performance
audit include economy and efficiency and program audits. OAGN has issued the
performance audit guide with technical assistance of World Bank with a view to
enhance performance auditing capability of OAGN. This guide follows the 3Es
(Economy, Efficiency and Effectiveness) principle.
Answer:6(b)
Sampling risk: “Sampling risk” arises from the possibility that the auditor‟s
conclusion, based on a sample may be different from the conclusion reached if the
entire population were subjected to the same audit procedure. There are two types of
sampling risk:

(i) The risk the auditor will conclude, in the case of a test of controls, that controls are
more effective than they actually are, or in the case of a test of details, that a material
error does not exist when in fact it does. This type of risk affects audit effectiveness
and is more likely to lead to an inappropriate audit opinion; and
(ii) The risk the auditor will conclude, in the case of a test of controls, that Controls
are less effective than they actually are, or in the case of a test of details, that a
material error exists when in fact it does not. This type of risk affects audit efficiency
as it would usually lead to additional work to establish that initial conclusions were
incorrect.
The mathematical complements of these risks are termed as confidence levels

Answer:6(c)
Management Audit: Management Audit refers to the analysis and assessment of
competencies and capabilities of a company‟s management in order to evaluate their
effectiveness, especially with regard to the strategic objectives and policies of the
business. The objective of a management audit is not to appraise individual
executive‟s performance, but to evaluate the management team in relation to their
competition.
It is a systematic assessment of methods and policies of the organization‟s
management in the administration and the use of resources, tactical and strategic
planning and employee and organizational improvement.
The objectives of management audit are

 Establish the current level of effectiveness,
 Suggest improvements and
 Lay down standards for future performance.
Answer:6(d)
Financial Mediation: Financial mediation is extrajudicial methods of resolving a
dispute between clients in which they agree to make their cases before an impartial
person or panel. The two sides employ a third party who attempts to find a common
ground that will resolve the dispute. Mediation is a less lengthy and less expensive
alternative to arbitration. Each side must agree to mediation and either side may walk
away from the process at any time. Mediation is an informal, voluntary method of
resolving disputes in which the parties in conflict meet with a trained, independent
third party to come up with a solution that is satisfactory to everyone involved.
Unlike, arbitration, mediation is non-binding, which means that if you are not happy
with the outcome, you can stop the process, and either drop the issue or move to more
formal proceedings.
Answer:6(e)
Risk Based Audit: Risk-based auditing is a style of auditing which focuses upon the
analysis and management of risk. A traditional audit would focus upon the
transactions which would make up financial statements such as the balance sheet. A
risk-based approach will seek to identify risks with the greatest potential impact.

A risk-based approach is designed to be used throughout the audit to efficiently and

effectively focus the nature, timing and extent of audit procedures to those areas that
have the most potential for causing material misstatements in the financial report.
NSA 315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment and NSA 330 The Auditor's Response
to Assessed Risks are auditing standards that specifically set out the risk based audit
approach, with other auditing standards containing specific risk-based principles and
procedures appropriate to their subject matter.
The risk-based approach requires the auditor to first understand the entity and its
environment in order to identify risks that may result in material misstatement of the
financial report. Next, the auditor performs an assessment of those risks at both the
financial report and assertion levels. The assessment involves considering a number
of focus such as the nature of the risks, relevant internal controls and the required
level of audit evidence.


Level: - CAP-III
Subject: - Advanced Audit & Assurance
Qn. 1(a) Overall performance of students was satisfactory.
Qn. 1(b) Students do not properly interpret the requirement of the question and provided
very general answer in most of the cases.
Qn. 2 (a) i) Concept of deferred revenue was not written by 60% of the students.
ii) Subsequent verification has not been written by majorityof students.
Qn. 2 (b) i) Few students were unable to write the concept of fraud & error in
segregation of duties.
ii) About 50% students have provided very generalized answers.
iii) Linkage of general ledger & sales ledger has not been explained by
majority of students.
Qn. 3 (a) Students have shown average performance.
Qn. 3 (b) Students did below average performance.
Qn. 4 (a) Most of the students were found to be lacking on ideas how to write answer of
second part of the question.
Qn. 4 (b) Most of the students attempted this question perfectly.
Qn. 5 There was lack of conceptual knowledge among students in this part.
Qn. 6 Students does average performance.

Paper 4:
Corporate Laws

Corporate Laws
Suggested
Marks
1. Answer the following questions:

a)
A newly established public limited company has appointed you as a consultant
with the specific purpose to manage the notice and meetings of the Board of
Directors. The Company has sought your clarifications to the following issues in
this regard. Clarify them in the light of the relevant provisions of the Companies
Act, 2063: 10
i)
Who should call the meeting of the Board of Directors?
ii)
Whether the Board of Directors can call the meeting of the Board?
iii)
What is the total number of meetings the Board of Directors can hold in a year?
iv)
What is the quorum required for a Board meeting?
b)
A banking company, named 'B' took approval from the Securities Board of Nepal
(SEBON) to issue the FPO of its three lakh shares at the rate of Rs. 250 per unit.
Immediately, after the approval obtained, 'B' appointed 'C' as the underwriter to
sale the shares, hence, 'B' and 'C' entered into an agreement. Accordingly, the
underwriter initiated the process to sell the shares, but only two lakh shares were
sold during the process. The Underwriter sold the unsold shares without bringing
them under his ownership. An application was filed by 'B' to the SEBON against
the activities of 'C'. SEBON appointed you as a legal consultant to provide legal
advise on the following issues. Advise SEBON to the following issues in the light
of the Securities Act, 2063. 10
i)
What legal rights and duties are available to the Underwriter? Whether the
Underwriter can sale such unsold shares to others without bringing them
under his ownership?

ii)
Is there any fine and punishment prescribed by the Securities Act against the
defaulting Underwriter? If yes, what is the amount of fine and punishment?
Answer:
a)
Section 98 of the Companies Act, 2063 provides for the Notice of meeting
of board of directors of the Company, as under:
i)
As per section 98 (1), except as otherwise provided in the articles of
association of the company, the company secretary or Chairman of the board
or chief executive of the company shall call a meeting of the board of
directors of the company.
ii)
As per Section 98(2) of the Companies Act, notwithstanding anything
contained in sub-section (1) above, if at least twenty five per cent directors
of the total number of directors make written requisition, setting out the
subject to be discussed in the meeting, for calling the meeting of the board of
directors, the Chairman shall call the meeting of the board no later than 15
days of the receipt of such requisition. If the meeting of the board of
directors is not called within that period, such requisition making directors
themselves may call the meeting of the board of directors.
iii)
The given company is a public limited company and as per Section 97 (2)
meetings of the board of directors of a public company shall be held at least
six times in a year. Provided, however, that the interval between any two
meetings shall not exceed three months.
iv)
As per section 97(4) of this Act, the quorum of the board of directors shall be
at least fifty one per cent of the total number of directors of the company.
Provided, however, that any director who is not entitled to take part in any
matter to be discussed in a meeting of the board of directors under this Act
shall not be counted for the purposes of this sub- section.
b)
i) Once the underwriting agreement is struck, the underwriter bears the risk of
being unable to sell the underlying Securities, and the cost of holding them
on its books until such time in the future that may be favorably sold. The
issuer may agree to make the underwriter the exclusive agent for the initial
sale of the Securities. That is, even though third party buyers might approach
the issuer directly to buy, the issuer agrees to sell exclusively through the
underwriter. The right regarding commission of underwriter and its
obligation for unsubscribed shares are generally mentioned in the agreement
between the issuer of Securities and the underwriter company, underwriting
agreement exposes the underwriter to substantial amount of risk. The
Securities issuer gets cash up from, access to the contracts and sales channels
of the underwriter, and is insulated from the market risk of being unable to
sell the Securities at a good price. Similarly, the underwriter gets a profit
from the markup, plus possibility an exclusive sales agreement. When

underwriting agreement is concluded it is the duty of the underwriter to take

all the unsold shares in his ownership. The underwriter cannot sale the shares
to the other without taking the same in its ownership. The underwriter is
entitled to get commission as settled between them. If underwriters violate
this it is unlawful.
ii) SEBON has the authority to make the punishment as a regulating authority.
The SEBON has to take initiatives to make the punishment to the wrongdoer.
Section five of the Act has made the provision that the license may be
suspended or cancelled.
a)
Mr. Bikash Bhattarai, a member of ICAN signed the minute of Board of Directors
of Kathmandu Microfinance. He has signed the minute in the capacity of a
Chartered Accountant. Later, the minute is questioned for its being illegal because
Mr. Bikash Bhattarai is alleged to have signed the minute book of the Board of
Directors of Kathmandu Microfinance, thus violating the code of conduct of
ICAN. Explain the power of the Disciplinary Committee in regard to investigation
against the violation of the code of conduct of ICAN pursuant to Nepal Chartered
Accountants Act, 2053. 7
b)
How does Nepal Rastra Bank (NRB) execute supervision and inspection of Banks
and Financial Institution(s)? What will be the responsibilities of such Banks and
Financial Institution(s) in the course of such supervision and inspection? 7
c)
Irrigation Department of Government of Nepal purchased Dell Laptops from Easy
Trade Pvt. Ltd. at the sum of Rs. 1,000,000. The Department had purchased the
laptops applying the force account method. Busy Suppliers Pvt. Ltd. questioned
the method and requested to cancel the procurement works regarding the
overlapping of the amount limitation. State the Procurement method on goods as
provided in the Public Procurement Act, 2063 and ensure the validity of the force
account procurement method in the above transaction. 6
Answer:
a)
The Code of Conduct issued under Nepal Chartered Accountants Act, 2053 is
binding to all the members of ICAN. Section 34 of this Act has enumerated the
various code of conducts. The following code of conducts was attractive to Mr.
Bikash Bhattarai, which he could not complied with:
(1) Members and members holding Certificate of Practice shall fully abide by
this Act and the Regulations framed under this Act.

(2) One shall not disclose or divulge any information and explanations acquired
in the course of professional service to any person other than the employer
employing him and the person whom he is compelled by the law to do so.
(3) Member holding Certificate of Practice shall, in order to truly present the
financial statement certified by him, clearly indicate all the material facts or
any false statements or explanations known to him or to the best of his
knowledge.
(4) Members holding Certificate of Practice shall discharge their duties with
due care in the course of their profession and shall draw attention of all
concerned to all material facts which are or have taken place contrary to the
prevailing law and do not comply with generally accepted principles of
auditing
(5) A member holding Certificate of Practice shall not accept his appointment
as an auditor of an organization without ascertaining that all required
procedures for appointment as the auditor under the prevailing law has been
duly fulfilled.
(6) One should have obtained sufficient information prior to giving audit
opinion.
Section 14 of Nepal Chartered Accountants Act, 2053 confers following powers

to the Disciplinary Committee of ICAN:
(1) A Disciplinary Committee shall be constituted to recommend to the Council
of ICAN to take necessary actions after investigation upon complaints
lodged against ICAN who committed action, contrary to this code of
conduct framed under this Act.
(2) The Disciplinary Committee shall have the authority, similar to a judicial
court, in respect of summoning concerned person and investigating
evidences and witnesses.
(3) The Disciplinary Committee shall recommend to the Council, along with its
opinion and finding, for necessary action against a member, if found guilty,
and the Council may, considering such a recommendation, impose any of
the following punishment according to the degree of offense:-
a. Reprimanding,
b. Removing from the membership for a period up to five years,
c. Prohibiting from carrying on the accounting profession for any particular
period,
d. Cancellation of the Certificate of Practice or membership.
b) Section 84 of Nepal Rastra Bank Ac, 2058 provides following authority and role
to NRB to conduct inspection and supervision of banks and financial institutions
and imposes certain responsibilities to such banks and financial institutions to
abide by the law, rules, regulations and institutions of NRB about the same:
(1) Pursuant to section 84(1) of NRB Act, 2058, the Board of Directors of NRB
shall frame and implement inspection and supervision bylaw confirming to
international standard for inspection and supervision of the Commercial
banks and financial institutions licensed by it.
(2) Nepal Rastra Bank my at any time inspect and supervise or cause to inspect
and supervise any of the offices of license holder institution. Such
inspection and supervision may be carried out by the deputed officials of

NRB or an expert designated by it or can do off site inspection by collecting

detailed information.
(3) It shall be the duty of the license holder institution and of the concerned
officer of license holder institution, to provide to the NRB officer doing
supervision and inspection as per sub section (2) or to the expert or Nepal
Rastra Bank as demanded by such officer or expert.
(4) Nepal Rastra Bank or officer doing inspection and supervision of any office
of the license holder institution may cause to record written statements of
any officer or employee of the licensed institution concerned in respect of
any functions and proceedings considered necessary in the course of such
inspection and supervision.
(5) If the officer carry out inspection and supervision pursuant to this section so
deems necessary in the course of such inspection and supervision, he or she
may affix his or her seal on the treasuries, records, books, ledger and other
documents of the licensed institution concerned as well as on the warehouse
pledged to it as security and cause the licensed institution concerned to hold
the same under its custody.
(6) In this course the officer doing inspection and supervision or Nepal Rastra
Bank itself can give necessary direction to license holder institution on
matters considered necessary. It is the duty of concerned license holder
institution to follow such direction given by Nepal Rastra Bank or officer
doing inspection and supervision. Information or direction so given by the
officer doing inspection and supervision should be informed to Nepal Rastra
Bank as soon as possible.
(7) The official or expert carrying out the inspection and supervision under this
section shall submit the report of the inspection and supervision he has
undertaken generally within fifteen days upon completion of his works to
the Bank. In case such report is not completed within fifteen days, the
Governor may extend the time limit for another fifteen days.
(8) the report submitted pursuant to sub-section (6) should be submitted in the
next meeting of the Board.
(9) The Board may, after making appropriate decision on matters contained in
the report submitted pursuant to sub-section (7), give appropriate directions
to the Governor about the actions to be taken in the matter. It shall be the
responsibility of the Governor to implement or cause to implement such
directions.
c) Section 8(1) of the Public Procurement Act (PPA), 2063 with amendment 2073,
has provided for the following methods of procuring any goods by any Public
Entity:
(1) By inviting open bids at international level,
(2) By inviting open bids at national level,
(3) By inviting sealed quotations,
(4) By procuring directly,
(5) Through participation of users' committee or beneficiary group,
(6) Through force account.

(7) Whole sale rate technique.

(8) Catalogue shopping technique.
(9) Limited Tendering (bid can be participated by limited bidders).
(10) Buy Back Method in which new goods purchased and old one returned to the
seller.
Regarding above force account method transaction the amount limitation is Rs.
5,00,000.00 Lakhs only. For the procurement exceeding to that amount, other
methods like sealed quotation and others could be applied. However, the
transaction limit shall be over till the amount of 20 Lakhs for procuring medicine
and till the 15 Lakhs for procuring the goods of Nepalese production. These
extra transaction limitation shall not be applied for the Dell Laptop as said
above. Therefore, the procuring of the Dell Laptop applying the force account
method of procurement is wrong under section 45 of the Public Procurement
Act, 2063 and should be canceled by the concerned authority.
a)
Mr.'X' has a saving account in a commercial bank of Nepal with the balance of
Rs. 10 Crore. There is a complaint that he has earned that amount from Hundi and
other illicit business. Mr. X's plea is that the sources of such amount are credit
amount, land selling amount, salary of father, agricultural income of joint family,
and that the evidence of such sources of amount has been provided. Now
observing the facts in issue, answer whether the Money Laundering Prevention
Act, 2063 can criminalize that amount of money as the laundered money or not?
Do you find any criminal act involved in this case? Explain. 7
b)
Discuss the provisions regarding classification of industries on the basis of size of
fixed asset and nature/sector of business as prescribed by the Industrial
Enterprises Act, 2073 and its objectives. 7
c)
A Nepalese company with its Malaysian joint venture partner has established a
separate company in Nepal. In the course of business of the joint venture company,
a dispute arose between the Malaysian and Nepalese investors and they sought
your legal advise on it. Suggest them the appropriate course of dispute resolution
under the Foreign Investment and Technology Transfer Act, 2049. 6
Answer:
a)
The Money Laundering (Prevention) Act, 2063, with its amendments, has under
section 3 criminalises the following acts as the money laundering offence:
(1) Nobody shall commit or cause to commit the following acts:
a. The conversion or transfer of property, knowing that such property is
derived from any offence for the purpose of concealing or disguising the
illicit origin of the property or of assisting any person who is involved in
the commission of such an offence or offences to evade the legal
consequences of his actions;

b. The concealment or disguise of the true nature, source, location,

disposition, movement, rights with respect to, or ownership of property
knowing that such property is derived from an offence and;
c. The acquisition, possession or use of property, knowing at the time of
receipt that such property was derived from an offence.
Section 28 of the above Act, requires an accused under this Act, to prove his
sources of property. Accordingly, in case the assets of the person sued for an
offence under this Act is found to be unnatural in comparison to his income
source or financial condition or he is living a life unnaturally high in standard or
proved to have donated, granted, gifted, provided loans, contribution or
endowment more than his capacity, he is required to prove the sources of
earnings and in case he fails to prove so he shall be deemed to have earned such
assets by committing offences under this Act. Such property not proved its
sources shall be seized.
In the given case, he has been charged for the offence of money laundering. He
has that amount of money in his bank account and claims that he would prove its
legal sources. He submits the sources of that amount like land selling amount,
salaries of the father, agricultural income and credit taken from various
individuals. On the basis of such sources of the amount deposited in the bank he
pleads that he is not an offender of an offence of money laundering. However,
the sources of fund should be thoroughly investigated under Chapters 5 and 6 of
this Act that whether the sources of amount and the documents as its evidence
submitted are fictitious or imaginary or he is concealing the illicit origin of that
property or not before reaching to any decision.
b)
Chapter-3 of the Industrial Enterprises Act, 2073 prescribes the provision
regarding classification of industries.
The Act has given continuity to the general classification of industries on the basis of:
(a) Size of fixed asset investment, and
(b) Nature/sector of business.
However, on the basis of size of fixed assets investment, the Act has newly
added "micro industries” within the classification.
Further, "Industries based on Information, Transmission and Communication
Technology" has been added as a new classification on the basis of sector of
business.
Classification of Industries on the basis of Fixed Assets
Pursuant to section 15 of this Act, for the purpose of this Act Industries have
been classified as follows:
a. Micro entrepreneur/Industries: following industries shall be considered as
micro entrepreneur/industries:
 With fixed capital up to five lakh excluding House and hand,
 Industries run by the proprietor himself
 Not exceeding nine employees including the proprietor,
 Having less than fifty lakh transactions annually, and
 In the case of using machines, equipments or electrical energy not be
more than 20 kilowatts.

However Industries mentioned under Schedule I of this Act, requiring to obtain

permission shall not be considered as Micro Industries.
b. Cottage Industries: Following industries will be considered as Cottage
industries:
 Traditional skill and technology based industries
 Labour intensive and special and skilled and based on local raw materials,
local technology and culture related industries.
 Industries which have been using engine machines or equipments, arts,
and should not have used more than 10 kilowatts of electrical energy.
 Industries prescribed under Schedule - 2 of this Act.
c. Small Industries: It refers to the industries other than micro and small
industries with fixed capital up to ten crores.
d. Medium Industries: It refers to the industries with fixed capital from more
than ten crores to the maximum 25 crores.
e. Large Industries: It refers to the industries having fixed capital of more than
twenty five crores.
Classification of above industries, on the basis of the nature of their production of
goods and services, pursuant to section 15(2)_ are as follows:
a. Energy based Industry: Industries mentioned in Schedule III of this Act.
b. Manufacturing Industry: Industries producing goods using raw materials or
semi processed raw materials or by products.
c. Agro and Forest based Industry: Industries based on agriculture or forest
based products, which are prescribed in Schedule IV of this Act.
d. Mineral Industry: Industries producing mineral product other than Metal or
Metallic mineral product through excavation or processing
e. Construction Industry: Industries prescribed under Schedule V of this Act,
which operated by creating Physical infrastructure.
f. Tourism Industry: Industries related to tourism services as prescribed in
Schedule VI of this Act,
g. Information Technology, Information Transmission and IT service based
industry: Industries as prescribed in Schedule VII of this Act,
h. Service Oriented Industry: Service production or service provider based
industries as prescribed in Schedule VIII of this Act.
Nationally prioritized industries has been listed in Schedule IX of the Act.
Government of Nepal can include any other industries in the above classification
on the recommendation of the Board.
The primary purpose of such classification appears to be the provision of fiscal
and non-fiscal incentives to be provided to the industries on the basis of their
classification. However, such an approach is likely to create problem especially
when a business in question does not fall under the category of “industries”. For
example, previously the Government of Nepal has classified "investment
business" as one of the categories of the industries and this category permitted
foreign investment in Nepal. However, as the Act has not included such industry
within the list, the DOI might take the view that foreign investment is not
allowed in investment business; unless the same is notified by the Government
of Nepal through Nepal Gazette.

c) Settlement of dispute between the Malaysian and Nepalese investors of a

company has to be legally settled under the provisions of section 7 of the
Foreign Investment and Technology Transfer Act (FITTA), 2049.
Thus section 7 of the Foreign Investment and Technology Transfer Act

(FITTA), 2049 provides that:
(1) If any dispute arises between a foreign investor, national investor and the
concerned industry, the concerned parties shall be required to settle the
dispute by mutual consultations in the presence of the Department of
Industries.
(2) If the dispute could not be settled in the manner as referred to in sub-section
(1) above, it shall be settled by arbitration in accordance with the prevailing
Arbitration Rules of the United Nations Commission on International Trade
Law (UNCITRAL) 1976 (now 2013).
(3) The arbitration shall be held in Kathmandu. The laws of Nepal shall be
applicable in the arbitration.
(4) Notwithstanding anything contained in sub-sections (1), (2) and (3) above,
disputes arising in regard to foreign investment made in the industries with
investment as prescribed may be settled as mentioned in the foreign
investment agreement.
a)
Under the Articles of Association of a Mechanical Company Ltd., the directors of
the company had power to borrow upto Rs. 5,000,000 without the consent of the
general meeting. The directors themselves lent Rs. 10,000,000 to the company
without such consent and took debentures. Is the company liable for
Rs. 10,000,000? If not, for what amount? if any, is the company liable? 8
b)
Explain the timeline for renewal of registration of Insurer. Under what
circumstances certificate of Registration of the Insurer cannot be renewed?
Answer 7
Answer:
a) This issue is related to the question whether insiders are protected as third party
for their transactions made with company exceeding their limitation on the
powers of the board of directors under the company‟s constitution. The
protection conferred on third parties does not apply fully to directors who enter
into transaction with their company. In such case the transaction is voidable at
the instance of the company under Section 103(2) of the Companies Act 2006.
In other words directors are not third party. Under Section 103(2) it is the duty
of director or officer to do such transaction within the ambit of jurisdiction
specified in the memorandum of association of the company.
The issue is related to the doctrine of indoor management. Thus the facts of this
problem are based on the case of Howard vs. Patent Ivory Manufacturing Co
(1888).In this case it was held that the directors had knowledge of the
irregularity and hence company could not be held liable for anything more than

the amount allowed to be borrowed under the Articles. Thus, in this case
company can be held liable only for Rs. 50,00,000. The protection of the rule
of indoor management cannot be claimed by one who has the knowledge of the
indoor happenings. So directors could not defend the issue which they were
lending money to the company required the assent of the general meeting which
they had not obtained.
b) Renewal of Registration of the Insurer :
It has been provided under section 11 of the Insurance Act, 2049 as under:
(1) The Insurer shall have to submit an application to the office of the Insurance
Board in the prescribed form along with the prescribed fees upto the last day
of Chaitra of each year for the renewal of the certificate of registration.
(2) Upon the receipt of the application pursuant to sub-section (1) above, the
Insurance Board shall have to renew the certificate of registration.
(3) In case any Insurer submits an application to the Insurance Board within
thirty days from the date of expiry of the time-limit pursuant to sub-section
(1) above, mentioning the reason for its failure to submit an application for
the renewal of the certificate of registration within the aforesaid time-limit,
the Insurance Board may, if it considers the reasons to be appropriate, renew
the certificate of registration of such Insurer.
Circumstance on which Certificate of Registration of the Insurer cannot be
renewed:
It has been provided under section 11A of the Insurance Act, 2049 as under:
(1) Notwithstanding anything contained in Section 11, the Insurance Board shall
not renew the certificate of registration of the Insurer in any of the following
circumstances:
(a) If the balance-sheet has not been submitted pursuant to Section 23 of this
Act,
(b) If the statement of income has not been submitted pursuant to Section 24
of this Act,
(c) If the audit report has not been submitted pursuant to Section 25 of this
Act,
(d) If the report of Actuary has not been submitted pursuant to Section 26 of
this Act,
(e) If the service-charge has not been paid pursuant to Section 40 of this
Act,
(f) If it has been prohibited to operate the Insurance Business pursuant to
Section 12A of this Act.
(2) If a circumstance has been created for not renewing the certificate of
registration of an Insurer due to any of the circumstance mentioned in sub
section (1) above, the Insurance Board shall notify the Insurer within fifteen
days from the emergence of such circumstances.
(3) If the Insurer has submitted an application to the Insurance Board within
fifteen days from the date of receiving the notice pursuant to sub-section (2)
above, stating reasonable grounds for not performing the liabilities to be
performed pursuant to Sections 23, 24, 25, 26 and 40, the Insurance Board
may, if it considers the reasons to be appropriate, provide an additional time-
limit of upto one month to perform such liabilities.
5. Answer the following questions: (3×5=15)

a) There is a company where majority of the shares are held by the Government of
Nepal. The Office of the Auditor General, due to work load, could not undertake
its audit. The Company appointed a private auditor with the consent of the Office
of the Auditor General for its auditing. Explain the procedure of the appointment
and the activities to be followed thereafter by the company and the office of the
Auditor General.
b) Rural Multiple Cooperative is in operation. It has completed its audit also. The
audit report shows that this Cooperative is in problematic situation. The
Management Committee of the Cooperative reassured to the concerned authority
that the Cooperative shall be operated within its objectives and the prevailing
legal regime. But, the concerned authority decided to go with the corrective
actions against the Cooperative. State the corrective actions as mentioned in the
Cooperatives Act, 2074.
c) Who is a foreign investor? What facilities and concessions are granted to the
foreign investors under the Foreign Investment and Technology Transfer Act,
2049? Answer.
Answer:
a) As per the Audit following are the procedures of the audit of the corporate
bodies substantially owned by the Government of Nepal:
(1) The audit of the corporate bodies substantially owned by Government of

Nepal shall be done in accordance with the prevailing laws relating to
such body.
(2) Notwithstanding anything contained in Sub-section (1), the Auditor

General shall be consulted while appointing an auditor for auditing of the
corporate bodies substantially owned by Government of Nepal.
(3) The procedures to be followed while consulting the Auditor General for
appointing auditors pursuant to Sub-section (2) and on matters to
principles of audit to be followed by the auditors during their audit shall
be as prescribed by the Auditor General.
(4) The concerned organization shall deliver at the Office of the Auditor
General a copy of the report submitted by the auditor appointed in
consultation with the Auditor General pursuant to Sub-section (2).
(5) The Auditor General may issue directives to the concerned organization
in respect of the irregularities observed in the report received pursuant to
Sub-section (4) and it shall be the duty of concerned organization to
abide by such directives.
b) The Rural Multiple Cooperatives has made its audit and the cooperative is taken
corrective action due to its audit report. The management committee, may,
pursuant to section 114 of the Cooperatives Act, 2074, take the following
corrective actions against the Cooperative association.

a. To order the Board of Directors to operate the management or perform

functions, and transact business of Cooperative.
b. To cause to operate the management or perform functions and transact
business to interim committee by constituting it from amongst the
shareholders of the concerned Association or Society.
c. To constitute or cause to constitute a new BoD from the AGM, after
dissolving the previous BOD in order to operate the management or carry
out the functions and transact business of the Association or Society.
d. To render the responsibility, to Central Sectoral Cooperatives Association
or National Cooperatives confederation, in which concerned Association or
Society has membership in such body by prescribing specific terms and
conditions, if such body is desirous to take responsibility to reoperate the
problematic cooperatives Association or Society through submitting its
reliable action plan.
e. To adopt other reformative or corrective measures as the Management
Committee deems it fit.
c) According to the Foreign Investment and Technology Transfer Act (FITTA),
2049, foreign investor is a person who makes an investment in share,
reinvestment of the earning derived from the investment share, and investment
made in the form of loan or loan facilities. Pursuant to section 2(d) of this Act,
"Foreign Investor means any individual, firm company or corporate body
involved in foreign investment or technology transfer including foreign
government or international agency.
The Act prescribes the repatriation facilities of the amount received out of
investment and visa facilities as concession to the foreign investors.
Repatriation facilities:
Pursuant to section 5 of the FITTA, 2049, a foreign investor making investment
in foreign currency will be entitled to repatriate the following amount outside of
Nepal:
a. The amount received by the sale of the share of foreign investment as a
whole or any part thereof.
b. The amount received as profit or dividend in lieu of the foreign investment.
c. The amount received as the payment of the principal of and interest on any
foreign loan.
Similarly a foreign investor will be entitled to repatriate outside of Nepal the

amount received the under an agreement for the transfer of technology in
such currency as set forth in the concerned agreement.
Visa Facilities:
Following three types of visa facilities are provided to the foreign investors:
i) Non tourist visa
ii) Business visa and
iii) Residential visa
Pursuant to section 6 of this Act, a foreign national visiting Nepal in connection
with undertaking any study or carrying out any research with the objective of
making investment in Nepal will be provided a non-tourist visa for up to six
month. Pursuant to section 6(2) of this Act, a foreign investor or dependent

family will for the purpose of stay in Nepal be provided a business visa until the
foreign investment is retained. There is a provision of residential visa under
section 6(3) of this Act, where a foreign investor or his dependent family who, at
a time makes investment in an amount no less than one hundred thousand US
dollar or in convertible foreign currency equivalent thereto, shall be granted a
residential visa until such investment is retained.
a) Under what circumstances a court can appoint Arbitrator(s)? 4
b) What are the procedures for obtaining a license to carry on foreign exchange
transactions pursuant to the Foreign Exchange Regulation Act, 2019? 3
c) What act is considered as offence in the matter of opening bank account as set
forth in the Banking Offence and Punishments Act, 2064? 3
Answer:
a) Section 7 of the Arbitration Act, 2055 provides for the appointment of
Arbitrators by the High Court as under:
(1) Any party of the Arbitral dispute may submit an application to the High
Court for the appointment of arbitrator(s) in the following circumstances:
(a) In case no arbitrator can be appointed upon following the procedure
contained in the agreement.
(b) In case the agreement does not mention anything about the appointment
of arbitrators.
(2) The application to be filed pursuant to sub-section (1) above, must explicitly
mention the full name, address, occupation and the field of specialization of
at least three persons who can be appointed as arbitrators, and also be
accompanied by a copy of the agreement.
(3) Upon receiving of an application pursuant to sub-section (1) above, the High
Court shall notify all the parties and shall appoint arbitrators from the
persons proposed by them in the case of consensus in that connection, and in
the case of fail to consensus, the persons deemed appropriate by the High
Court, within 60 days from the date of receipt of the application. The
decision taken by the court in that manner shall be final.
Pursuant to section 8 of this Act, the High Court may appoint Arbitrator(s) in
vacant posts in special circumstances subject to section 7 of this Act within 15
days.
b) The procedure for obtaining license to carry on foreign exchange transactions

are provided in section 3 of Foreign Exchange Regulation Act, 2019 as under.
1. A person, firm, company or body who intends to carry on the foreign

exchange transactions shall obtain the license from Nepal Rastra Bank
(Bank).

2. A person, firm, company or body who intends to carry on the foreign

exchange transactions shall make an application, accompanied by the details
specified by the Bank, to the Bank to obtain the license.
3. If an application is made pursuant to sub-section (1) above, the Bank shall
make necessary inquiry into the matter on the basis of the specified criteria
and may, if it considers appropriate, issue the license to the concerned
person, firm, company or body to carry on the foreign exchange
transactions. In so issuing the license, the Bank may also specify the type
and limit of the foreign exchange to be transacted, the period for carrying on
the transaction and other necessary terms.
4. The Bank may, from time to time, give necessary order or directive to the
licensee in relation to the regularization and management of the foreign
exchange transaction. It shall be the duty of the licensee to abide by such an
order or directive.
5. The licensee bank shall pay to the Bank such annual fees and deposits as
may be prescribed by the Bank. The Bank may cancel or suspend the
license of the licensee who fails to pay the annual fees and deposits so
prescribed.
6. If any person, firm, company or body applies for a provisional (Patake)
license to carry on the foreign exchange transaction, the Bank may issue the
provisional license to such a person, subject to this Section.
c) The Banking offence and Punishments Act, 2064 has prohibited unauthorized
opening of bank account.
Pursuant to section 3 of this Act, the following acts are treated as offence
regarding the opening of a bank account. It requires, while opening an account
with a bank or financial institution or demanding cash payment, no one shall
undertake the following acts:
1. Open or knowingly allow to open an account by submitting false documents,
or deposit, caused to deposit or withdraw an amount from such an account or
assist to do such acts or withdraw an amount from such account through
using electronic card or instruments.
2. Open or allow to open an account in the name of a fictitious or other person

or organization, except otherwise permitted by the laws.

Level: - CAP-III
Subject: - Corporate Law
Qn. 1 Preparation of the studnets in this part was not sufficient. Students found
to have lack of legal understanding. This was a very simple question which
students have taken as difficult to answer. . In some cases students did not
understand question properly. They have not explained provisions of the
Acts/Rules, so they have to be specific while answering questions.
Qn. 2 (a) First part was not written properly by most of the students.
Qn. 2 (b) There was less knowledge of Section 84 of NRB Act among the students,
however students have answered on the basis of assumptions.
Qn. 2 (c) Students found to have very poor preparation; since they have not gone
through the PP Act.
Qn. 3 Question no. 3(a) was attempted in general without referring the legal
provisions. Question No. 3(b) attempted without mentioning section of the Act
and same was in the case of question 3(c).
Qn. 4 Relevant legal provisions were not properly mentioned by the students. Most
of the students have not referred case laws while answering. Sub parts of
question was not responded by the students. Students found to have partial
presentation in this part. There was lack of legal provision among the
students. Requirement of question was identified by the students.
Qn. 5 In this part of question, students did average performance.
Qn. 6 (a) Very few students have given specific answer.
Qn. 6 (b) Students did average performance.

Paper 5:
Management Information and Control System

MICS
Suggested
Total No. of Questions - 6 Total No. of Printed Pages -11

Marks
1. XYZ Ltd., in the business of manufacturing and sales of Packaged Edible Oil, is
contemplating conversion to computerized system from present manual system for
recording of production, sales, inventory and accounting transactions. Your company
has been hired by XYZ Ltd. for development of computerized system. Answer the
following questions assuming that you have been assigned for system analysis.
a)
Describe any five functional areas of a system which needs to be analyzed by
system analyst for detailed investigation of the present manual system of the
organization. 10
b)
Based on the functional area of XYZ Ltd., design a template of report to show
summary of the production, sales and inventory information of the Edible Oil
products produced by the company. 10
Answer: 1(a)
Analysis of the Present System - Detailed investigation of the present system

involves collecting, organizing and evaluating facts about the system and the
environment in which it operates. Survey of existing methods, procedures, data flow,
outputs, files, input and internal controls should be intensive in order to fully
understand the present system and its related problems. There are several functional
areas, which should be studied in depth. We have discussed the following five major
functional areas:
(i) Analyze Inputs – Source documents are used to capture the originating data for
any type of the system. The system analyst should be aware of the various
sources from where the data are initially captured. He must keep in view the fact
that outputs for one area may serve as an input for another area. He must
understand the nature of each form, what is contained in it, who prepared it, from
where the form is initiated, where it is completed, the distribution of the form and
other similar considerations to determine how these inputs fit into the framework
of the present system.
(ii) Review data files – The analyst should investigate the data files maintained by
each department noting their number and size, where they are located, who uses
them and the number of times per given time interval these are used. This
information may be contained in the system and procedures manuals. He should
also review all online and off-line files which are maintained in the organization

as it will reveal information about data that are not contained in any output. The
related cost of retrieving and processing the data is another important feature to
be considered by the system analyst.
(iii)Review methods, procedures and data communication – Methods and
procedures transform input data into useful output. A procedure review is an
intensive survey of the methods by which each job is accomplished, the
equipment utilized and the actual location of the operations. Its basic objective is
to eliminate unnecessary tasks or to perceive improvement opportunities in the
present information system. The analyst must review the types of data
communication equipment including data interface, data link, modems, dial-up
and leased lines and multiplexers. He must understand how the data
communication network is used in the present system so as to identify the need to
revamp the network when the new system is installed.
(iv) Analyze Outputs - The outputs or reports should be scrutinized carefully by the
system analyst in order to determine how well they will meet the organization‟s
need. The analyst must understand what information is needed and why, who
needs it and when and where it is needed. Additional questions concerning the
sequence of the data, how often the form reporting it is used, how long it is kept
on file etc. must be investigated. Often many reports are a carry-over from earlier
days and have little relevance to current operations. Attempts should be made to
eliminate all such reports in the new systems.
(v) Review internal controls - A detailed investigation of the present information
system is not complete until internal controls are reviewed. Locating the control
points helps the analyst to visualize the essential parts and framework of a
system. An examination of internal controls may indicate weaknesses that should
be removed in the new system. The adoption of advanced methods, procedures
and equipment‟s might allow much greater control over the data.
Answer: 1(b)
Based on the functional area of XYZ Co., design a template of report to show
summary of the production, sales and inventory information of the Edible Oil
products produced by the company.
A sample template can be as shown below (the answer need not be exactly similar to
this but should show relevant information)
ABC Company Ltd.
Address 1, Address 2, City, Country
Production, Sales and Inventory Summary Report
Date:
Report of
Month:
All quantity in thousands of jars.

This
Qty. Previous Month's Closing
SN Item Produced Stock Sale Stock Remarks

1 Oil 1 100 40 120 20

2 Oil 2 200 50 190 60
3 Oil 3 150 80 200 30
4 Oil 4 90 100 180 10
5 Oil 5 30 200 230 0 Zero stock
6 Oil 5 280 30 300 10
Note:
1 Check sales report for detailed sales record.
Check inventory report for detailed inventory record including batches, dates and
2 age.
2. Suppose you are hired to develop an e-commerce website of a retail shop to sell
different items online to its customers. Based on this scenario, answer the following
questions.
a)
What different e-commerce features do you consider to develop this website? 7
b)
Do you have any plan for disaster recovery? Discuss. 7
c)
Which e-commerce category will you suggest? Why? (2+4=6)
Answer: 2(a)
The different features of e-commerce considered to develop e-commerce website are
as follows:
1. Ubiquity: The traditional business market is a physical place, access to
treatment by means of document circulation. For example, clothes and shoes are
usually directed to encourage customers to go somewhere to buy. E-commerce is
ubiquitous meaning that it is available everywhere.
2. Global Reach: E-commerce allows business transactions across national
boundaries to be more convenient and more effective as compared with the
traditional commerce. On the e-commerce businesses potential market scale is
roughly equivalent to the reach of the network. The whole world can be a
potential market.
3. Richness: Advertising and branding are an important part of commerce. E-
commerce can deliver video, audio, animation, billboards, signs and etc. It can use
rich set of media & technologies to provide information & service.
4. Interactivity: Twentieth Century electronic commerce business technology is
interactive, as they allow two-way communication between businesses and
consumers.
5. Personalization: E-commerce technology allows for personalization. Business
can be adjusted for a name, a person's interests and past purchase history,
personalized marketing message can be sent to a specific individual. The
technology also allows for customization. Merchants can change the product or
service based on user preferences, or previous behavior.

Answer: 2(b)
A Disaster Recovery Plan (DRP) is a business plan that describes how work can be
resumed quickly and effectively after a disaster. Disaster recovery planning is just
part of business continuity planning and applied to aspects of an organization that
rely on an IT infrastructure to function.
The overall idea is to develop a plan that will allow the IT department to recover
enough data and system functionality to allow a business or organization to operate -
even possibly at a minimal level.
The creation of a DRP begins with a DRP proposal to achieve upper level
management support. Then a business impact analysis (BIA) is needed to determine
which business functions are the most critical and the requirements to get the IT
components of those functions operational again after a disaster, either on-site or off-
site.
Every employee must be made aware of the DRP and when implemented, effective
communication is essential. The DRP must include a comprehensive off-site data
backup and an on/off-site recovery plan.
The biggest issue may be the sourcing of an alternate location with adequate
equipment, but there are many places where data center time and bandwidth can be
rented so these arrangements could also be included in a DRP. Some companies can
operate from just a single server so a backup machine can be kept at a remote
location and kept up to date with a regular backup of the essential data required to
operate. This would suit a small organization, but where there are more computers
and a data center involved there needs to be a more extensive plan made.
A DRP may require employees to relocate to a hot-site to resume work, if work
cannot be conducted at the normal business site. This hot-site is an off-site location
supplied with the computer equipment and data necessary to continue an
organization's normal work.
It is imperative that organizations not only develop a DRP but also test it, train
personnel and document it properly before a real disaster occurs. This is one reason
why off-site hosting of all IT services can be a good choice for the protection they
provide; in disaster situations personnel can access data easily from a new location,
whereas relocating a terminally damaged data center and getting it operational again
is not an easy job.
Often a specialized disaster recovery planning consultant is hired to assist
organizations in attending to the many details that can arise during such contingency
planning.
Answer: 2(c)
First Part: I suggest B2C (business to consumer) e-commerce. B2C (Business-to-
Customer) ecommerce is the exchange of goods or services over the internet between
online stores and individual customers. Consumer preference for the convenience of
online shopping - coupled with the ease of starting an online store - has made
ecommerce among the fastest growing sectors of the economy.
Second Part: In today‟s technology-based world, business owners have started
understanding that the old and traditional B2C business has gone down due to the
entry of ecommerce. So, all the businesses have now started adapting the modern
ways to sell through the Internet directly to the customers. B2C e-commerce offers
following benefits for both businesses and consumers.

 Direct Communication - With the help of this business, you can directly connect
with your consumers through a website. This shows the consumers that you care
for them and ultimately they would appreciate you with the fact that you provide a
good customer service.
 Business Expansion - With the help of great B2C e-commerce, you can easily
expand your business to different portions of the world. In traditional B2C
business, you can‟t reach every place due to lack of funds, approach, etc. But, here
things will reach to such a level that you could have never achieved so fast and
easily with traditional business like shops.
 Scope of Niche Marketing - In traditional business, we have got niche marketing
but here you can expand that idea. You can have more opportunities to strike and
there are more chances of succeeding in your seasonal businesses on the internet
 Cheaper Than Normal Businesses: If you plan to go and set up a shop, it‟s
going to involve quite a few expenses but in case of online business, you don‟t
require a lot of stuff. The investment is a lot less compared to any other physical
retail store. Plus, it‟s easier to set up and gain access by the consumers.
 Not only the businesses, a B2C e-commerce also carries advantages to the
customers. As a consumer, you can shop at your own convenience and time which
is the best part about B2C E-commerce business. There‟s no place or time
restriction as such. You also get to have a better customer service. Big companies
give customer satisfaction its first priority. The consumers connect directly to the
merchant who makes sure that at the end of the day you are happy as then only
you would spread the word and become a returning customer in future. With an
array of purchasing options, the prices are also less compared to the physical
stores in the conventional market.
3.
a)
What are the Information Systems classified by the specific organizational
functions they serve? Briefly describe each of the functional information systems. 8
b)
What do you mean by a Transaction Processing System (TPS)? Explain important
features of a TPS. (1+6=7)
Answer: 3(a)
Information systems can be classified by the specific organizational function they

serve as well as by organizational level. The following are the typical information
systems that support each of the major business functions and provide examples of
functional applications for each organizational level.
i) Sales and marketing information system
The sales and marketing function is responsible for selling the organization‟s
products of services. Marketing is concerned with identifying the customers for the
firm‟s products or services, determining what customers need or want, planning and
developing products and services to meet their needs, and advertising and promoting
these products and services. Sales are concerned with contacting customers, selling

the products and services, taking orders, and following up on sales. Sales and
marketing information systems support these activities.
At the strategic level, sales and marketing systems monitor trends affecting new
products and sales opportunities, support planning for new products and services,
and monitor the performance of competitors. At the management level, sales and
marketing systems support market research, advertising and promotional campaigns
and pricing decisions. They analyze sales and marketing systems, assist in locating
and contacting prospective customers, tracking sales, processing orders, and
providing customer service support.
ii) Manufacturing and production systems
The manufacturing and production function is responsible for actually producing the
firm‟s goods and services. Manufacturing and production systems deal with the
planning, development, and maintenance of production facilities; the establishment
of production goals; the acquisition, storage, and availability of production materials;
and the scheduling of equipment, facilities, materials, and labor required to fashion
finished products. Manufacturing and production information systems support these
activities. Information systems can guide the actions of machines and equipment to
help pharmaceutical and other types of firms monitor and control the manufacturing
process.
Strategic-level manufacturing systems deal with the firm‟s long-term manufacturing

goals, such as where to locate new plants or whether to invest in new manufacturing
technology. At the management level, manufacturing and production systems
analyze and monitor manufacturing and production costs and resources. Operational
manufacturing and production systems deal with the status of production tasks.
Most manufacturing and production systems use sort of inventory system. Data about
each item in inventory, such as the number of units depleted because of a shipment
or purchase or the number of units replenished by reordering or returns, are either
scanned or keyed into the system. The inventory master file contains basic data about
each item, including the unique identification code for each item, a description of the
item, the number of units on hand, the number of units on order, and the reorder
point (the number of units in inventory that triggers a decision to reorder to prevent a
stockout). Companies can estimate the number of items to reorder or they can use a
formula for calculating the least expensive quantity to reorder called the economic
order quantity. The system produces reports that give information about such things
as the number of each item available in inventory, the number of units of each item
to reorder, or items in inventory that must be replenished.
Product life cycle management (PLM) systems are one type of manufacturing and
production system that has become increasingly valuable in the automotive,
aerospace, and consumer products industries. PLM systems are based on a data
repository that organizes every piece of information that goes into making a
particular product, such as formula cards, packaging information, shipping
specifications, and patent data. Once all these data are available, companies can
select and combine the data they need to serve specific factions. The software

enables users to create a digital model of a part, a product, or a structure and make
changes to the design on the computer without having to build physical prototypes.
iii) Finance and accounting information systems
The finance function is responsible for managing the firm‟s financial assets, such as
cash, stocks, bonds, and other investments, to maximize the return on these financial
assets. The finance function is also in charge of managing the capitalization of the
firm (finding new financial assets in stocks, bonds, or other forms of debt). To
determine whether the firm is getting the best return on its investments, the finance
function must obtain a considerable amount of information from sources external to
the firm.
The accounting function is responsible for maintaining and managing the firm‟s
financial records- receipts, disbursements, depreciation, and payroll-to account for
the flow of funds in a firm.
Strategic level systems for the finance and accounting function establish long-term
investment goals for the firm and provide long- range forecasts of the firm‟s
financial performance. At the management level, information systems help managers
oversee and control the firm‟s financial resources. Operational systems in finance
and accounting keep track of a firm‟s finances through transactions such as
paychecks, payments to vendors, securities reports, and receipts.
iv) Human Resources Information Systems
The human resources function is responsible for attracting, developing, and

maintaining the firm‟s workforce. Human resources information systems support
activities, such as identifying potential employees, maintaining complete records on
existing employees, and creating programs to develop employees‟ talents and skills.
Human resources information systems reduce administrative costs, provide faster
service to employees, and help firms manage their workforce.
Answer: 3(b)
Transaction Processing System (TPS): TPS at the lowest level of management is

an information system that manipulates data from business transactions. Any
business activity such as sales, purchase, production, delivery, payments or receipts
involves transactions and these transactions are to be organized and manipulated to
generate various information products for external use. Transaction processing
system records and manipulates transaction data into usable information.
Some of the important features of a TPS are given as follows:
(i) Large volume of data: As TPS is transaction–oriented, it generally consists of

large volumes of data and thus, requires greater storage capacity. Their major
concern is to ensure that the data regarding the transaction in the organizations
are captured quickly and correctly.
(ii) Automation of basic operations: Any TPS aims at automating the basic
operations of a business enterprise and plays a critical role in the day-to-day

functioning of the enterprise. Any failure in the TPS for a short period of time
can cause havoc in the functioning of the enterprise. Thus, TPS is an important
source of up-to-date information regarding the operations in the enterprise.
(iii) Benefits are easily measurable: TPS reduces the workload of the people
associated with the operations and improves their efficiency by automating
some of the operations. Most of these benefits of the TPS are tangible and easily
measurable. Therefore, cost benefit analysis regarding the desirability of TPS is
easy to conduct. As the benefits from TPS are mainly tangible, the user
acceptance is easy to obtain.
(iv) Source of input for other systems: TPS is the basic source of internal
information for other information systems. Heavy reliance by other information
systems on TPS for this purpose makes TPS important for tactical and strategic
decisions as well.
4.
a)
Discuss Internet security. Explain the four major aspects in which the Internet
security professionals should be fluent. (3+5=8)
b)
What is ethics? What ethical issues are raised by information systems? How does
copyright and patent protect digital content? (1+2+4=7)
Answer: 4(a)
When a computer connects to a network and begins communicating with other
computers, it is essentially taking a risk. Internet security involves the protection of a
computer's Internet account and files from intrusion of an unknown user. Basic
security measures involve protection by well selected passwords, change of file
permissions and back up of computer's data.
Security concerns are in some ways peripheral to normal business working, but serve
to highlight just how important it is that business users feel confident when using IT
systems. Security will probably always be high on the IT agenda simply because
cyber criminals know that a successful attack can be very profitable. This means they
will always strive to find new ways to circumvent IT security, and users will
consequently need to be continually vigilant. Whenever decisions need to be made
about how to enhance a system, security will need to be held uppermost among its
requirements.
The four major aspects in which the internet security professional should e fluent are
as follows:
Penetration Testing
Penetration testing is a predefined step-by-step procedure to test the vulnerability of
the system. For this, the security professional should have good knowledge and
experience of conducting such testing. The thorough idea of how these tests are
performed, the steps needed and the outcomes expected of such testing is vital for
any security professional required to do such penetration testing. The professional
should also have good idea about the system being tested and its potential
weaknesses.

Intrusion Detection
Intrusion detection is the process of identifying the unlawful entry into the system or
an attempt for such entry. For timely detection of such unwanted entry, the security
professional should have good idea of the symptoms and signs of such intrusion. He
or she should also have clear idea about where to look for such symptoms and signs.
It is also necessary to have idea about the remedial action to be performed in case of
identification of such incidents.
Incidence Response
Whenever a security incidence such as a system breach, network breach, data loss or
identity theft etc happens and is reported or identified, the security personnel should
be able to respond appropriately. He should have idea about the steps or actions to be
performed for each kind of known incidents. It is good to have a good and well-
audited documentation to guide the actions to be performed in response to in
incident. For unknown incidents, the security professional should have appropriate
judgment and presence of mind to take necessary actions, consult teams, alert
management and take external help if needed.
Legal / Audit Compliance
Security incidences are related to legal provisions and actions. Hence, the security
personnel should also be aware of the existing legal provisions related to security
incidents related to information systems and related assets. The security personnel
should also regularly follow up on the findings of system audit and the issues
identified therein. Based on that the team should be able to take corrective action so
that the issues and incidents are not encountered again.
Answer: 4(b)
First Part: Ethics refers to the principle of right and wrong that individuals, acting
as free moral agents, use to make choices to guide their behaviors.
Second Part: Information systems raise new ethical questions for both individuals
and societies because they create opportunities for intense social change, and thus
threaten existing distributions of power, money, rights, and obligations. Information
technology can be used to achieve social progress, but it can also be used to commit
crimes and threaten cherished social values. The development of information
technology will produce benefits for many and costs for others. Ethical issues in
information systems have been given new urgency by the rise of Internet and
electronic commerce, unleashing new concerns about the appropriate use of customer
information, the protection of personal privacy, and the protection of intellectual
property. Other issues raised by information systems include establishing
accountability for the consequences of information systems, setting standards to
safeguard system quality that protects the safety of the individual and society, and
preserving values and institutions considered essential to the quality of life in an
information society.
Third part: Copyright is a statutory grant that protects creators of intellectual
property from having their work copied by others for any purpose during the life of
the author plus an additional 70 years after the author‟s death. For corporate-owned
works, copyright protection lasts for 95 years after their initial creation. Most
industrial nations have their own copyright laws, and there are several international
conventions and bilateral agreements through which nations coordinate and enforce
their laws. Copyright protects against copying of entire software programs or their

parts; However, the ideas behind a work are not protected, only their manifestation in
a work; A competitor can build new software that follows the same concepts without
infringing on a copyright.
A patent grants the owner an exclusive monopoly on the ideas behind an invention
for 20 years. The intent behind patent law is to ensure that inventors receive the full
financial and other rewards and yet still make widespread use of the invention
possible for those wishing to use the idea under license from the patent‟s owner. The
granting of a patent is determined by the Patent Office and relies on court rulings.
The key concepts in patent law are originality, novelty, and invention. Patent
protection is that it grants a monopoly on the underlying concepts and ideas of
software. The difficulty is passing stringent criteria for novelty and invention.
5.
a)
ABC Pvt. Ltd. has recently migrated to real-time integrated ERP System. As an
IS Auditor, advise the company as to what kinds of businesses risks it can face. 8
b)
Define information systems audit. What are the benefits of this audit? What is
CAAT? (1+3+3=7)
Answer: 5(a)
The company, ABC Pvt. Ltd. may face several new business risks when they migrate
to real-time, integrated ERP systems. These risks include the following:
1. Single point of failure – All input data of an organization and transaction

processing is within one application system.
2. Structural Changes - Significant personnel and organizational structural changes
associate with reengineering or redesigning business processes.
3. Job Role Changes - Traditional roles of users are changed to empowered-based
role. They have more chances to access enterprise information in real-time. This
point of control shifts from the back-end financial processes to the front-end
point of creation.
4. Online Real-Time – This environment requires a continuous business interaction.
This warrants the capabilities of utilizing the ERP application and responds
quickly to any problem that requires a re-entry of information (e.g., if field
personnel are unable to transmit orders from handheld terminals, customer
service staff may need the skills to enter orders into the ERP system correctly so
the production and distribution operations will not be adversely impacted).
5. Change Management - It is challenging to bring together a highly integrated
environment when different business processes have existed among business
units for long. The level of user acceptance of the system has a significant
influence on its success. Training and awareness of users is mandatory, to
understand that their actions or inaction have a direct impact upon other users
and in the performance of their day-to-day duties.
6. Distributed Computing Experience - Inexperience with implementing and
managing this kind of environment may pose significant challenges.
7. Broad System Accessibility – Increased remote access by users and outsiders and

high integration among application functions allow increased access to the

application and data.
8. Dependency on External Assistance – Organization accustomed to in-house
legacy systems may find that they have to rely on external help. Unless such
external assistance is properly managed, it could introduce an element of
security and resource management risk that may expose the organizations to a
greater risk.
9. Program Interfaces and Data Conversions–Extensive interfaces and data
conversions from legacy systems and other commercial software are necessary.
The exposures of data integrity, security and capacity requirements for ERP are
much higher.
10. Audit Expertise – Specialist expertise is required to effectively audit and control
an ERP environment. The relative complexity of ERP systems has created
specialization such that each specialist may know only a relatively small fraction
of the entire ERP‟s functionality in a particular core module, e.g. FI auditors,
who are required to audit the entire organization‟s business processes, have to
maintain a good grasp of all the core modules to function effectively.
11. Single sign on - It reduces the security administration efforts associated with
administrating web-based access to multiple systems, but simultaneously
introduces additional risks in that an incorrect assignment of access may result
in inappropriate access to multiple systems.
12. Data content quality - As enterprise applications are opened to external suppliers
and customers, the need for integrity in enterprise data becomes paramount.
13. Privacy and confidentiality - Regularity and governance issues surrounding the
increased capture and visibility of personal information, i.e. spending habits.
Answer: 5(b)
First Part: An information technology audit, or information systems audit, is an
examination of the management controls within an Information Technology (IT)
infrastructure. The evaluation of obtained evidence determines if the information
systems are safeguarding assets, maintaining data integrity, and operating
effectively to achieve the organization's goals or objectives. These reviews may
be performed in conjunction with a financial statement audit, internal audit, or
other form of attestation engagement. IT audits are also known as "automated
data processing (ADP) audits" and "computer audits". They were formerly called
"electronic data processing (EDP) audits".
Second Part: The purposes of an IT audit are to evaluate the system's internal
control design and effectiveness. This includes, but is not limited to, efficiency
and security protocols, development processes, and IT governance or oversight.
Installing controls are necessary but not sufficient to provide adequate security.
People responsible for security must consider if the controls are installed as
intended, if they are effective, or if any breach in security has occurred and if so,
what actions can be done to prevent future breaches.
The primary functions of an IT audit are to evaluate the systems that are in place
to guard an organization's information. Specifically, information technology
audits are used to evaluate the organization's ability to protect its information
assets and to properly dispense information to authorized parties. The IT audit
aims to evaluate the following:

 Will the organization's computer systems be available for the business at all
times when required? (known as availability)
 Will the information in the systems be disclosed only to authorize users?
(known as security and confidentiality)
 Will the information provided by the system always be accurate, reliable, and
timely? (measures the integrity)
Many organisations are spending large amounts of money on IT because they
recognise the tremendous benefits that IT can bring to their operations and
services. However, they need to ensure that their IT systems are reliable, secure
and not vulnerable to computer attacks.
IT audit is important because it gives assurance that the IT systems are
adequately protected, provide reliable information to users and properly managed
to achieve their intended benefits. Many users rely on IT without knowing how
the computers work. A computer error could be repeated indefinitely, causing
more extensive damage than a human mistake. IT audit could also help to reduce
risks of data tampering, data loss or leakage, service disruption, and poor
management of IT systems.
Third Part: Computer Assisted Audit Technique (CAAT) is the tool which is
used by the auditors. This tool facilitates them to make search from the
irregularities from the given data. With the help of this tool, the internal
accounting department of any firm will be able to provide more analytical results.
These tools are used throughout every business environment and also in the
industry sectors too. With the help of Computer Assisted Audit Techniques,
more forensic accounting with more analysis can be done. It‟s really a helpful
tool that helps the firm auditor to work in an efficient and productive manner.
The CAAT tool supports the forensic accounting in which larger amount can be
diverted to the analytical form and it also prompts where the tool detects the
fraud. This tool simplifies the data and in the automated form. The name of
CAATs tool is placed in almost every firm where the auditing or advance level
accounting takes place. The firm is well aware of the benefits of these tools and
also making some advancement in this tool in accordance with their need, in
return all the large raw data becomes in statistical and analytical form. It‟s a time
saving tool.
6.
Write short notes on: (53=15)
a)
Expert system
b)
Full backup vs incremental backup
c)
Sales and marketing information system
d)
Ethical hacking
e)
Audit trails

Answer:6(a)
a) Expert system
One of the most practical and widely implemented applications of artificial
intelligence in business is the development of expert systems and other
knowledge-based information systems. A knowledge based information system
(KBIS) adds a knowledge base to the major components found in other types of
computer based information systems. An expert system (ES) is a knowledge-
based information system that uses its knowledge about a specific, complex
application area to act as expert consultant for its users. Expert systems provide
answers to questions in a very specific problem area by making human like
inferences about knowledge contained in a specialized knowledge base. They
must also be able to explain their reasoning process and conclusions to a user, so
expert systems can provide decision support to end users in the form of advice
from an expert consultant in a specific problem area.
Answer: 6(b)
Full Backup vs Incremental Backup
Full Backup: A Full Backup captures all files on the disk or within the folder
selected for backup. With a full backup system, every backup generation contains
every file in the backup set. However, the amount of time and space such a
backup takes prevents it from being a realistic proposition for backing up a large
amount of data.
Incremental Backup: An Incremental Backup captures files that were created or

changed since the last backup, regardless of backup type. This is the most
economical method, as only the files that changed since the last backup are
backed up. This saves a lot of backup time and space. Normally, incremental
backup are very difficult to restore. One will have to start with recovering the last
full backup, and then recovering from every incremental backup taken since.
Answer: 6(c)
Sales and marketing information system
Sales and marketing function is responsible for selling the organization‟s
products or services. Marketing is concerned with identifying the customers for
the firm‟s products or services, determining what they need or want, planning
and developing products and services to meet their needs, and advertising and
promoting these products and services. Sales is concerned with contacting
customers, selling the products and services, taking orders, and following up on
sales. Sales and marketing information systems support sales and marketing
activities.
These information systems are arranged by organizational level. At strategic
level, these systems monitor trends affecting new products and sales
opportunities, support planning for new products and services, and monitor the
performance of competitors. At the management level, these systems support
market research, advertising and promotional campaigns, and pricing decisions;
they also analyze sales performance and the performance of the sales staff. At the
knowledge level, these systems support market analysis activities. At the
operational level, these systems assist in locating and contacting prospective

customers, tracking sales, processing orders, and providing customer service

support.
Answer: 6(d)
Ethical hacking is a process of deliberately hacking into a system in full
knowledge of the system developer or owner to find out flaws and
vulnerabilities. Software development companies may have their own internal
ethical hacking team or they can also hire external ethical hackers to find out
weaknesses, backdoors and vulnerabilities in their system or network or
datacenter environment. Because of the increasing threat posed by hacking,
system compromises and subsequent loss of data and credibility, companies are
increasingly using such services to make sure their systems and equipment are
sufficiently hardened to mitigate the threats. A whole security industry that does
activity such as VAPT (Vulnerability Assessment and Penetration Testing) of the
designated system, hardware, software or network infrastructure on an on-
demand, payed service basis. There are even individuals that do announced and
solicited hacking without any malicious intent.
In summary, ethical hacking is kind of a fire drill to make sure that the system in
question is secure and able to handle any malicious threats and attempts of
compromise.
Answer: 6(e)
Audit trails are logs that can be designed to record activity at the system,
application, and user level. When properly implemented, audit trails provide an
important detective control to help accomplish security policy objectives. Many
operating systems allow management to select the level of auditing to be
provided by the system. This determines which events will be recorded in the log.
An effective audit policy will capture all significant events without cluttering the
log with trivial activity. Audit trails can be used to support security objectives in
three ways:
(i) Detecting unauthorized access to the system,

(ii) Facilitating the reconstruction of events,
(iii) Promoting personal accountability.


Level: - CAP-III
Subject: - Management Information and Control System
Qn. 1 Most of the students have not provided specific answer to the question.
Qn. 2 (a) Most of the student answered this question.
Qn. 2 (b) Most of the student answered with their own view which was not in line
with the answer expected. not.
Qn. 2 (c) Most of the students were confused about the concept of this question.
Qn. 3 (a) Lots of students have classified MIS by hierarchy of management where
they have to classify by functional areas of organizations.
Qn. 3 (b) Lots of students have not answered this question correctly. May be students
were confused in the absence of through study. As they should have
written components of TPS (UI, DB, and Middleware) but they didn‟t
answered accordingly. Students seem to have no proper preparation & idea
about this question.
Qn. 4 Some students have not answered second part of question 4 (a) correctly. They
should have emphasized on conceptual answer.
Qn. 5 (a) Students provided very general answer. Student should focus on specific
points about risk of implementation of ERP.
Qn. 5 (b) Most of students even do not explained IS Audit Properly.
Qn. 6 (a) Students did not perform well. There was lack of conceptual knowledge.
Qn. 6 (b) There was Lack of conceptual knowledge.
Qn. 6 (c) Most of the students have answered properly.
Qn. 6 (d) Some students have confusion in hacking & ethical hacking.

Paper 6:
Advanced Taxation

Advanced Taxation
Suggested
Marks
Attempt all questions. Working notes should form part of the answer.
1. Ramro Saathi Foundation is a not for profit Company incorporated under Company
Act, 2063 for providing assistance in education field for the betterment of deprived
children. The Company has also obtained tax exemption certificate from Inland
Revenue Department. Details of its transactions for Income Year 2074/75 are given
below:
a. Donation of USD 10,000 has been received on 15 Falgun 2074 from USA.
Applicable USD rate at the date of receipt of donation is 1 USD = Rs. 103.37.
Foundation deposited the amount in USD Bank Account which remained idle in
bank account till year end. USD rate at the year end is 1 USD = Rs. 109.34.
b. Foundation has received donation of Rs. 500,000 from local cement factory for
construction of school. Rs. 600,000 was spent on construction of local community
school which was handed over to the local community. Foundation has contributed
Rs. 100,000 from its own fund.
c. Foundation also runs a school for benefit of deprived children where it charges
normal fee to general students and provides scholarships to deprived students.
During the income year, School was in loss of Rs. 1,000,000 after charging
following expenses:
i. Special scholarship of Rs. 100,000 to a student who is son of one of trustees
of the Foundation.
ii. Contribution of Rs. 50,000 to local club for maintenance of road so that its
students can reach school safely.
iii. Gift of Rs. 100,000 to the employee of the local donor.
iv. Travelling expenses of Rs. 100,000 incurred for the wife of one of the trustees
of the Foundation.
v. Repair expenses of Rs. 1,000,000 for repair of school building damaged by
earthquake.
d. Opening WDV of the Property, Plant and Equipment as per Income Tax Act is as
given below:
Block Particulars Amount (Rs.)
A Buildings 5,000,000
B Computers and Office Equipment 1,000,000
C Vehicles 5,000,000
D Other Assets 500,000
e. During the year, Foundation decided to hire vehicles for carrying school children, and
hence sold all of the vehicles for Rs. 6,000,000.

f. Foundation has received donation of Computers for school worth Rs. 600,000 on 1
Baishak 2075, which is not considered for computing the loss.
g. Foundation has received donation of ERP system for school worth Rs. 1,000,000 on 1
Shrawan 2074, which is not considered for computing the loss. Its life is 5 years.
h. Depreciation expense has not been provided for yet.
i. Foundation has opened a Fixed Deposit of Rs. 10,000,000 with a Bank on which it
received interest income of Rs. 1,020,000 after TDS of Rs. 180,000.
j. Foundation had conducted a workshop on “Best Practices for Betterment of
Educating Young Children”, where it charged Rs. 50,000 per participant. Total
numbers of participants were 100. Total expenses incurred for the workshop was Rs.
500,000. Foundation plans to utilize the surplus amount for its objectives. Foundation
also appealed for the contribution and it was able to collect total donation of Rs.
1,000,000 from the participants of the said workshop.
k. It has not deposited any advance tax except for the tax deducted at source.
Required: 20
i) Citing relevant provisions of the Income Tax Act, 2058 and Rules 2059, advise
whether Ramro Saathi Foundation is required to file tax return or not?; and
ii) Determine the Tax Liability of Ramro Saathi Foundation, including fine, interest and
penalty if the foundation intends to submit tax return, if any, on due date.
Answer:1
i) Section 96(1) of the Income Tax Act, 2058 provides that every person is required to
submit income tax return for the income year within 3 months of the end of the income
year. Further, Section 97 of the Income Tax Act, 2058 provides for exemptions from
filing of the income tax return. Section 97 of the Income Tax Act, 2058 does not exempt
tax exempt entities from filing of income tax return. Further, Rule 5ka(2) of the Income
Tax Rules, 2059 specifically provides that tax exempt entities are required to file income
tax return for getting its tax exemption certificate renewed. Hence, Ramro Saathi
Foundation is required to file income tax return.
ii) Computation of Tax Liability of Ramro Saathi Foundation
Tax Taxabale Remarks

Exempt(Rs.) (Rs.)
Particulars
Donation from USA 1,033,700 Exempt u/s 10(chha)(1)
Donation from local donor 500,000 Exempt u/s 10(chha)(1)
School Construction Cost (600,000) Non-deductible as not
related to income generation.
Income from school (1,000,000) Not exempt u/s 10(chha)(2)
as school is run with a
motive of earning income
Add : Special Scholarship to 100,000 Personal benefit to trustee
son of one of trustee
Add: Contribution to club 50,000 Non-deductible expenses as
given to a non-TEO
Add: Repair and 650,000 Repair and Improvement

Improvement Expenditure Expenditure for earthquake

reconstruction was fully
deductible until IY 2073/74
but is under the limitation of
7.5% of respective
depreciation base from IY
2074/75.
Add : Gift to Local Donor‟s 100,000 Personal expenses
employee
Add : Travelling expenses 100,000 Personal expenses
of
the wife of trustee
Add : Donation of 600,000 Taxable as related to school
Computers which generates normal fees
Add : Donation of ERP 1,000,000 from students
Less : Depreciation (825,000) Refer Below Note
Add : Gain on Sale of 1,000,000 Refer Below Note
Vehicle
Add : Interest on Fixed 0 Interest income earned by
Deposit tax exempt entity is a final
withholding income as per
Section 92 and is not
included in income as per
Section 7(3).
Add : Income from 5,000,000 Not exempt u/s 10(chha)(1)
Workshop as workshop is run with a
motive of earning income
Less : Workshop Expenses (500,000)
Donation collected at 1,000,000
Workshop
Total 1,933,700 6,275,000
Tax @ 25% 1,568,750
Fee u/s 117 for not filing 2,000
estimated return
Interest u/s 118 for non - 111,185.15 Working Note
deposit of advance tax
Total Tax Liability 1,681,935.15
Calculation of Depreciation and allowable Repair and Maintenance

Block A Block B Block C Block D Block E Remarks
Opening 5,000,000 1,000,000 5,000,000 500,000 0
WDV
Add : 1,000,000 Refer
Addition Below
during the Note
year – upto
Poush end
100%

Add :
Addition
during the
year – After
Poush but
before
Chaitra end
2/3
Add : 200,000 Refer
Addition Below
during the Note
year – After
Chaitra but
before Ashad
end 1/3
Less : 6,000,000
Disposal of
Vehicle
Closing 5,000,000 1,200,000 (1,000,000) 500,000 1,000,000
WDV Block is
zero.
Hence this
amount
treated as
profit as a
balance
charge.
Depreciation 5% 25% 20% 15% 200,000
Rate per
annum
Depreciation 250,000 300,000 0 75,000 200,000 825,000
Calculation of Interest for Non Deposit of Advance Tax

Particulars First Second Third Total
Installment Installment Installment
40% 70% 100%
627,500 1,098,125 1,568,750
Amount Deposited 0 0 0
90% of concerned 564,750 988,312.50 1,411,875
installment minus
Deposited Amount
Interest for 3 21,178.12 37,061.72 52,945.31 111,185.15
months @ 15%
2.
a)
Apeksha Community Hospital operated by Jagaran Yuba Club, a tax exempt
organization, paid interest to the Club @ 18% on a loan of Rs. 2,000,000 borrowed

on 2074/02/03 from the club and refunded the whole loan amount on 2074/12/06.
With the following relevant information, calculate the interest allowable for
deduction in the income year 2074/75. 7
Particulars Amount(Rs.)
Fees collected by the hospital 1,630,000
Salaries 740,000
Lab Expenses 60,000
Interest Earned from Fixed Deposit 71,000
Telephone Expenses 35,000
Previous Years‟ Loss 56,000
Fuel 83,000
Donation to a political party registered in Election 25,000

Commission
Interest paid to Bank 43,000
For your information, following are the days in the months of 2074/75:
Month Days Month Days
2074 Shrawan 32 2074 Magh 29
Bhadra 31 Falgun 30
Ashwin 31 Chaitra 30
Kartik 30 2075 Baishakh 31
Marga 29 Jeshtha 31
Poush 30 Ashadh 32
Total 366
b)
Rastriya Jana Party is a political party registered with Election Commission and
has the following income for the fiscal year 2074/75.
Amount (Rs.)
a. Interest on deposit received from Rastriya 200,000
Banijya Bank Ltd.
b. Membership fees received from members 340,000
c. Amount received from the canteen operated in 250,000
Kathmandu

d. Amount received from sale of office equipment 50,000

e. Dividend received from Investment 25,000
f. Motor Bike received from Mr. Ram Shrestha as a (Market value of Motor
gift to the party Bike is Rs. 125,000)
g. Rent received on letting out the ground floor of 360,000

party office
h. Interest received from other than Bank 250,000
I Donation received from FNCCI 80,000
j Amount received from sale of old newspaper 7,500
Required: 7
Calculate the tax liability of Rastriya Jana Party for the income year 2074/75.
Also mention which income is exempt from income tax.
c)
Swastik Private Limited has shareholding pattern on 1 Shrawan 2074 as
mentioned below:
Shareholder No. of Shares Share Capital
Ram Shrestha 20,000 2,000,000
Hari Adhikari 25,000 2,500,000
Prem Yadav 25,000 2,500,000
Som Saud 10,000 1,000,000
Krishna Singh 120,000 12,000,000
Total 200,000 20,000,000
Krishna Singh decides to sell all of his shares. Accordingly, he makes application
to the board of the directors for approval for the sale of his shares. Board approves
for sale of shares owned by Krishna Singh to Shyam Rawal at the rate of Rs. 150
per share on 1 Poush 2074.
Below is detail of transactions of Swastik Private Limited for the income year
2074/75:
Particulars Upto 1 Poush 2074 From 1 Poush 2074 Total
to 32 Ashadh 2075
Sales 4,500,000 15,000,000 19,500,000
Cost of Sales 2,400,000 9,000,000 11,400,000
Employee Cost 500,000 2,000,000 2,500,000
Interest Expenses 500,000 500,000 1,000,000
Total carried forward accumulated loss pertaining to last 3 income years is
Rs. 1,500,000 as on 1 Shrawan 2074 as per Income Tax Return.
Detail of Assets and Laibilites are as below:
Book Value Market Value As Book Value Market Value
As On 1 On 32 Ashadh As On 32 As On 32
Poush 2074 2075 Ashadh 2075 Ashadh 2075
Stock 500,000 400,000 1,000,000 900,000
Debtors 1,500,000 1,000,000 2,500,000 2,000,000
Creditors 1,000,000 1,000,000 1,500,000 1,500,000

Compute the Total Tax Liability of Swastik Private Limited for the income year
2074/75. 6
Answer:2(a)
According to Section 14(2), interest paid to a controlling tax exempt organization is
deductible to the extent of the amount of interest income and 50% of adjusted taxable
income before any interest items.
Inclusions Fees collected by the hospital 1,630,000
Deductions Salaries 740,000
Lab Expenses 60,000
Telephone Expenses 35,000
Previous Years‟ Loss 56,000
Fuel 83,000
Adjusted Taxable Income before interest items 656,000
50% of Adjusted Taxable Income before interest items 328,000
Interest Income 71,000
Maximum ceiling of the interest deductible 399,000
Actual interest paid 243,934.43

(2000000*18%*(32+31+31+30+29+30+29+30+6)/366
Deductible interest 243,934.43
Answer:2(b)
According to Sec. 10 (chha) of Income tax Act, 2058 amount derived by a tax-
exempt organization in the following form are exempt from income tax:
 Donation
 Gift, and/ or
 A contribution that relates directly to the objective of the organization with
or without consideration.
“Contribution that relates directly to the objectives” has not been defined and
clarified anywhere in the Act. But as per generally accepted interpretation, this
contribution may include:
 Membership fee
 Advertisement charge for the publication of a souvenir being published by
the organization.
 Fee for participation in a program run by the organization.

 Entrance fee for any program run by the organization.

The income derived by a tax-exempt organization other than a gift, donation or
contribution is taxable in hand of the organization. Such taxable income may
include:
 Interest or dividend from investment

 Profit from sale of investment
 Profit from any business activity conducted by the organization
 Profit from sale of assets.
If the tax-exempt organization provides any benefit, which is neither according to
the objective of the organization nor given in consideration of assets provided to
the organization, to a person, the benefit or tax exemption is not available to the
organization.
Computation of tax liability of Rastriya Jana Party for the income year 2074/75.
S.N. Particulars Amount

(NRs.)
A Income from Business
1 Membership fee received from members (Note 3) -
2 Amount received from the canteen operated in Kathmandu 250,000
3 Amount received from sale of office equipment 50,000
4 Gift received from Mr. Shrestha (Note 4) -
5 Rent received on letting out the ground 360,000
6 Donation received from FNCCI. (Note 4) -
7 Amount received from sale of old newspaper 7,500
8 Interest on deposit received from Rastriya Banijya Bank -
Ltd. (Note 2)
9 Interest received from other than bank 250,000
10 Dividend received from Investment (Note 2 ) -
Assessable income from Business (A) 917,500
Tax Liability 25% 229,375
Notes
1. In Section 2.dha of Income Tax Act, 2058, Political party registered in Election
Commission shall be treated as tax exempted entity even though it has not been
registered with Inland Revenue Department as a tax exempted entity.
2. Interest received on deposit from bank and dividend received from the company is
final withholding amount as per Section 92 of Income Tax Act, 2058. Hence not
required to include in the total taxable income.
3. Contribution directly related to the functions of an exempt entity with or without
expecting any returns received by the tax exempted entity shall be exempted from tax
according to Section 10 of Income Tax Act, 2058.
4. Donation & Gift received by tax exempted entity is exempt for taxation purpose.

Answer:2(c)
Note: Transactions up to 1 Poush 2074 is considered to be the transactions before

the transfer of shares of Krishna Singh and the transactions from 1 Poush 2074 to
32 Ashadh 2075 is considered to be the transactions after the transfer of shares of
Krishna Singh.
Computation the Total Tax Liability of Swastik Private Limited
Upto 1 Poush From 1 Poush Remarks
2074 2074 to 32 Ashad
2075
Sales 4,500,000 15,000,000
Less : Cost of Sales (2,400,000) (9,000,000)
Less : Employee Cost (500,000) (2,000,000)
Less: Interest (500,000) (500,000)
Expenses
Less : Loss on disposal (100,000) 0 Asset deemed to be
of Stock disposed off on date
of share transfer u/s
57
Less : Bad Debts 0 0 Not Allowed
Net Profit 1,000,000 3,500,000
Carried Forward Loss (1,500,000) 0 Balance Carried
Forward Loss not
Allowed u/s 57
Net Taxabale Profit 0 3,500,000
Income Tax @ 25% 875,000
3.
a)
Inland Revenue Department has done tax assessment of Ashok Industries Limited for
the Income Year 2072/73. Accordingly, IRD has assessed the tax amount of Rs.
50,000,000 which the management of the Company is unable to pay. Management of
the Company asks for your opinion regarding various actions that Inland Revenue
Department can take against them for recovery of the tax amount. The management
of the company also seeks your opinion whether they can pay tax on installment
basis? 5
b)
Can a statutory auditor provide taxation services to its audit client?
Explain, giving consideration to ICAN Code of Ethics. 5
Answer:3(a)
Income tax Act, 2058 has provided various measures for collection of taxes due to the
Government of Nepal. Some of the actions that Income Tax Department can take
against Ashok Industries Limited is as below –
(a) Lien Over Property of the Tax Payer u/s 104: Section 104 of the Income Tax
Act, 2058 provides that Government of Nepal will have lien over the entire
property of the person who has not paid tax. However, Government of Nepal has to
claim lien on such property and fulfil prescribed procedures.

(b) Auction of Property of the Tax Payer u/s 105: Section 105 of the Income Tax
Act, 2058 provides that Government of Nepal can auction the lien property of tax
payer who has not paid tax.
(c) Travel Ban u/s 106: Section 106 of the Income Tax Act, 2058 provides that
Government of Nepal can impose travel ban on the tax payer who has not paid tax,
and stop from leaving the country.
(d) Recovery from Liquidator u/s 108: Section 108 of the Income Tax Act, 2058
provides that Government of Nepal can recover tax amount from the liquidator of
the Company.
(e) Recovery from a person who has to pay to the Tax Payer u/s 109: Section 109
of the Income Tax Act, 2058 provides that Government of Nepal can recover tax
amount from a person who is liable to pay to tax payer who has not paid tax.
Section 110A of the Income Tax Act, 2058 provides the facility of paying tax amount
on installment basis. However, for availing the facility of paying tax on installment
basis, the tax payer has to make application to the tax officer before filing of the suit in
court u/s 111 by the Government of Nepal. In that case, tax officer can allow payment
of tax on installment.
Answer:3(b)
ICAN code of ethics emphasizes for minimizing threats and enhancing safeguards. The code of
ethics explains about self-interest threat, self-review threat, advocacy threat, familiarity threat,
and intimidation threat. Performing certain tax services creates particularly self-review and
advocacy threats. To overcome from the threats, the code of ethics prescribes some measures
for safeguarding the service of the accountant.
Thus, the code of ethics does not prohibit an accountant to provide the service of statutory
audit and taxation services to the same client.
4.
a)
Shrestha Electric Co. Ltd. has imported 10,000 Kg. different types of electronic goods
from Singapore and 7,000 Kg. goods were arrived in Birgunj Custom Office and 3,000
Kg. goods were arrived in Tribhuvan International Custom Office on Shrawan 1, 2074.
But due to shortage of funds the company could take delivery of the goods only after 90
days from Birgunj as well as Tribhuvan International Custom Office.
Required:
i)
Whether Custom Office can charge demurrage in the above cases as per Custom Act?
If yes, what would be the demurrage charge? 7
ii)
Explain who has authority to grant remission for the demurrage. 3
b)
Hanuman Trading Private Limited, a VAT registered Company, is considering for closure
of business due to continuous loss suffered by it.
Below is the detail of its assets and liabilities, and VAT receivable/payable as on
1st Baishakh 2075.

a. As per VAT return filed for Falgun 2074 on due date, it has VAT payable of Rs.
5 lacs, which it did not pay. All earlier VAT liabilities have been cleared on
time. It has not yet filed VAT return for Chaitra 2074.
b. Below is the detail of its stock and capital goods and other assets and liabilities
as on 1st Baishakh 2075:
i. Finished Goods Inventory (VAT applicable) – Rs. 10 lacs (Market Value
Rs. 5- lacs)
ii. Raw Material (VAT applicable) – Rs. 2 Lacs (Market Value Rs. 1.5 lacs)
iii. Damaged Goods (VAT applicable) – Rs. 5 lacs (Market Value Rs. 1 lacs)
iv. Plant and Machinery (VAT applicable) – Rs. 100 lacs (Market Value
Rs. 40 lacs)
v. Vehicle – 4 Wheeler (VAT applicable) – Rs. 30 lacs (Market Value Rs. 20
lacs)
vi. Vehicle – 2 Wheeler (VAT applicable) – Rs. 1 lacs (Market Value Rs. 1
lacs)
vii. Land – Rs. 2 Crores (Market Value Rs. 5 Crores)
viii. Sundry Debtors – Rs. 10 lacs (Rs. 5 lacs is bad debts)
ix. Sundry Creditors – Rs. 40 lacs (all amount payable)
x. Secured Bank Loan against Land – Rs. 5 Crores
xi. There is no sale in the month of Chaitra 2074.
In this regard, suggest management of the Company regarding
i)
Amount of VAT payable or refundable to the Company at the time of
voluntary liquidation of the Company on 1st Baishakh 2075. 5
ii)
What would be the consequences if the Company is unable to pay VAT to
the Government after voluntary liquidation? 5
Answer:4(a)
i.)
The warehouse facility is provided free of cost for 7 days of delivery of the goods
to the warehouse. Customs warehouse are mostly owned by government of Nepal.
But as per Rule 11, a person with prior permission of Government of Nepal can
establish a custom warehouse. These warehouses are called Non –government
warehouse.
The importer should pay demurrage charges if he fails to take delivery of goods stored at
the customs warehouse within the prescribed time limit. When goods are delivered to
custom warehouse for custom clearance, 7 days‟ time is allowed for storing at the
warehouse without payment of any charge. But in case the person fails to take delivery of
the goods after custom clearance within the prescribed days, it has to pay demurrage as per
the prescribed rate. It may call rent for warehouse for storing goods. No demurrage shall
be charged in the case of those goods which could not be cleared by the Customs Officer
because of confusion about the valuation, classification of goods or for other reason.
Notwithstanding anything contained in Section 72 subsection (1), if there is a reasonable
ground for remission of demurrage chargeable of any goods because of the occurrence of

any special circumstance or condition, the prescribed authority may make full or partial
remission, as prescribed.
Demurrage charge rate as per Rule 50, Annex -9 is as follows:
Days Rate NRs. Amount
NRs.
A. Birgunj Custom Office For 7,000 KG
Up to 7 days = 7 days No charge -
8 days to 30 days = 23 days NRs 0.40 per kg per day 64,400
31 days to 60 days = 30 NRs 0.60 per kg per day 126,000
Total days 90 days Total demurrage charges (A) 358,400
B. Tribhuvan International For 3,000 KG

Custom Office
Up to 7 days = 7 days No charge -
8 days to 30 days = 23 days NRs 0.60 per kg per day 41,400
31 days to 60 days = 30 NRs 1 per kg per day 90,000
Total days 90 days Total demurrage charges (B) 257,400
Grand Total (A+B) 615,800
ii.) Remission for the demurrage
If the owner of the goods has reasonable ground for the remission of the demurrage, the
owner may apply for the remission with the evidence and documents to prove the claim to
the chief of the custom office.
The Chief of the custom officers may decide in writing within the limitation granted under
Rule 51 sub rule (3) and (6) to grant remission from demurrage either partially or in full in
respect of goods to be exported or imported, in case he is satisfied that there exist specific
reasons for granting such remission.
In case of remission of the demurrage, following officers can grant remission to the
following amount.

 Up to Rs 25,000/ if non-gazetted staff is the chief of the custom office

 Up to Rs 100,000/ if third class gazetted officer is the chief of the custom office
 Up to Rs 300,000/ if First or Second class gazetted officer is the chief of the custom
office
If the chief of the custom office is satisfied that the remission should be granted over and
above the amount within his authority, the chief should write to the Director General with
his recommendation along with the relevant documents.
Upon the enquiry into the recommendation if the Director General is satisfied that either
partially or in full remission should be granted, he should approve and instruct the chief of
the custom office.
Answer:4(b)
Computation of VAT Payable on closure of Business
Particulars Amount Market VAT Remarks
(Rs.) Value (Rs.) Amount
(Rs.)
Finished Goods 1,000,000 500,000 65,000 VAT on
Market
Value
Raw Material 200,000 150,000 19,500 VAT on
Market
Value
Damaged Goods 500,000 100,000 13,000 VAT on
Market
Value
Plant and 10,000,000 4,000,000 520,000 VAT on
Machinery Market
Value
Vehicle – 4 3,000,000 2,000,000 260,000 VAT on
Wheeler Market
Value
Vehicle – 2 100,000 100,000 13,000 VAT on
Wheeler Market
Value
Land 20,000,000 50,000,000 0 Land is Not
a VAT
Applicable
Sundry Debtors 1,000,000 500,000 0 Not VAT
Applicable
Sundry Creditors 4,000,000 4,000,000 0 Not VAT
Applicable
Secured Loan 50,000,000 50,000,000 0 Not VAT
Applicable
Total VAT 890,500
payable for the
Month

Opening VAT 500,000

Payable
Fee u/s 19 for 36 (500,000/365*6*10%) 822
days @ 10% per
annum on VAT
payable of Falgun
Interest u/s 26 for (500,000/12×2×15%) 12,500
36 days @ 15%
per annum on
VAT payable of
Falgun
Total VAT 1,403,822
payable
Consequences if the Company is unable to pay VAT
Section 29B(2) of the Value Added Tax Act, 2052 provides that each of the Officers
who are in position at the time of due date of the payment or were in position within 6
months of the due date of the payment are severally and jointly responsible for
payment of such VAT amount. Hence, Officers are liable to pay VAT.
5.
a)
Bajaj Electric Company sold its products on a scheme of buy two get one free of
Laptop Computers. The Company issues VAT bill on the value of Laptop
Computers on every sale of three Laptop Computers and collects VAT
accordingly. During the tax period company sold computers having taxable value
of Rs. 5,000,000.
However, the tax officer claimed that the company has sold three Laptop
Computers on every sale, so VAT should be collected on the taxable value of three
Laptop Computers on each sale by the company. Tax office is on the contention
that the company has done under invoicing of the goods and wants to levy fine
according to Section 29 for under invoicing. Decide with brief note whether the
opinion of VAT officer is correct? 7
b)
Thamel Agro Private Limited has imported hatchery plant set at the cost of USD
100,000 FOB Germany. The goods arrived at Customs point on 10 Jestha 2075,
and Customs Agent filed Pragyapan Patra on the same date. He has submitted
transportation bill of USD 2,000 for the same, and insurance bill of Rs. 20,000.
Packing charges of USD 5,000 has also been incurred for the same. The Customs
Officer refused to accept the invoice value of the machine set stating that it is
under invoiced, and fixed transaction value of USD 125,000 on the basis of
similar machinery imported by another importer in the same month, and made
assessment on 20 Jestha 2075. Rate of Customs Duty on the said machine on 10
Jestha 2075 was 10% and 1 USD = Rs. 100, and Rate of Customs Duty on the
said machine on 20 Jestha 2075 was 15% and 1 USD = Rs. 110. Customs Officer
applied rate of 20 Jestha 2075 for USD and Custom Duty. Thamel Agro Private
Limited is not satisfied by the assessment done by the Customs Officer. Stating
the relevant provisions of the Customs Act, 2064 and Rules 2064, advise the

management of the Thamel Agro Private Limited regarding process to be

followed for correction of the same, and calculate the Total Customs Duty
payable by the company. 7
c)
Hi-Tech Appliances sells Washing Machines on installment basis. It has a scheme
of sales promotion. According to the scheme, every customer will deposit
Rs. 1,500 per month in 12 installments and out of the customers; one will receive
the television set irrespective of installments paid. During 2075 Ashwin, 2
television sets were gifted in 3rd and 5th installment payment. The tax officer
levies VAT on full amount of Television set at Rs. 18,000 but the firm had
accounted VAT collection for Rs. 4,500 and Rs. 7,500 respectively on the two
sets. Evaluate the tax officer's decision. 6
Answer:5(a)
According to Value Added Tax Act, 2052, taxable value of goods or service is
defined in Section 12 as amount received from the buyer as consideration. The
VAT manual has clarified that quantity discount can be allowed by the supplier
which will not be part of the taxable value. Likewise, Rule 24 of VAT Rule 2053
allows the registered person to distribute goods without any consideration on the
promotional scheme.
In given case, the company has received the amount of only two Laptop Computers
by giving quantity discount. This is not a case of under-invoicing and therefore, the
contention of the tax officer that the company had sold the goods by under
invoicing is not correct.
Answer:5(b)
(A) Determination of Base Date for Customs Valuation
As per section 8(1) of the Customs Act, 2064, Customs Duty will be levied on the
basis of custom duty rate prevalent on the date of filing of Pragyapan Patra at the
Customs Office except for the case where Pragyapan Patra has been filed before
arrival of the goods at the Customs Point. So, act of the Customs Officer of
assessing the Custom Duty on 20 Jestha 2075 is incorrect. Customs Duty should be
levied on the basis of Customs Duty Rate and USD Rate Prevalent on the 10 Jesth
2075, i.e. date of filing of Pragyapan Patra.
(B) Determination of Transaction Value for Customs Valuation

Section 13 of the Customs Act, 2064 provides for the process to be followed for
determination of the transaction value upon which Customs Duty is to be levied. It
clearly states that transaction value will be determined on the basis of documents
submitted by the importer. The Customs Act has given power to determine the
transaction value on the basis of similar goods only if the Customs officer has
reasonable doubt that the transaction value declared by the importer is not correct.
Here, act of Customs officer of determining transaction value on the basis of
import of similar goods by another importer is not correct. Hence, act of the
Customs Officer is not correct.

(C) Recourse to the Importer

Section 61 of the Customs Act, 2064 provides for the recourse to the assessment
done under section 13. As per section 61, if the importer is not satisfied by the
assessment done by the Customs Officer, it can file review petition to the
“Valuation Review Committee” within 15 days of the date of assessment. The
“Valuation Review Committee” will assess the case and give their decision. If the
importer is not satisfied by the decision of the “Valuation Review Committee”,
then it can again file appeal to Revenue Tribunal within 35 days as per Section 62
of the Custom Act, 2064.
(D) Determination of Customs Duty Payable by the Importer

FOB price of Machine USD 100,000 x 100 NPR 10,000,000
Transportation Cost USD 2,000 x 100 NPR 200,000
Insurance Cost 20,000
Packing Charge USD 5,000 x 100 NPR 500,000
Total Transaction Value 10,720,000
Customs Duty @ 10% Customs Duty on the date of 1,072,000
filing of Pragyapan Patra
Answer: 5(c)
Sub-section 3 of Section 12 of Value Added Tax Act, 2052 has mentioned that
Taxable value does not include the amount of discount, commission or other
similar commercial rebate granted on value in supplying goods or services.
Likewise, Sub-section 6 of Section 12 mentions that if the value of any goods or
service is found to be much lower than the prevailing market value, the taxable
value of such goods or services shall be equal to the market value. Sub-section (7)
further states that the taxable value of goods or service supplied for partial
consideration shall be equal to the market value.
VAT Manual issued by IRD has not allowed deducting any amount from taxable
value which is not certain before supplying the goods.
On the background of the above legal provisions, the VAT collection amount
shown by Hi-Tech is not a discount as per Sub-section 3 and are seemed as less
than the market value. So, in this case Hi-Tech has collected VAT on lesser
amount and, therefore, the decision of Tax Officer is correct under the prevailing
law.
6.
a)
What is transfer pricing and explain briefly about the remedy stipulated by the
Income Tax Act, 2058 against Transfer Pricing. 5

b)
Describe the mechanism for taxation on "Independent Personal Service" in the
light of Double Taxation Avoidance Agreement between the Government of Nepal
and the Government of Islamic Republic of Pakistan. 5
Answer:6(a)
Transfer pricing is an arrangement for minimizing tax liability through transactions
between two or more related persons.
As per Section 33 of the Income Tax Act, 2058 if any arrangement for tax
avoidance scheme between associated persons is made, the department may, by
notice in writing, distribute, apportion, or allocate amounts to be included or
deducted in calculating income between the persons as is necessary to reflect the
taxable income or tax payable that would have arisen for them if the transaction
had been held at arm‟s length price.
In making any adjustment, the department may re-characterize the source and type
of any income, loss, amount, or payment; or allocate costs, including head office
expenses, incurred by one person in the business.
Associated person means two or more persons or group of such persons where one
may reasonably be expected to act in accordance with the intention of the other
persons.
Answer:6(b)
The followings are the mechanism for taxation of Independent personal services
under double tax avoidance treaty:
 Income derived by a resident of a Contracting State in respect of professional

services or other activities of an independent character shall be taxable only in
that State unless he has a fixed base regularly available to him in the other
Contracting State for performing his activities or he is present in that other
State for a period or periods exceeding in the aggregate 183 days in any twelve-
month period. If he has such a fixed base or is present in that other State for the
aforesaid period or periods, the income, may be taxed in that other State but
only so much of it as is attributable to that fixed base or is derived in that other
State during the aforesaid period or periods.
 Notwithstanding the provisions of paragraph 1, income derived by a resident of
Contracting State in respect of professional services or other activities of an
independent character performed in the other Contracting State, may be taxed
in that other State if the remuneration for those services or activities is paid by
a resident of that other State or is borne by permanent or a fixed base situated
in that other State.
 The term "professional services" includes especially independent scientific,
literary, artistic, educational or teaching activities as well as the independent
activities of physicians, lawyers, engineers, architects, dentists and accountants.


Level: - CAP-III
Subject- Advanced Taxation
Qn.1 Student‟s performance was Average. No conceptual knowledge on filing

income tax return by tax exempt organization.
Qn.2 (a) Adjusted taxable income was not properly calculated or understood by most
of the students.
Qn.2 (b) Although, calculations are correct, explanations notes were not sufficient.
Qn.2 (c) Most of the student have done well, but failed to adjust the stock material.
Qn.3 (a) Most of the students have lack of knowledge of installment basis of payment
provision and proper presentation of the answer.
Qn.3 (b) There was lack of knowledge about code of ethics of ICAN regarding
providing taxation services provided by statutory auditor.
Qn.4 (a) Student performed well.
Qn.5 Students have very poor preparation and lack of conceptual understanding and
very little knowledge of provision of the Act.
Qn.6 (a) There was satisfactory level of performance by the students.
Qn.6 (b) Students performed very poor, hardly about 5 to 6 students have written
correctly. Most of the students did not even attempted part (b) of the
question.

Paper 7:
Advanced Cost and Management Accounting

Advanced Cost & Management Accounting

Suggested

Marks
Attempt all questions. Working notes should form part of the answer. Make
assumptions whenever necessary.
1. You are appointed as the first management accountant by a manufacturer of Power

Tool Company. You have been asked to supply financial result by product line to
help in marketing decision making.
The following account was produced for the year ended 16th July, 2018:
Figures in '000 Figures in '000

Sales 1,200
Cost of Goods sold:
Materials 500
Wages 300
Production expenses 150
Marketing costs 100 1,050
Net Profit 150
A statistical analysis of the figures shows the following variable element in the
cost:
%
Materials 90
Wages 80
Production expenses 60
Marketing costs 70
Below is given, as percentages, the apportionment of the sales and the variable
elements of the costs among the five products manufacture:
Products Total
A B C D E
Sales 30 15 7 28 20 100
Materials 40 20 10 20 10 100
Wages 15 25 10 25 25 100
Production expenses 30 10 10 30 20 100
Marketing costs 10 30 20 30 10 100

From the information given: 20
a. Prepare a statement for the year showing contribution by product.
b. The order of sales preference of additional orders to maximize contribution as

a percentage of sales.
c. A revised mix of the 1,200,000 sales to maximize contribution assuming that

existing sales by products can only be varied 10% either up or down.
d. A product mix to maximize contribution if manpower availability were

reduced by 10% but the product mix could be varied 20% up/down.
Answer:
a. Statement of Contribution In 000

A B C D E Total
Sales 360 180 84 336 240 1,200
Marginal Cost
Material 180 90 45 90 45 450
Wages 36 60 24 60 60 240
Production expenses 27 9 9 27 18 90
Marketing Cost 7 21 14 21 7 70
Total Marginal Cost 250 180 92 198 130 850
Contribution 110 - (8) 138 110 350
b. Statement of Ranking - Order of sales preference of additional orders

A B C D E
Contribution 110 - (8) 138 110
Sales 360 180 84 336 240
PV Ratio [ Contribution/Sales%] 30.56 - (9.52) 41.07 45.83
Ranking 3 4 - 2 1
c. Statement of Revised Sales Mix - Sales by product can only varied 10% up or down
In 000
Sales 1,200
Less,
Minimum Sales
A 324.00
B 162.00
C 75.60
D 302.40
E 216.00 1,080
Surplus 120
Rank 1 - E [ 264-216] (48.00)

Rank 2 - D [369.6-302.4] (67.20)

Surplus 4.8
Rank 3 – A 4.8 Remaining

Revised Sales Mix hence would be
A 328.80
B 162.00
C 75.60
D 369.60
E 264.00 1,200.00
d. Statement of Revised Sales Mix - when wages is a constraint and sales of each
product can only varied 20% up or down
Statement of allocation of labour
In 000
Wages 216.00
Less,
Minimum Sales Sales Wages
A 288.00 28.80
B 144.00 48.00
C 67.20 19.20
D 268.80 48.00
E 192.00 48.00 192.00
Surplus 24.00
Rank 1 – A 144.00 14.40 Using unitary method
Surplus 9.60
Rank 2 – D 53.76 (9.60) Remaining
Surplus -
Revised Sales Mix hence would be

A 432.00
B 144.00
C 67.20
D 322.56
E 192.00 1,157.76
Working Note 1:
When Sales of each product can only be varied by 10% up or down
A B C D E
Minimum Restriction 324.00 162.00 75.60 302.40 216.00
Maximum Restriction 396.00 198.00 92.40 369.60 264.00
Difference 72.00 36.00 16.80 67.20 48.00
Ranking 3 4 - 2 1

Working Note 2:
Statement of Contribution per Rs of Labour
A B C D E
Contribution 110 - (8) 138 110
Wages 36 60 24 60 60
Contribution/Rs of wages 3.06 - (0.33) 2.30 1.83
Ranking 1 4 - 2 3
Working Note 3:
Labour is a constraint and sales of product can only be varied by 20% up or
down.
A B C D E
Minimum Restriction 288.00 144.00 67.20 268.80 192.00
Maximum Restriction 432.00 216.00 100.80 403.20 288.00
Difference 144.00 72.00 33.60 134.40 96.00
Ranking 1 4 - 2 3
Working Note 4: A B C D E
% of wages to sales 10 33.33 28.57 17.86 25.00
Working Note 5:
Difference between maximum and minimum sales of D is : 134.40
Wages required if D is produced upto maximum (in 000) 24.00
Available Surplus wages (in 000) 9.6
Available surplus wages is less than the wages required. Hence D would 53.76
be produced up to the level that is permitted by wages of 9.6 thousand i.e.
when wage is 60 , sales is 336, hence when wage is 9.6, sales would be (=
336/60*9.6)
2.
a) ABC Furniture House specializes in the production of House Racks. It uses
standard costing and flexible budgets to account for the production of a new
line of Racks. For 2074-75, budgeted variable overhead at a level of 3,600
standard monthly direct labor-hours was Rs. 432,000; budgeted total overhead
at 4,000 standard monthly direct labor-hours was Rs. 1,034,000. The standard
cost allocated to each output included a total overhead rate of 120% of
standard direct labor costs. For Magh, ABC incurred total overhead of Rs.
1,207,000 and direct labor costs of Rs. 1,285,120. The direct labor price
variance was Rs. 5,120 unfavorable. The direct labor flexible-budget variance
was Rs. 35,120 unfavorable. The standard labor price was Rs. 250 per hour.
The production-volume variance was Rs. 346,000 favorable.
Required: 10
i) Compute the direct labor efficiency variance, and the spending and
efficiency variances for overhead.
ii) Describe how individual variable overhead items are controlled from day
to day.

b) Artistic Frames Pvt. Ltd. (AFPL) makes and sells artistic wooden frames for
pictures. Arjun, the finance controller, is responsible for preparing the
company‟s master budget and has accumulated the following information for
the financial year 2075/76:
Shrawan Bhadra Asoj Kartik Marga
Estimated sales unit 6,000 7,000 7,500 7,000 7,000
Selling price (Rs.) 1,400 1,400 1,550 1,550 1,550
Direct manufacturing labor- 2 2 1.5 1.5 1.5
hours/ unit
Wage/ direct manufacturing 15 15 18 18 18
labor-hour (Rs.)
In addition to wages, direct manufacturing labor-related costs include pension

contributions of Rs. 0.80 per hour, worker‟s compensation insurance of Rs.
0.15 per hour, employee medical insurance of Rs. 0.40 per hour, and Social
Security taxes. Assume that as of Shrawan 1, 2075, the Social Security tax
rates are 5% for employers and 5% for employees. The cost of employee
benefits paid by AFPL on its employees is treated as a direct manufacturing
labor cost.
The company has a labor contract that calls for a wage increase to Rs. 18 per
hour on Asoj 1, 2075. New labor-saving machinery has been installed and will
be fully operational by Asoj 1, 2075. The company expects to have 9,600
frames on hand at 2074/75 financial year end, and it has a policy of carrying
an end-of-month inventory of 100% of the following month‟s sales plus 50%
of the second following month‟s sales.
Required: 10
Prepare a production budget and a direct manufacturing labor budget for
Artistic Frames Pvt. Ltd. by month and for the first quarter of 2075/76. The
direct manufacturing labor budget should include labor-hours, and show the
details for each labor cost category.
Answer:
a)
i) Direct labor efficiency variance = Direct labor flexible-budget
variance – Direct labor price variance
= Rs. 35,120 U – Rs. 5,120 U
= Rs. 30,000 U
For calculation of overhead spending and efficiency variance we require

calculation of actual labor hour input, budgeted labor hour input, variable
overhead rate and budgeted fixed overhead which are calculated as below:
Actual input = (Actual costs – Price variance)/ Budgeted rate

= (Rs. 1,285,120 – Rs. 5,120)/ Rs. 250
= Rs. 1,280,000/ Rs. 250
= 5,120 hours
Budgeted input = (Actual costs – Price variance – Efficiency variance)/ Budgeted rate
= (Rs. 1,285,120 – Rs. 5,120 – Rs. 30,000)/ Rs. 250
= Rs. 1,250,000/ Rs. 250

= 5,000 hours
Variable overhead rate = Rs. 432,000 ÷ 3,600 hrs. = Rs. 120 per standard labor-hour
Budgeted fixed overhead = Budgeted total overhead – Budgeted variable overhead
= Rs. 1,034,000 – (4,000 hrs. × Rs. 120)
= Rs. 554,000
Fixed Overhead rate = Rs.554,000/4,000 = Rs.138.5 per labor hour
Total overheads rate = Rs.120 + 138.5 = Rs.258.5 per labor hour
Now,
Overhead spending variance
= Actual overhead – {Budgeted fixed overhead + (Actual input × Variable overhead
rate)}
= Rs. 1,207,000 – {Rs. 554,000 + (5,120 hrs. × Rs. 120)}
= Rs. 1,207,000 – {Rs. 554,000 + Rs. 614,400)
= Rs. 38,600 U
Overhead efficiency variance

= (Budgeted hours for actual production - Actual hours for actual production) ×
overhead rate per hour
= (5,000 hrs. -5,120 hrs.) × Rs.258.5
= Rs.31,020 U
ii) The control of variable manufacturing overhead requires the identification of the cost
drivers for such items as energy, supplies, equipment, and maintenance. Control often
entails monitoring nonfinancial measures that affect each cost item, one by one.
Examples are kilowatts used, quantities of lubricants used, and equipment parts and
hours used. The most convincing way to discover why overhead performance did not
agree with a budget is to investigate possible causes, line item by line item.
b)
Artistic Frames Pvt. Ltd.
Budget for Production and Direct Manufacturing Labor
for the Quarter Ended Asoj 31, 2075
Particulars Shrawan Bhadra Asoj Quarter
Budgeted sales (units) 6,000 7,000 7,500 20,500
Add: ending finished goods inventory (units) 10,750 11,000 10,500 10,500
Total requirements (units) 16,750 18,000 18,000 31,000
Less: opening finished goods inventory (units) 9,600 10,750 11,000 9,600
Units to be produced 7,150 7,250 7,000 21,400
Direct mfg. labor-hours (DMLH) per unit ×2 ×2 × 1.5
Total hours of direct mfg. labor time needed 14,300 14,500 10,500 39,300
Direct wages (@ Rs. 15, 15, 18 per DMLH) 214,500 217,500 189,000 621,000
Pension contributions (@ Rs. 0.80 per DMLH) 11,440 11,600 8,400 31,440
Workers‟ compensation insurance (@ Rs. 0.15 2,145 2,175 1,575 5,895
per DMLH)
Employee medical insurance (@ Rs. 0.40 per 5,720 5,800 4,200 15,720
DMLH)
Social Security tax (employer‟s share) (@5% 10,725 10,875 9,450 31,050
per DMLH rate)
Total direct manufacturing labor costs 244,530 247,950 212,625 705,105

3.
a) (7+3=10)
i) A manufacturer of a certain component has the following estimates of the
demand for its product.
Period: 1 2 3 4
Demand: 50 70 85 75
The regular production capacity for each period is 60 units while with
overtime working, an additional of upto 20 units can be produced in each
period. The unit cost of production in regular time is worked out to be Rs.
6 whereas it would cost Rs. 10 per unit for the items manufactured during
overtime. You may assume that the costs would be identical in all the
periods. Any production in excess of the requirement in the current period
may be held at a cost of Rs. 3 per unit per period. No holding cost is
involved if a unit is sold in the period in which it is produced.
Formulate the problem as a transportation problem. (Do not solve it).
ii) Obtain the initial feasible solution to the following transportation problem
by North West Corner (NW) Rule.
Destination (Market)
Factory i ii iii iv Suppl
A 7 3 8 6 y 60
B 4 2 5 1 100
C 2 6 5 10 40
Deman 2 5 5 8 200
d 0 0 0 0
Note: Numbers in the table are cost of transporting 1 unit from factory to
destination.
b) The following table shows for each activity needed to complete the project the
normal time, the shortest time in which the activity can be completed of a
building contract and the cost per day for reducing the time of each activity.
The contract includes a penalty clause of Rs. 100 per day over 17 days. The
overhead cost per day is Rs. 160. (4+6=10)
Activity Normal Shortest Cost of
time in time in reduction per
days days day (Rs.)
1-2 6 4 80
1-3 8 4 90
1-4 5 3 30
2-4 3 3 0
2-5 5 3 40
3-6 12 8 200
4-6 8 5 50
5-6 6 6 0

The cost of completing the eight activities in normal time is Rs. 6,500.
a. Calculate the normal duration of the project and the critical path.
b. Calculate
i) The lowest cost and associated time
ii) The shortest time and associated cost
Answer:
a) (1)
Period [ Destination]
Production/Origin 1 2 3 4 Dummy Supply
Regular time (R1) 6 9 12 15 0 60
Over time (OT1) 10 13 16 19 0 20
Regular time (R2) ∞ 6 9 12 0 60
Over time (OT2) ∞ 10 13 16 0 20
Regular time (R3) ∞ ∞ 6 9 0 60
Over time (OT3) ∞ ∞ 10 13 0 20
Regular time (R4) ∞ ∞ ∞ 6 0 60
Over time (OT4) ∞ ∞ ∞ 10 0 20
50 70 85 75 40 320
The cost element in each cell are determined by adding the production cost (Rs 6 or Rs 10
depending upon whether the production is in regular period or in overtime) and the
holding cost (equal to Rs 3 per unit each period). And since the output of any period
cannot be used in a period preceding it, the cost element ∞ is written in the appropriate
cells. A dummy column is also required since the supply exceeds demand.
Ans 3A (2)
Step Step Step Step Stem
i ii iii iv Supply 1 2 3 4 5
7 3 8 6
A 60 40 0 NA NA
20 40
4 2 5 10
B 100 100 100 90 40 0
10 50 40
2 6 5 1
C 40 40 40 40 40 0
40
Demand 20 50 50 80
Step 1 0 50 50 80
Step 2 NA 10 50 80
Step 3 NA 0 50 80
Step 4 NA NA 0 80
Step 5 NA NA 0 0
The initial feasible solution as per NW Corner Method is

A – i – 20 Units @ 7 = Rs 140
A – ii – 40 Units @ 3 = Rs 120
B – ii – 10 Units @ 2 = Rs 20
B – iii – 50 Units @ 5 = Rs 250

B – iv – 40 Units @ 10 – Rs 400
C – iv – 40 Units @ 1 = Rs 40
Total Cost = Rs 970
b) The network depicting the normal and crash time as well as the cost of reducing each
activity per day is as follows:
3
12(8)
8(4) 90 200
6(4) 5(3) 6(6) 6

1 2 5
80 40 0
5(3) 0 3(3)
8(5)
30 50
4
The network depicting crashing
3 9
4 10, 11, 12 (8)
5,6,7,8 (4) 90 200
4 3
5 (4) 4,5 (3) 6(6) 7
1 2 5
80 40 0
5(3) 3(3) 5
0 7,8 (5)
30 50
6
From the network, we can determine the normal duration by the length of the critical
path using normal activity times. The minimum duration of the project is given by the
length of the critical path based on the crash times as shown here:
Paths Normal Length Crash Length

1-3-6 20 (Critical) 12
1-4-6 13 8
1-2-4-6 17 12
1-2-5-6 17 13 (Critical)
Hence, the project can be crashed from 20 days to 13 days. Cost of crashing project
from 20 days up to 13 days one day at a time is depicted below:

Option
Cost of Cum.
Crash having Cost of
Crash Sele reductio cost of
days Paths min. cost Activities reduction
No ction n per reducti
from - to of per day
day on
reduction
Crash 1 20 to 19 1-3-6 1 1-3 90 1-3 90 90
Crash 2 19 to 18 1-3-6 1 1-3 90 1-3 90 180
Crash 3 18 to 17 1-3-6 1 1-3 90 1-3 90 270

1-3-6; 1 1-3 90 1-3;
Crash 4 17 to 16 1-2-4-6; 170 440
1-2
1-2-5-6 2 1-2 80
1-3-6; 1 3-6 200
3-6;
Crash 5 16 to 15 1-2-4-6; 280 720
1-2
1-2-5-6 2 1-2 80
1-3-6; 1 3-6 200 3-6;
Crash 6 15 to 14 1-2-4-6; 2-5 and 4- 2-5 290 1010
1-2-5-6 2 6 90 4-6
1-3-6; 1 3-6 200 3-6;
Crash 7 14 to 13 1-2-4-6; 2-5 and 4- 2-5 290 1300
1-2-5-6 2 6 90 4-6
Finally, the Statement of Total Cost at each duration

Project
Direct Cost [A] Indirect Cost [B] Total
duration
Cost
Days Normal Crashing Total Overhead Penalty Total
20 6,500 0 6,500 3200 300 3500 10,000
19 6,500 90 6,590 3040 200 3240 9,830
18 6,500 180 6,680 2880 100 2980 9,660
17 6,500 270 6,770 2720 2720 9,490
16 6,500 440 6,940 2560 2560 9,500
15 6,500 720 7,220 2400 2400 9,620
14 6,500 1010 7,510 2240 2240 9,750
13 6,500 1300 7,800 2080 2080 9,880
Answer:
i) Lowest and associated time is Rs 9,490 and 17 days
respectively.
ii) The shortest time and associated cost is 13 days and Rs 9,880
respectively.
4.
a) Ramen Co. Ltd. produces four products, viz A, B, C & D. The data relating to
production activities are as under:

Material Direct Direct labor

Quantity of cost/unit labour Machine cost/unit Rs.
Product production in Rs. hours/unit hours/units
A 1,000 10 1 0.5 6
B 10,000 10 1 0.5 6
C 1,200 32 4 2 24
D 14,000 34 3 3 18
Production overheads are as follows:

a. Overhead applicable to machine oriented activity : Rs.149,700
b. Overheads relating to ordering material :
Rs.7,680
c. Set up cost :
Rs.17,400
d. Administration overheads for spare parts :
Rs.34,380
e. Material handling cost :
Rs.30,294
Following further information have been compiled:

No. of No. of material No. of times No of spare
Product set ups orders materials handled parts
A 3 3 6 6
B 18 12 30 15
C 5 3 9 3
D 24 12 36 12
Required: (2+4+2=8)
i) Select suitable cost driver for each items of overhead expenses and find
out overhead per cost driver.
ii) Calculate the overhead cost of per unit of the products.
iii) Using the concept of activity based costing, compute the factory cost per
unit of each product.
b) You obtained permit to run a luxury micro bus on a route 20 km long. The
luxury micro bus costs you Rs. 6,000,000. It has been insured @ 1 % p.a. and
annual tax will be Rs. 10,000. Garage rent is Rs. 10,000 per month. Annual
repair and maintenance cost will be Rs. 10,000 and bus is likely to last for 5
years with scrap value of Rs. 1,000,000.
Drivers salary will be Rs. 20,000 per month and conductor‟s Rs. 15,000
together with 10% of the takings as commission (to be shared equally by
both). Stationery will cost Rs. 6,000 per month the manager-cum-accountant‟s
salary will be Rs. 18,000 per month.

Diesel and oil be Rs. 6,000 per hundred kilometers. The bus will make 3 round
trips for carrying on the average 40 passengers on each trip. Assuming 15%
profit on takings. The bus will work on the average 25 days in a month.
Salary is payable for 12 months only. Taking is considered total operating

cost.
Required: 7
i) Calculate bus fare per passenger KM.

ii) Calculate the fare to be charged from each passengers for one way
route.
Answer:
a) Working Note 1:
Product Quantity of production Hours/unit Total Hours

A 1000 0.5 500
B 10000 0.5 5,000
C 1200 2 2,400
D 14000 3 42,000
Total 49,900
i. overhead per cost driver
Cost
overhead per Driver
Overhead cost cost driver cost driver unit
Cost drivers Rs. units in Rs.
Machine related Machine
costs 149,700 49,900 3 hour
Material ordering No. of
costs 7,680 30 256 order
No of set
set up costs 17,400 50 348 up
No of
spare parts 34,380 36 955 spare parts
No of
Material
material handling 30,294 81 374 Handel
ii. Overhead cost of Per unit of the products

Material
Machine ordering Material No. of
related cost costs @ Set up costs Spare parts handling Total units Overhead
Product @ Rs.3 Rs.256 @ Rs.348 @ 955 @ Rs.374 Overhead produced / unit
A 1000

1,500 768 1,044 5,730 2,244 11,286 11.29
B 15,000 3,072 6,264 14,325 11,220 49,881 10000 4.99
C 7,200 768 1,740 2,865 3,366 15,939 1200 13.28
D 126,000 3,072 8,352 11,460 13,464 162,348 14000 11.60
iii. Total Factory cost per unit:

(Rs.)
Direct
Product Material labor Overhead Total
A 10 6 11.29 27.3
B 10 6 4.99 21.0
C 32 24 13.28 69.3
D 34 18 11.60 63.6
b)
I. Operating Cost Statement with fare per passenger KM
Per passenger km.

Particulars Per annum ( Rs.)
A Standing Charges:
Depreciation (60,00,000-
10,00,000)/5 1,000,000.00
Tax 10,000.00
Insurance 60,000.00
Stationery 72,000.00
Managers Salary 216,000.00
Total 1,358,000.00 0.94
B Garage Rent 120,000.00

Repairs 10,000.00
Total 130,000.00 0.09
C Operating or Running Charges:

Diesel and Oil 2,160,000.00
Drivers Salary 240,000.00
Conductor's Salary 180,000.00
Total 2,580,000.00 1.79
Grand Total 4,068,000.00 2.83
Loading @ 25/75 0.94
Fare per passenger- KM 3.77

II. Fare per route:

Distance per route : 20 KMs
Fare per passenger per route = 3.77* 20 = Rs. 75.33
Working Note:
1 Number of KMs run in a month 3*2*20kms*25 = 3,000 KMs
2 Number of KMs run in a year 3,000* 12=36,000 KMs
3 Diesel & Oil 36,000*6,000/100 = Rs.21,60,000 p.a.
Number of passengers-kms per
4 month 3,000*40 = 120,000 passenger km
Number of passengers-kms per year 120,000* 12 = 14,40,000 passengers km
5 loading of extra charges : 10% for commission and 15% for profit = 25% of taking
5. Write short notes/Distinguish between: (5×3=15)

a) Lean production
b) Absolute profitability and relative profitability
c) Limitations of value chain analysis
d) Internal failure cost and external failure cost of quality
e) Conditions for use of simulation
Answer:
a) Lean Production is a management approach that organizes resources such as people

and machines around the flow of business processes and that only produces units in
response to customer orders. It is often called just-in-time production (or JIT) because
products are only manufactured in response to customer orders and they are
completed just-in-time to be shipped to customers. Lean thinking differs from
traditional manufacturing methods, which organize work departmentally and
encourage those departments to maximize their output even if it exceeds customer
demand and increases inventories. Because lean thinking only allows production in
response to customer orders, the number of units produced tends to equal the number
of units sold, thereby resulting in minimal inventory. The lean approach also results in
fewer defects, less wasted effort, and quicker customer response times than traditional
production methods.
b) Absolute profitability is the impact on the organization‟s overall profits of adding or
dropping a particular segment such as a product or customer, without making any
other changes. A segment is considered profitable in an absolute sense if dropping it
would result in lower overall profits. Absolute profitability is measured by the
segment‟s incremental profit, which is the difference between the revenues from the
segment and the costs that could be avoided by dropping the segment.
Relative profitability is the ranking of products, customers, or other business
segments for the purposes of making trade-offs among segments. Such rankings are
necessary only if a constraint forces the organization to make trade-offs among
segments. To appropriately measure relative profitability, three things must be known.
First, the constraint must be identified. Second, the incremental profit associated with

each segment must be computed. Third, the amount of the constrained resource
required by each segment must be determined. Thus the profitability index is
calculated, which is the incremental profit from the segment divided by the amount of
the constrained resource required by the segment.
c) Value chain analysis is a powerful tool for managers to identify the key activities
within the firm which form the value chain for that organisation, and have the
potential of a sustainable competitive advantage for a company. Therein, competitive
advantage of an organisation lies in its ability to perform crucial activities along the
value chain better than its competitors. The major limitations of VCA are:
1. Availability of data: Multiple-period data for long term strategic decision-making,
changes in cost structures, capital investments and market prices may not be
immediately available.
2. Ascertainment of revenues, costs and assets: Identification of relevant revenues,
costs, and assets for each value chain activity is difficult; much work is done through
trial-and-error and experimentation methods.
3. Identification of cost drivers: Identification of cost drivers for value–creating
activities and value chain linkages across activities present serious challenges.
4. Identification of stages: Identification of stages in an industry‟s value chain is
affected by the ability to locate at least one company department that participates in a
specific stage.
5. Resistance from employees: Value chain analysis involving strategic partners
outside the company may face resistance from employees.
d) Internal failure costs are incurred because products and services do not conform to
specifications or customer needs. This nonconformance is detected prior to being
shipped or delivered to outside parties. These are the failures detected by appraisal
activities. Examples of internal failure costs are scrap, rework, downtime (due to
defects), re-inspection, re-testing, and design changes. These costs disappear if no
defects exist.
External failure costs are incurred because products and services fail to conform to
requirements or satisfy customer needs after being delivered to customers. Of all the
costs of quality, this category can be the most devastating. Costs of recalls, for
example, can run into the hundreds of millions. Other examples include lost sales
because of poor product performance, returns and allowances because of poor quality,
warranties, repair, product liability, customer dissatisfaction, lost market share, and
complaint adjustment. External failure costs, like internal failure costs, disappear if no
defects exist.
e) Simulation is the process of building, testing and operating models of real-world
phenomena through the use of mathematical relationship that exist among critical
factors. This technique is useful for solving complex problems that cannot be readily
solved by other techniques. It can be conducted by using physical model and
mathematical model. Following are some conditions where simulation is used:
 Design variables are stochastic;
 Accumulative effect of dynamic system are critical rather than the typical effects;
 Problem or system is complex;
 Solution may not be generalized;
 Total system behavior is divisible into events whose individual behavior can be
predicted or described.
6.
a) Define sustainability accounting and elaborate the role of the management
accountant in sustainability accounting. 5

b) Navin Engineering manufactures water testing equipment. It also installs the

equipment at customers' sites and ensures that it functions smoothly.
Additional information on the year's manufacturing and installation is as
follows:
Equipment Manufactured
Equipment Installed
Annual capacity 400 units
250 units
Equipment manufactured
and installed 250 units
250 units
Navin manufactures only 250 units per year because of enough capacity to
install 250 units. The equipment sells (installed) for Rs. 60,000 per unit and
has direct material costs of Rs. 35,000. All costs other than direct material
costs are fixed.
Required: 5
i) Navin's engineers have found a way to reduce equipment manufacturing

time. The new method would cost an additional Rs. 6,000 per unit and
would allow Navin to manufacture 20 additional units a year. Should
Navin implement the new method?
ii) Navin's designers have proposed a change in direct materials that would
increase direct material costs by Rs. 3,000 per unit. This change would
enable Navin to install 280 units of equipment each year. If Navin makes
the change, it will implement the new design on all equipment sold.
Should Navin use the new design? Show your calculations.
Answer:
a) The term „sustainability accounting' encompasses a range of new accounting and

reporting tools and approaches which are part of a transition towards a different kind
of organisational decision-making, focused not just on economic rationality, but
consistent with ecological and social sustainability.
The role of the management accountant in sustainability accounting includes:

i) Producing public reports of an organisation‟s carbon emissions, energy use, and
impact on the local economy (sometimes called physical, environmental or social
accounting);
ii) The use of such reports as part of an environmental or sustainability management
system;
iii) According to the International federation of Accountants (IFAC), “a
sustainability or (environmental) management system can help an organisation:
 Define its sustainability objectives, and ensure their alignment to business
objectives;
 Identify sustainability challenges, risks, and opportunities; and

iv) Ensure that management and operational practices respond to these challenges,
risks, and opportunities.”
v) The reporting of initiatives which demonstrate that an organisation is taking its
social and
vi) Environmental impacts into account in its decisions (such as in Corporate Social
Responsibility reporting);
vii) The reporting of such initiatives together with an organisation‟s financial
accounts; and
viii) The reporting of information within key performance indicator criteria,
reflecting progress towards
ix) The sustainability of an organisation.
x) The reporting of costs organisations incur to prevent, monitor and report
environmental impacts.
b)
i) It will cost Navin Rs. 6,000 per unit to reduce manufacturing time. But
manufacturing is not a bottleneck operation; it is installation. Therefore,
manufacturing more equipment will not increase sales and throughput margin.
Navin should not implement the new manufacturing method.
ii) Throughput margin = Rs. 60,000 – Rs. 35,000 = Rs. 25,000
Increase in throughput margin = Rs. 25,000 × 30 units = Rs.
750,000
Additional costs of new direct materials = Rs. 3,000 × 280 units = Rs.
840,000
Increase/(Decrease) in operating income = Rs.
(90,000)
The additional incremental costs exceed the benefits from higher throughput margin
by Rs. 90,000, so Navin should not implement the new design.


Level: - CAP-III
Subject: - Advanced cost and Management Accounting
Qn.1 Students should try to attempt all parts of the question. Presentation should be
neat and precise. Working notes and main answer should be clearly separated.
Qn.2 (a) Student did very inadequate preparation. Most of students did not answer the
question.
Qn.2 (b) Student did not prepared quarterly budget. They did not read the question
properly. They should be crucial about requirements.
Qn.3 (a) None of the students have solved the first part of question. It seems there
was no clarity about how to formulate a transportation problem where
overtime is also one of the factors. Most of the students have solved it
correctly. Knowledge of North West Corner rule was found to be okay.
Qn.3 (b) Overall knowledge about CPM was okay however most of the students don‟t
have clarity regarding concept of crashing. Few students have solved it
correctly.
Qn.4 Both of the questions were easy with satisfactory performance.
Qn.5 (a) Most of the students did not attempted the question. Students generally
focused on literal meaning of lean.
Qn.5 (b) Most of the students answered with the meaning of words absolute and
relative rather than focusing on actual meaning.
Qn.5 (c) Students provided unnecessary explanations rather than exact focus on
limitation.
Qn.5 (d) Student attempted this question properly.
Qn.5 (e) Student attempted it with little knowledge. Performance was not
satisfactory.
Qn.6 (a) Performance of the students in this question was very poor and
disappointing. Except few students they were not aware about the new
concept and emerging dimensions of management accounting. They
wrongly understood and interpreted sustainability accounting as being
accounting system followed by organizations for long time and linked it
with the concept of going concern and consistency. Very few students only
could rightly pointed out the sustainability accounting as being related to
non-financial aspect (environment, social responsibility etc.) of accounting
and reporting requirement of business and industries.
Qn.6 (b) Performance of the candidates in first part of this question was found to be
poor and unsatisfactory. Most of them depicted their poor knowledge on the
concept of limiting factor and could not understand that installation
capacity has been fully utilized and any production over and above the
installation capacity would not produce any contribution to the firm. They
were unable to identify the fact that there is still remaining manufacturing
capacity for 150 units. They wrongly made unnecessary calculations under
two situations and compared outcomes to provide their conclusion.
Performance of the students in second part of the question was found to be
satisfactory. Majority of the students could correctly calculate the impact

of increment in raw material cost on the overall performance of the firm.

Still few students simply calculated contribution under revised situation
and gave their conclusion without comparing it with the situation before.

Paper 8:
Strategic Management and

Decision Making Analysis

Strategic Management & Decision Making Analysis

Suggested Answer

Marks

7. Read the following and answer the questions accordingly:

Bhat-Bhateni Supermarket (BBS) is a leading supermarket and departmental store
chain in Nepal. Min Bahadur Gurung, the Chairman and also the Managing Director of
Bhat-Bhateni Group, established Bhat-Bhateni in the year 1984 AD as a private
company. Gurung is an extraordinarily dynamic, self-made businessman. His passion
for history led him to explore ancient and recent civilizations and culture. With an
impressive growth history since its inception, BBS has developed a reputation for
continuous improvements, low price and unique product offer to the consumers.
There are currently more than fourteen stores conveniently located in Kathmandu,
Lalitpur, Bhaktapur, Pokhara, Chitwan, Dharan and Butwal. All the stores used to
open from 7:30 am to 8:30 pm, 7 days per week and offer a full range of 150,000
products from 1,000 local and international suppliers.
There is an interesting history of Bhat-Bhateni supermarket. Min Gurung, born in
Khotang district of Nepal, started banking career after completing his university
education (MA Economics). Gurung with his wife started a single shutter grocery shop
of 120 sq. feet in 1984 having initial investment of NRs. 35,000 with daily sales of
NRs. 2,000. This single shutter store has transformed to become a leading supermarket
chain in Nepal with his vision and courage. He left his career with the vision of
extending business in a full-time capacity following the expansion to a two floor
(3,000 sq. ft.) supermarket in 1992 AD having investment of NRs. 2,500,000 with
daily sales of NRs. 50,000 with eleven dedicated staffs.
With the slogan 'save time, save money' Gurung always dedicated to offer quality
products at reasonable price to the diversify customers which made an impressive
growth of historic single shutter grocery Bhat-Bhateni to the today's BBS. As per the
company report, more than 50,000 people visit the stores every day to enjoy
purchasing of daily consuming kitchen products, utensils, to garment and jewelry
products. It is one of the largest organizations employing about 5,000 people directly
as store staff, merchandising and customer service. BBS currently does a huge
business of minimum of NRs. 35 million ($ 350,000) per day. It is known now for
consistent merchandising and guaranteed customer service. It is going to be extended
across the nation with its good name very shortly.
BBS has established as a known name for social responsibility. It has made
remarkable contribution on establishment of fully fledged Emergency Treatment

Building in Tribhuvan University Teaching Hospital (TUTH) with the funding of

NRs. 140 million ($ 1,750,000). BBS has provided job opportunities to the families of
political martyrs and indigenous people. Social responsibility is being way of life at
Bhat-Bhateni. It has set the vision of farmer's cooperative throughout the country to
uplift their lives. BBS, now is selling the grocery items, vegetables and more
purchasing from such cooperative societies. Gurung claims that his commitment to
social responsibility is as strong today as it was when the company was founded. A
list of areas of social responsibility contributions of BBS are as donation of money,
clothes, food, cooking utensils and blankets to the Dubhekol (1995) and Sungdel
(2003), Khotang flood victims, donation of an ambulance to Tamu Boudha Sewa
Samittee and funding construction of primary school in Khotang village, funding
construction of Ganesh Temple (Khotang), Sai Centre (Narayan Chaur) and Shiva
Temple (Haridwar, India) and constructed the green parks in Maharajgunj, Baluwatar
and Koteshwor. Apart from this, BBS as part of its Corporate Social Responsibility
(CSR) has provided scholarships to two students each year from the remote districts
of Nepal for five-year long MBBS programmes at a leading medical college in Nepal.
It is also contributing to the environmental protection campaign.
BBS offers a unique shopping experience for customers in Nepal following the
international „hypermarket‟ format. The ground floor offers a wide range of fresh
organic food and vegetables and a broad range of leading international Liquor,
Toiletries and Cosmetics brands. The remaining floors offer a wealth of choice
including Kitchenware, Clothing, Sports & Toys and Electricals, with convenient
escalators and air-conditioning on all floors. Each store includes a shirting & suiting
service and a promotional area to display carefully selected promotions. In addition,
furniture & fixtures is a new exciting offer introduced in 2009. Bhat-Bhateni and
Maharajgung premises benefit from the co-location of an excellent value jewelry
stores that offer a wide range of gold and silver items in both traditional and modern
ornaments. Excellent free parking facility on the premises, a secure locker system to
keep personal belongings, restaurants, ATM facility of various banks, on line
payments, dry cleaning services in the vicinity, a free home delivery service to the
bulky purchasing, etc. make the BBS a one-stop shopping destination.
Economic development indicators are positive and different international
organizations are forecasting the GDP remains at the growth rate of 6.8 per cent next
year. But, continuous decrease in currency value (weakest in the history), increasing
tariff, increasing valuation rate of the importing goods, etc. will increase the cost of
products. Bank interest rate if fluctuating, liquidity is uncertain and the public sector
expenses are too low. Increasing inflation rate will decrease the purchasing power of
the buyers. Socio-economic dimension has been changing. Political stability has set a
milestone to the corporate sector development. Such macro environmental factors
cause the future business level of BBS.
Besides the inspiring successful history, there are few symptoms for decreasing the
sales volume in future. Big Mart, a grocery super market is expanding its coverage
throughout Kathmandu valley. It is providing wide range of grocery goods almost in
each nook and corner at comparable price range. Big Mart provides information
regarding new arrival and the change in price offer to each household. It facilitates
home delivery facility. More importantly, Big Mart is extending its stores at nearest

location of major residential areas. Likewise, KK store is another supermarket

extending its business in the city. Thus, many marts at the individual level are also
providing purchasing joys to the customers. Many shopping malls provide the
varieties of kitchenware, clothing, toys and electronics. Such developments in
business structure models alarm the sales expansion of BBS in the future.
a) Prepare Environmental Threat Opportunity Profile (ETOP) for Bhat-
Bhateni supermarket. What is the competitive advantage over the other
sellers can BBS enjoy? (7+3=10)
b) What different strategies do you suggest to the BBS in order to sustain
the continuous growth? 10
Answer:
1. a) Environment threat and opportunity profile is a technique to structure the environment
for fundamental business analysis. It is the analysis of external environment of any business.
This technique was developed by glueck. The preparation of ETOP involves dividing the
environmental factors into different sectors and then analyzing the impact of each sector on
the organization. A summary description of ETOP of Bhat-Bhateni supermarket is presented
below :
Environmental Environmental indicators Nature Impact of each sector
sector of
Impact
Political - Political stability + There will be positive impact
- Majority government + of political change on
- Local government formation + business
Economic - Growing per capita income + There will be immediate
- Growing GDP + impact of economy on
- Weak national currency - business but long term
benefits can be attained
- Increasing inflation -
Social - Employing both husband and + There seems to be benefits of
wife +/- change in social dimension on
-Advancing marriage age + business in aggregate.
-Involving female for higher
education. +
- Social involvement +/-
- Increasing consumerism +
- Increasing involvement of
people in agriculture
production
Technological - Online shopping + Technological environment
- Home delivery service - seems to increase investment
- Business applications - on supply of goods and
services.
Market - Growth of market + Market changes seem to

- Decreasing demand of local - create more challenges on

products selling local products.
Competition - Increasing supermarkets - Competition creates threats to
- Increasing franchising - the existing level business on
the product line
International - Threats of Chinese substitutes - International business creates
always challenges
Competitive advantages: A competitive advantage is an advantage gained

over competitors by offering customers greater value, either through lower prices or by
providing additional benefits and service that justify similar, or possibly higher, prices.
Competitive advantage is gained through internal environmental analysis. Only the unique
resources create competitive advantages. Bhat-Bhateni supermarket has the following
competitive advantages over competitors:
 Specialized products: BBS provides specialized product which are not available in the
market. It purchases at bulk from large number of suppliers which cannot be purchased
by small supermarket.
 Local products: BBS has set local suppliers on cooperative producers. It is difficult to
set such channel by every supermarket.
 Unique service: BBS has several unique services like free parking facility, home
delivery, ATM lounges, restaurants and more.
 Providing international purchasing experience: BBS is departmentalized one-stop
purchasing supermarket with specialized product display. Large number of products
offering within the same product line is the best value creating action.
 Integrated target customers: BBS provides blend of products offering from kid to
senior citizens with wide range of price affordable to each customers. It is thus, a center
for all the customers.
1. b) Following different strategies are suggested to BBS to sustain and grow the sales.
i. Corporate level strategy: Since BBS is strong organization having good
organizational image and wide coverage of product and customers, it should
continue growth strategy. For the growth strategy, following different
strategies are suggested:
 Market penetration strategy: BBS should start up its new branches in
major cities of Nepal. It should follow strategies for lowering the price in
various occasions.
 Market development strategy: As being the market leader, BBS should
continue the market development strategy for different innovative
products.
 Product expansion strategy: Though BBS provides wide range of products
with 150000 varieties; it should continue to add the number of products.
Less contributing products should be dropped down.
 Diversification strategy: BBS should conduct marketing research and
should provide the products which customers mostly like to purchase.

ii. Strategic business level strategies: BBS has departments on the basis of the
product line. Each department has some specific features and contributes to
the net profit. As per the case, there is competition on grocery product line,
thus, BBS can highlight the strategies in more profitable departments.
Likewise, research department should try to standardize the products, sales
department should innovate how the additional sales can be made. Proper
advertisement should be focused. Human resources should be motivated to
have best contribution. For instance, during winter, special discount offer can
be made in refrigerators. Product depth should be increased. Product should
have own design, color and texture so that consumers feel BBS provides
unique products.
iii. Operational strategies: In many of the cases, current level of operational
strategies should be followed. Especially in grocery items, products should be
standardized, organic products should be kept separate from non-organic
products, and there should be frequent price change as Big Mart does. Human
resources should be properly supervised so that they can pay due concern in
quality. Product packaging for vegetables should be trustable.
8.
a) How does corporate strategy affect business and functional strategies?
Exemplify. 10
b) Explain GE matrix as a tool of selecting corporate strategy. In what
ways it is superior to BCG matrix? Discuss. (7+3=10)
Answer:
2. a) Corporate strategy affects business strategy and functional strategies directly and
significantly. In fact, corporate strategy is the independent variable and business
strategy and functional strategies are dependent variables.
 For example, if a company adopts growth as corporate strategy then it has to design
its business strategy and consequently functional strategies in line with growth.
 The company can adopt either cost-based approach or differentiation based approach
as business strategies to support growth strategy.
 Suppose it adopts business strategy based on cost approach, then it drives to reduce
cost from all possible angles.
 The business divisions exploit all resources optimally and have to have all sources of
cost advantage, reap scale of economy, efficient scale facilities, and vigorous cost
reduction from experience.
 They sell standard quality products. SBUs have to design, produce, and market a
comparable product more efficiently than the competitors. Low cost enables the SBU
to compete on price if that is required (i.e. should reduce the price to generate the
same profit as enjoyed by other firms)
 The low cost business strategy is possible to happen when functional strategies are
tailored to this direction. For example, it has to do all possible efforts to tweak

activities in functional departments like marketing costs, financial costs, operational

costs, human resource costs, etc.
More specifically, the company has to expend low on advertising and sales promotion
activities, has to resort to mass scale production, should use direct channel of
distribution extensively, have low profit margin, reduce HR compensation, to acquire
land & building on lease in place of purchasing, etc.
2. b) General Electric, with collaboration of the McKinsey & Company consulting firm,
developed GE matrix. It includes nine cells based on long-term industry attractiveness
and business strength/ competitive position. Beside growth rate and market share of
BCG matrix, it includes much more data in its two key factors. The GE matrix has been
presented below.
Business Strength
Strong Average Weak
Low Medium High
1. Winners 2. Winners 3. Question Marks

Attractiveness
4. Winners 5. Average Businesses 6. Losers

Industry
7. Profit Producer 8. Losers 9. Losers
As depicted in the figure, the GE Business screen includes nine cells. The successful
strategic business units in GE matrix have high market attractiveness and strong
competitive position. The matrix can be divided in three zones.
Cell 1, 2 and 4
The strategic business units in cell 1, 2, and 4 are the winners. They should be given
priority in portfolio. They get priority in investment.
Cell 3, 5 and 7
Cell 3, 5, and 7 indicate the medium or average situation of strategic business units.
They should be included in the portfolio on a selective basis for investment.
Cell 6, 8 and 9
Cell 6, 8, and 9 are the loser strategic business units. They should be divested or closed
down.
In this way GE nine-cell matrix provides a mechanism for including a host of relevant
variables in the process of formulating strategy.
The following are some of the reasons that make the GE matrix superior to BCG
matrix.
 The GE matrix considers many more variables and does not lead to such simplistic
conclusions as by the BCG matrix.
 Unlike BCG matrix, GE matrix offers an intermediate classification of medium and
average ratings.

 GE matrix is a powerful analytical tool to channel corporate resources to business that

combine medium to high industry attractiveness with an average to strong business
strength competitive position.
9.
a) What is project control? Discuss the fundamental purpose of control. (6+4=10)
b) What do you mean by project? What are the essential skills required
to be a successful project manager? Discuss. (3+7=10)
Answer:
3. a) Project management stress on the need to plan, check on progress, compare progress to
the plan, and take corrective action if progress does not match the plan. Control is the
act of reducing the gap between plan and real performance. It is the last element in the
implementation cycle. Project managers wish to decrease the gaps in plan and
performance. So they monitor and collect information about system performance
making comparison and taking action to decrease the differences. Control process is
perceived as a closed-loop system, with revised plan and schedule as possible following
corrective actions. The planning-monitoring –controlling cycle is continuously in
process until the project is completed.
The aim of the project is to help achieve some strategic objective of the organization.
Thus the regular deliberations of the project management office or group charged with
implementing the project portfolio process must include an appraisal of the continuing
value of the project in achieving those objectives. Using the information, this project
group may need to take some form of control action regarding the project, such as
redirecting it, getting it back on track, or perhaps even terminating it.
The key things to be planned, monitored, and controlled in project management are time
schedule, cost budget and scope of performance. Project management is constantly
concerned with these three aspects of the project. Is the project delivering what it
promised to deliver, or more? Is it making delivery at or below the promised cost? Is it
making delivery at or before the promised time? The project requires the control on
scope if unexpected technical problems arise. It requires the control on cost if technical
difficulties need more resources. If technical difficulties took longer than planned to
solve the project requires the control on time. The Problems in these aspects might be
mechanistic or human. There are no purely mechanistic or purely human problems on
project but a mixture of feeling and fact that is difficult to examine. So the balance in
control is required instead of criticizing people in public.
Two fundamental purposes of control are the regulation of results through the alteration
of activities and the stewardship of organizational assets. Mostly the control function is
focused on regulation. Different activities are altered with strict regulation to achieve
objectives. But the project management needs to be equally attentive to both regulation
and conservation. The project manager has role of regulator as well as conservationist.
Basically when we talk about the purpose of control one should never forget the fact
that project management must guard the physical assets of the organization, its human
resources and its financial resources. Physical asset control is concerned with asset
maintenance, whether preventive or corrective. Stewardship of human resources
requires controlling and maintaining the growth and development of people. Financial
resource controls are exercised through a series of analysis and audits.

3. b) A project is any series of activities and tasks that has specific objective to be completed
within certain specifications, have defined start and end dates, have funding limits and
consume resources. It is a unique one-time job that has specified starting and ending
dates, a clearly specified objective and goals, a scope of work to be performed,
predefined budget and usually a temporary organization in dynamic environment
The major characteristics of the project are
 Specific objectives
 Life span
 Single entity
 Custom made
 Time, cost/budget and quality constraints
The essential skills required to be a successful project manager are discussed below.
1. Technical skills: It refers to the knowledge, abilities and proficiencies in performing
a specialized task using technology. For this he/she should;
 Have a clear understanding of technology involved in the project
 Have a technical concept and solution
 Communicate technically with project team
 Assess technical risk, trend and innovations.
2. Managerial skills: It is the ability to practice management concepts, tools and
techniques. In regard to management skill the project manager must possess.
 Planning and control skills
 Organizational skills
 Decision making skills
 Human resource management skills
 Leadership skills
3. Human skills: It is the ability to understand, communicate, motivate, coordinate,
lead and control the behavior of project team members including project
stakeholders. They basically are related to human side of project management. The
major human skills required are
 Communication skill
 Motivation skill
 Negotiation and bargaining skill
 Conflict management skill
 Stress management skill
4. Conceptual skill: It involves the ability of the project manager to visualize
holistically the project in its environment. These skills include the project manager's
ability to identity problems and resolve problems for the realization of project
deliberates within the various constraints.

5. Team building skills: One of the major responsibilities of project manager is to

build a team. Hence, he must be capable of identifying, committing and integrating
the various cross functional task groups into a single project team.
10.
a) Discuss the stages in rational decision-making process. 7
b) Describe the types of strategic control useful in strategic management. 8
Answer:
4. a) Followings are the stages in rational decision-making process.
1) Identification of a problem
First, the manager should recognize and define decision situation i.e. problem or
opportunity. Recognize symptoms and causes leading to problem or opportunity
clearly and precisely, i.e. its causes & relationship to other factors. Understand the
situation clearly and accurately, i.e. falling profit, lagging sales, rising cost, customer
complaint, machine failure, losing market share. Pinpoint the gap between what we
want to happen & what is likely to occur if no action is taken. Let‟s take an example;
buying a company car is the identified problem.
2) Identification of decision criteria
Decision criteria to buy a company car may be engine size, car size, car maker
nationality, navigation facility, car price, durability, after sales services, comfort, etc.
3) Allocation of weights to criteria
All decision criteria may not be equally important, hence each selected criteria in step
2 will be given weights as per priority. For example, 10 for price, 8 for interior
comfort, 5 for durability, 3 for fuel economy, 1 for handling.
4) Development of alternatives
(Courses of effective action to solve the problem)
Then the decision maker lists the alternatives that could succeed in resolving the
problem, e.g. Toyota Camry, Volkswagen Golf, Hyundai Elantra, Ford Focus, Kia
soul, BMW 335etc. No attempt is made in this step to appraise these alternatives, only
to list them.
5) Analysis of alternatives
Once the alternatives have been identified, the decision maker must critically analyze
each one. Each alternative is evaluated by appraising it against the criteria. The
strengths and weaknesses of each alternative become evident as they‟re compared
with the criteria and weights established in steps 2 and 3.
6) Selection of an alternative
Select the best alternative considering the weighted criteria, i.e. that alternative
scoring the highest.
7) Implementation of the alternative
Although the choice process is completed in the previous step, the decision may still
fail if it‟s not implemented properly. Decision implementation includes conveying the

decision to those affected and getting their commitment to it. Implementation of a

decision sometimes may be obstructed by people‟s resistance to change (due to feeling
of insecurity, inconvenience, fear of unknown).
4. b) Strategic control systems are the formal target, measurement, and feedback systems that
allow strategic managers to evaluate whether a company is achieving superior
efficiency, quality, innovation, and customer responsiveness or not while implementing
its strategy. The strategic controls identify the key assumptions and keep track of any
change in them so as to assess their impact on the strategy and its implementation.
Further, strategic control monitors the progress of various activities undertaken while
implementing the strategy and if deviation exists, starts the corrective actions. There are
four areas in which strategic control involves.
 Premise control
 Implementation control
 Strategic surveillance and
 Special alert control
i. Premise Control: A strategy may be based on certain premises related to
environment and industry factors. The environmental factors are beyond the control of
a company and they exercise considerable influence over the success of the strategy.
These factors differ among industries. The premise control is designed to check
systematically and continuously whether or not the premises set during the planning
and implementation process are still valid.
The premise control enables the strategist to take corrective action at the right time
rather than continuing with a strategy based on invalid assumptions. The
responsibility for premise control can be assigned to the corporate planning staff that
can identify key assumption and keep a regular check on their validity.
ii. Implementation Control: The implementation of a strategy results in a series of
steps, plans programs, projects, investment, and moves undertaken over a period of
time and the resources are allocated for implementing these. Strategic control
continually evaluates the performance of implemented strategy and identifies the gap
of actual performance comparing with objectives. It evaluates whether the plans,
programs, and projects are actually guiding the organization towards its
predetermined objectives or not. If it is felt to revise, they have to be revised. In this
manner, strategic control leads to strategic rethinking.
iii. Strategic Surveillance : Strategic surveillance aims at a more generalized and
overarching control. It is designed to monitor a broad range of events inside and
outside the company that are likely to threaten the course of the company‟s strategy.
After the examination of assumptions and evaluation of implemented strategy, the
strategic control adjusts the strategies according to new requirements. This is done
because of the dynamic environments and gap identified while implementing
strategy, likely to threaten the course of the firm's strategy.
iv. Special Alert Control: Special alert control is a mechanism for a quick response
and urgent reassessment of the strategy in the light of sudden and unexpected events.
It can be exercised through the formulation of contingency plans and assigning the
responsibility of handling unforeseen events to teams constituted for the purpose of

unexpected product lunch. Industrial disaster, natural catastrophe are the examples of
such unforeseen events.
11. Write short notes/distinguish on the following: (5×3=15)

a) Growth strategy and Retrenchment strategy
b) Characteristics of strategy
c) Core competencies
d) Available, threshold and unique resources
e) Project termination
Answer:
5. a) Both of them are corporate level strategic options. Growth strategy is pursued in highly
competitive and changing environment. Retrenchment strategy is pursued in threatening
environment. The pace of activities are increased in growth strategy where as the pace
of activities are decreased in retrenchment strategy. The growth strategy is suitable if
the product is in the growth stage of product life cycle but in contrary retrenchment
strategy should follow if the product is in the declining stage of product life cycle.
Growth is through increased market share and production capacity. The aim is high
growth through diversification, integration, cooperation and globalization. Here new
products, markets and functions are added. Retrenchment reduces market share and
drop product lines. The aim is contraction of activities through turnaround, divestment
and liquidation.
5. b)
1) Formulated in line with vision, mission, objectives of the organization
-Strategy is formulated keeping in mind vision, mission, and objectives of the
organization. It must be within the value, norms and expectations as expressed in the
strategic goal.
2) Concerned with matching organizational strengths with environmental
opportunities
-i.e. fine tuning or strategic fit. Since environment is dynamic and uncontrollable,
strategy should be capable of exploiting environmental opportunities and offsetting
environmental threats.
3) Strategy helps overcome significant problems or enhance problem prevention
capabilities of the firm
4) For developing necessary resource capabilities/internal efficiency to
create/exploit environment opportunities
-there are opportunities in the environment but if the organization doesn‟t have
resources, certain strategy is made for this gap;building on /stretching an
organization‟s resources and competences to create opportunities or capitalize on
them
5) Strategy often has major resource implications for the organization, hence they
are risky
-Physical resources, financial resources, human resources in significant proportion are
involved.

6) Strategy affects operational decisions

-Operational decisions like marketing & distribution, HR polices etc. have to be
revised in line with strategy otherwise no matter how excellent the strategy, it will not
succeed.
7) Strategy is in turn affected by the environmental forces and resource availability
of the organization too
-So considerations of external environment & internal environment is mandatory
while making strategy
5. c) A core competency is the sum of competencies that is widespread within the
organization. It is something that the organization can do exceedingly well. Core
competencies are the organization's most important sources of competitive advantage.
They drive the selection of strategies. Hence, it is central to strategy and
competitiveness. Normally, a core competency is knowledge based, residing in people
not in the balance sheet.
It can be related to the following.
 Expertise in integrating multiple technologies to create a new product.
 In cost efficient supply chain management
 Expertise in after sales service
 Skills in manufacturing high quality products at low cost
5. d) For strategic management purpose, following different resources need to be measured :

a. Available resources : Resources which are currently available in the organization are
called available resources. Machinery, human resources, capital, raw materials, land
and building, stocks available, intellectual capabilities, etc. are such available
resources. Such resources are classified in to threshold resources and unique resources
which create core competencies and competitive advantages.
b. Threshold resources: Fundamental resources required for the basic functioning of the
organization are called threshold resources. Without the threshold resources,
organizations cannot perform their basic functions. Organizations should develop
threshold resources in continuous basis. For developing human resources,
organizations focus on regular job design, training and development, and effective
maintenance programs. Similarly, organizations constantly invest on research and
development or acquiring advance technology.
c. Unique resources: Critical and valued resources which create competitive advantage
to the organization are called unique resources. They are called unique as they cannot
easily be copied by other competitors. Unique resources are developed at long times
which are the success factor of the organization. Such resources are valuable,
inimitable, rare and non-substitutable.
5. e) Termination comes to every project. But the process of termination is never easy, always
complicated. The termination stage of the project rarely has much impact on technical
success or failure. It has a great deal to do with residual attitudes of the client, senior
management and the project team toward the project in the form of the taste left.
Implementation of plans has been carried out and death of project can be declared in

clean way. But there are times when it is practically impossible to establish that death
of project has occurred. The skill with which termination is managed has a great deal
to do with the quality of life after the project.
In construction-type projects where the project cadre remains intact, the termination
issue is eased because the team moves on to another challenge. For non-recurring
projects, the issue is far more akin to the breakup of a family.
12.
a) Outline the strategic management practices typically observed in
Nepalese corporate sector. 5
b) Describe the importance of strategic decision in strategic
management. 5
Answer:
6. a)
1) less competitiveness
-Most Nepalese organizations are less competitive in international market and the
main reason for this is lace of strategic management perspective.
2) domination of foreign multinationals
National market is captured by foreign multinationals because they have extended
their strategic management practice from their home country to Nepal.
3) lack or ambiguity of strategic plan
Many Nepalese organizations do not have mission, objectives, goals or they are
unclear; without which they do not know where they are proceeding.
4) inability to recognize strengths/core competencies
-Most Nepalese organizations are unable to identify their strengths, core competencies
with which to exploit environmental opportunities. Nepalese managers are not able to
realize the significance of environmental analysis & diagnosis and corporate
appraisal. Hence, they are not able to identify their organizational strengths &
weaknesses as well as environmental opportunities & threats.
5) short term perspectives
-Most Nepalese organizations are concerned with short run results not long run
perspectives.
-Nepalese managers do not base their decisions on the long run forecasts, but have the
spur-of-the-moment reactions.
6) reactive not proactive approach

-Most Nepalese organizations are reactive rather than proactive and operating under
entrepreneurial mode of planning. Nepalese managers and top executives are not able
to anticipate the future and to plan in time to take advantages of new opportunities
and to reduce the risk, i.e. inability toproact or make changes happen.
7) inescapable global competition
-Nepalese organizations cannot face global cut throat competition as they are not
strategically strong enough to sustain this, i.e. vulnerable. Nepalese managers are not
skilled enough to optimum utilization of resources and remain competitive and be
capable of withstanding the severity of the global cut-throat competition.
8) executives/managers not better decision makers
Due to lack of strategic management practice, they are not skilled in better decision-
making and actions that determine whether an organization or a country excels,
survives, or dies.
Hence, majority of these organizations a lower probability of success.
9) Less integration of knowledge and experience:
The Nepalese managers are not able to integrate the knowledge and experience gained
in various functional areas of management and to foster a generalist approach to
decision-making, problem solving, and management. They do not view organizational
problems in their totality and in assessing a situation from all possible angles. They
are not able to function under conditions of partial ignorance by using their judgment
and intuition.
10) Lack of broad perspective:
They lack broad perspective and so infected with business myopia. So, they are not
able to understand the complex interactions taking place among different functional
units. They are not capable to deal with constraints and complexities of the real life
business with the systemic vision.
11) Succession plan:
The middle level managers are not prepared as successors to the senior level
management position and thus middle level managers are not able to contribute to the
success by securing resources essential to their sub units.
6. b) Strategic decision is setting the long term direction of the organization. It focuses on
choosing activities and their directions to achieve organizational goals with matching
strengths with environmental challenges. Strategic decision concerns with the external
rather than the internal problems and the selection of the product mix which the firm
will produce and the markets to which it will sell.

Strategic decisions are means to achieve ends. These decisions cover the definition of
the business, products and markets to be served, functions to be performed and major
policies needed for the organization to execute these decisions to achieve objectives.
Along with the environmental forces and resources availability, the strategic decision
is affected by the value and expectations of top management.
Importance of strategic decisions
1. Strategic decision is helpful to achieve strategic advantage for an organization. It
searches for effective positioning to give such advantages.
2. Strategic decision concerns with the activities of the organization. Change in
product production policies, personnel policies, etc. are the examples of strategic
decisions related with the organizational activities.
3. Strategic decision matches the resources and activities of the organization to its
environments in which it operates. It helps the organization to cope up with
environment demand.
4. Strategic decision affects the operational decision. The operational decision is
related with day-to-day operation of the organization. Such a decision is mostly of
repetitive nature and is taken within the overall framework of strategic decision.
5. Strategic decision is helpful to build on organization‟s resources and competences
to create opportunities. It identifies the existing resources and competence, which
is a base for creating new opportunities.


Level: - CAP-III
Subject: - Strategic Management & Decision Making Analysis

Qn. 1 Focus on the core point of the question was lacking from students side .
Their performance shows absence of critical thinking.
Qn. 2 Almost all the students did not answer question 2(a) correctly and exactly
what has been asked. They answered in a very peripheral way.
Qn. 3 Specifically students have shown little preparation on project controlling
and its purposes.
Qn. 4 They have answered first part (a) since it was a general question. However,
many of them, failed to answer part (b) since it involves specific
knowledge.
Qn. 5 Overall performance was satisfactory.
Qn. 6 In this section both questions A and B were very clear and understandable
by the students. They can easily interpret because the questions are related
with subject matter i.e. strategic management and decision making analysis.
Thank You!

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CHARTERED ACCOUNTANCY PROFESSIONAL

The Institute of Chartered Accountants of Nepal

Paper 1: Advanced Financial Reporting

The Institute of Chartered Accountants of Nepal 2

Advanced Financial Reporting

Total No. of Questions - 6 Total No. of Printed Pages - 15

Time Allowed - 3 Hours Marks

The Institute of Chartered Accountants of Nepal 3

The Institute of Chartered Accountants of Nepal 4

b) Bagmati Ltd.’s Consolidated Statement of Profit or Loss and Other

Particulars Rs. in million

Other comprehensive income (Amounts that will not be reclassified

Profit of the year attributable to:

Total comprehensive income attributable to

The Institute of Chartered Accountants of Nepal 5

2) Non-Controlling Interest (NCI)

Particulars Profit TCI*

Note: Goodwill may be included in cost of sales for full credit.

4) Share of result of associate

Profit for year generated by associate 360

Profit on sale of land included above (a) (80)

Profit generated across the year 280

Bagmati Ltd.‟s share of profit of associates (280 * 30% * 6/12) 42

Bagmati Ltd.‟s share of profit on sale of land (80 * 30%) (b) 24

Eliminated due to inter-company trading (80 * 30%) (b) (24)

Impairment loss this year on investment in associate (25)

The Institute of Chartered Accountants of Nepal 6

Net income recognized from associates 17

Note: The profit on sale of land by associate has two complications:

5) Fair Value adjustment consequences

(48 m/ 6 years * 9/12) Rs. 6 m

NCI is affected as it is Bagmati Ltd.‟s assets that is being adjusted.

The Institute of Chartered Accountants of Nepal 7

 Capital redemption reserve in the beginning 1,000

The Institute of Chartered Accountants of Nepal 8

The Institute of Chartered Accountants of Nepal 9

Total (G) 960 (140) 740 (860) (700)

b) Vhairab Ltd. (Relevant extracts) (Rs. in million)

Statement of Profit or loss

Statement of Other Comprehensive Income 2074/75 2073/74

Notes to the financial statements 2074/75 2073/74

Note Amount recognized in Profit & Loss

The Institute of Chartered Accountants of Nepal 10

Note Key Actuarial assumption used are:

The Institute of Chartered Accountants of Nepal 11

i) NFRS 10 - Consolidated Financial Statement requires ABC Ltd. to consolidate a

The Institute of Chartered Accountants of Nepal 12

v) No adjustment is required in opening NFRS statement as change in estimates are

b) Journal Entries to record the decognition of the Loan:

2. Apportionment of carrying amount in the ratio of fair values

4. Write short notes on the following:

The Institute of Chartered Accountants of Nepal 13

c) Define investment property and explain how the treatment of an investment

c) An investment property is a property held to earn rentals or for capital appreciation or

The Institute of Chartered Accountants of Nepal 14

1.9.25 All comparisons of budget and actual amounts shall be presented on a

The Institute of Chartered Accountants of Nepal 15

The Institute of Chartered Accountants of Nepal 16

b) Calculation of Economic Value Added

Particular Rs. in million

2. Computation of cost of equity

3. Cost of Debt = Interest ( net of tax) x 100

4. Computation of weighted average cost of capital